Case Study

M/s. ABC Garments Ltd. Was incorporated in 1980 and is a part

of BCG Group. The client is engaged in the manufacturing of Men
formal and casual ware. They sell its finished product to local and
international buyers at credit period of up to 60 days. Their export
sale constitutes of more than 50% of their sale

The company has a strong banking relationship with MBL and the
owners are interested in Islamic banking. As the customer usually
sell its goods on credit basis so there is always a short term
requirement of funds for working capital needs. The owners of the
company have approached the bank and informed about their
working capital requirements (to manufacture the goods for the
order). The customer has informed the bank that it has very
sound relationships with its customers and till to date there is no
default in payment and provides list of credible customers.

Case Study

Upon inquiry of the RM customer informed that it has a confirmed

order in place for the supply of 100,000 units of Men sports tshirts to Faysal Agencies at Rs. 10,000,000 for which he has not
yet started the production. Following additional information was
also obtained by the RM to determine the nature of the Istisna
facility to the customer:
1)
2)
3)
4)
5)
6)

Related RMs decided to offer Istisna Financing to the customer

Base unit: Number (Quantity in units).

Cost price per unit: Rs. 80
Sale price per unit :Rs. 100
Market Price fluctuation: 5%
Gross margin: 20%
Credit period: 60 days

7) Warehousing facilities: Spread over 10,000 sq feet and

insured

Case Study
Istisna Parameters
On the basis of available information RM decided to offer Istisna
facility against the following parameters.
Istisna Price:
1. Since the customer has a gross margin of 20% so the RM
decided to give order to manufacture to the customer to
manufacture 100,000 units of Men t-shirts fpr Rs. 7,500,00 at
Rs. 75 per unit (the selling price of which is Rs. 100/unit).
2. Customer intimate that it will deliver the manufactured goods to
Bank after 30 days and before shipment.
3. This Purchase price of Rs. 75/unit also gives a cushion(5% over
the Gross profit margin I.e 25%) to RM to sell the goods in the
market and to recover its principal and profit in case the
customer fails to sell the goods to the ultimate purchaser as an
agent of MBL (With confirmed order in place this risk is
mitigated to a huge extent)

Case Study

After 30 days, customer delivers the goods to MBL and

ownership is transferred to MBL.

MBL SELLING PRICE:

1)

2)
3)

MBL, after purchase of goods would ask the customer to sell the
goods, as MBLs agent to the ultimate purchase as per the
purchase order at Rs. 9,500,000 (5% less than the normal
order price of Rs, 10,000,000) to mitigate the risk of price
fluctuation in the market.
As per the terms of the order MBL the agent would be required
to bring the sale proceeds to MBL within 60 days of the
execution of sale.
MBL will give a fixed agency fee to its agent @ 1% of the MBLs
selling price i.e Rs. 95,000

Case Study
4) Incentive fee:
{Incentive fee= MBLs sale price-Agency fee- MBL Purchase price
MBLs profit margin (MBL Purchase price x profit/365 x No of
days) }
For Credit of 90 days (as per the confirmed order)
Incentive fee= 9,500,000-95000- 7,500,000- 277,397
(7,500,000x0.15/365x90)= 1,627,603

fully

Case Study
PRACTICAL PROCESS FLOW
Credit Approval Stage
After necessary Credit and Shariah approvals, MBL & ABC
(Manufacturer) will enter into Master Istisna Agreement to
manufacture goods from time to time on agreed terms and
conditions. The customer and MBL will also enter into an Agency
Agreement to sell/export the goods to credible buyers Customer
also
an independent corporate guarantee for the
creditworthiness of its customer by listing out their names.

Upon the requirement of the facility the customer furnishes a

Written Offer (Appendix A) mentioning complete description of
goods (Men sport shirts), quantity (100,000 Units), delivery
date(after 30 days) and Istisna price (Rs. 7,500,000) etc along
with copy of valid confirmed order.

Case Study
Transaction Stage

Upon acceptance of the offer MBL disburses the fund into the
account of the customer.
Customer delivers the goods on 30th day of the acceptance of
Written offer.
MBLs representative inspects the goods to ensure existence of
goods, its proper identification & separation from the
customers owned stocks (i.e. goods not sold).

Case Study
A Goods Receiving Note (Appendix B) will be executed at this
moment by the Bank representative & Customer to evidence
the delivery of the Finished Goods (100,000 units) to MBL. The
risks and rewards associated with the Goods will be transferred
to MBL at this stage.

Agency Stage

As per the Agency Agreement MBL appoints the customer as his

agent to sell the goods at Rs. 9,500,000 (accounting for price
fluctuation of 5%) and bring the sale proceeds in 90 days as
per the confirmed order.

Case Study

Case Study

Agency Stage

On the basis of financing model following agency fee and

incentive fee was agreed via schedule 2 of Agency
Agreement:
Agency fee: Rs. 95,000 (1% of Minimum selling price)
Days from the
date of
Notice

Incentive Fee
(Rs.)

85

1,643,014

90

1,627,203

95

1,612,192

As an Agent, ABC will sell the goods to Faysal Agencies on

credit basis of 60 days which will be evidenced via
Confirmation of Sale of Finished Goods (Schedule 3 of
the Agency Agreement).
As per the payment terms, the buyer will pay the selling price
to the Agent. After receiving the payment, the Agent will pass
on the proceeds i.e. Rs 7,777,397 (net of applicable Agency &
Incentive fee) to MBL on due date .
If the customer makes the payment on due date than following
will be the net cash flow out of this transaction:

Outflow

Inflow

Agency fee

Incentive fee

Net inflow

Margin

PKR

PKR

PKR

PKR

PKR

PKR

7,500,000

9,500,000

95,000

1,627,603

7,777,397

15%

Case Study
Following table debits different scenarios of early and late
payment by the customer (Customers incentive fee will be
reduced/increased to account for his performance)
S no

Bank
outflow

(7,500,000)

Inflow

Agency
fee

Incentive

Net flow

Case Study
RISK MITIGANTS

Profit

Price Fluctuation Risk: This risk was covered by asking the

customer to sell the goods at minimum value of Rs. 95/kg as
against market value of Rs. 100/kg.
Ultimate Buyer Risk: This risk is covered by asking the
customer to list down its 4 creditworthy customer and provide a
corporate guarantee for these customers.

85

9,500,000

95,000

1,643,014

7,761,786

261,986

90

9,500,000

95,000

1,627,603

7,777,397

277,397

95

9,500,000

95,000

1,612,192

7,792,808

292,808

Delay Payment risk: This risk is covered by linking incentive

fee with the timely payment of the customer which reduces on
daily basis for late payments.