2 (A) Case Study-Istisna New
2 (A) Case Study-Istisna New
2 (A) Case Study-Istisna New
Scenario
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
wear. They sell its finished product to local and international buyers on credit
basis. 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.
Related RMs decided to offer Istisna Financing to the customer
Statistics
Upon inquiry of the RM customer informed that it has a confirmed order in place for
the supply of 4000 units of Men sports Outfit to Faysal Agencies at Rs. 1.11 Mn 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:
Market Price fluctuation: 5%
Cost Cushion: 5%
Mens Short
Number of Units:
Cost price per unit:
Sale price per unit :
Gross Margin:
1000
Rs.254
Rs.318
20%
1000
Rs.130
Rs.156
17%
Istisna Pricing
1. Since the customer has a average gross margin of 19% for the four outfit
products, so the R.M decided to give order to the customer to manufacture
1000 units each at the following prices:
Zip Hoodie Sweat Shirt Mens
Cost Price for Istisna/Unit:
Rs.260
Market Selling Price/Unit:
Rs.338
Target Selling Price/Unit:
Rs.321
Mens Short
Cost Price for Istisna/Unit:
Market Selling Price/Unit:
Target Selling Price/Unit:
Rs.242
Rs.318
Rs.302
Rs.123
Rs.156
Rs.148
2. Customer intimate that it will deliver the manufactured goods to Bank after
120 days and before shipment.
Istisna Pricing
Istisna Pricing
MBL SELLING PRICE:
1)
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.
1,049,988 (5% less than the normal order price of Rs, 1,105,250) to
mitigate the risk of price fluctuation in the market.
2)
As per the terms of the order MBL the agent would be required to bring
the sale proceeds to MBL within 30 days of the execution of sale.
3)
MBL will give a fixed agency fee to its agent @ 1% of the MBLs selling
price i.e Rs.11,053
Istisna Pricing
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) }
Financing Period of 150 days= Istisna Delivery Period + Credit Sale Period)
Incentive Fee = MBLs Sale Price MBL Purchase Price Agency Fee
(1,049,988)
(853,221)
(11,053)
133,118
Upon acceptance of the offer MBL disburses the fund into the account of
the customer.
Agency Stage
As per the Agency Agreement MBL appoints the customer as his agent to sell
the goods at Rs. 1,049,988 (accounting for price fluctuation of 5%) and bring
the sale proceeds in 30 days as per the confirmed order.
Incentive Fee
(Rs.)
145
134,871
150
133,118
155
131,365
Inflow
PKR
Agency fee
PKR
Incentive fee
PKR
Net inflow
PKR
Margin
PKR
853,221
1,049,988
11,053
133,188
7,777,397
15%
Bank
outflow
(853,221)
Inflow
Profit
145
1,049,988
11,053
134,871
7,761,786
50,843
150
1,049,988
11,053
133,118
7,777,397
52,596
155
1,049,988
11,053
131,365
7,792,808
54,349
APPENDIX A
WRITTEN OFFER
[Date]
We (the Manufacturer) are pleased to confirm our willingness to manufacture the Goods
subject to the following terms and conditions:
(a)
(b)
S.no
Specification of Goods
Quantity
1
2
3
5000
6900
7200
(c)
Total Istisna
Price
5,000,158
1,966,500
2,534,400
Delivery Date
14 Feb 2011
14 Feb 2011
14 Feb 2011
Point of Delivery:
(2)
We also attach the original and valid [Letter of Credit][Purchase Order] (if available).
(3)
All terms and conditions (including the definitions) of the Master Istisna Agreement shall
apply to this Written Offer.
IN WITNESS WHEREOF, the Manufacturer has executed and delivered this Written Offer as of
the date mentioned hereinabove.
Yours faithfully,
For and on Behalf of the Manufacturer
______________________
WITNESSES:
1. __________________________
2. __________________________
APPENDIX B
GOODS RECEIVING NOTE
(for ISTISNA Transactions)
[Date]
To:
[Insert name and address of the Manufacturer]
Dear Sirs,
Master Istisna Agreement dated [______] (Agreement) Goods Receiving Note
(1)
We confirm having received the Goods contracted to be delivered by you as per the
following details:
a) Date of Receipt:
b) Time:
c) Address:
d) Description of Goods received: The quantity, quality, and other specifications of the
Goods have not been ascertained.
e) Specification of Goods received:
Description
Pillow Case
Single Fitted Sheet
Double Fitted Sheet
f)
Qty
(Units)
5000
6900
7200
Specification
100% Cotton Flannel Dyed
100% Cotton Flannel Dyed
100% Cotton Flannel Dyed
Value in PKR
(Per unit)
158
285
352
h) Additional remarks: This receipt of Goods is subject to the Goods being inspected and
found in order and Meezan Bank Limited reserves its rights to claim any remedies under
the law and in terms of the aforementioned Agreement from the Manufacturer if the
Goods are found not to be in order and as per the specifications agreed upon. Meezan
Bank Limiteds acceptance of the Goods hereunder does not amount to a waiver of any
of its rights under the law and/or under the Agreement.
Yours faithfully,
______________________________________
For and on Behalf of Meezan Bank Limited
[Date]
To,
[Agent]
[Address]
Attention:
From:
[
[
]
]
] and us dated [
](Agency Agreement)
In pursuance of Clause 3 of the Agency Agreement, we hereby authorize you to sell the following Goods
(Sale Goods) on our behalf as our undisclosed agent and following the sale of the Sale Goods collect
and pay us the Sale Price immedietaly upon receipt of the Sale price. We hereby advise and authorize you
to take possession of the Sale Goods from [Point of Delivery] on [
] so as to be able to
execute the sale contemplated by this Notice and the Agency Agreement. Your Agency Fee and
Incentive Fee shall be as per attached Schedule 2
Description
Pillow Case
Single Fitted Sheet
Double Fitted Sheet
Total
Buyer (If identified)
Qty (Units)
5000
6900
7200
Specification
100% Cotton Flannel Dyed
100% Cotton Flannel Dyed
100% Cotton Flannel Dyed
Minimum Target
Selling Price (PKR
/ Unit)
158
285
352
Terms: Advance ____ days before sale (advance payment to be received after Notice)
Advance ___ days before sale (advance payment already received before Notice)
Spot (Cash)
Credit ____ days from Sale
Sale Price Payment Date (If identified):
Payment Instructions:
[to be credited to our account [
] with [
]
Without limiting the applicability of any other provision of the Agency Agreement or any of the other
related transaction documents) the provisions of the Agency Agreement shall apply (mutatis mutandis)
to this Notice as if the same were herein set out in full. In addition to the terms of the Agency
Agreement, the above authorization to sell as our undisclosed agent is subject to the following
conditions:
Examples of conditions include:
a.
b.
c.
IN WITNESSES WHEREOF, the Principal has executed and delivered this Notice as of the [*] day of
[*]
For and on behalf of
______________________________________
For and on Behalf of Meezan Bank Limited
WITNESSES:
1. _____________________
2. _____________________
Schedule 2
Agency Fee
1. Agency Fee Rs.11,053
2. Incentive Fee as per following Schedule:
Days from the date of Notice
15
129,612
30
122,599
45
117,339
60
112,080
Risk Mitigation
RISK MITIGANTS
Price Fluctuation Risk: This risk was covered by asking the customer to sell
the apparel 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.
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.