UPDATE ISLAMIC FINANCE -PART 2

Why Asset Purchase and Asset Sale Agreements are necessary........

Islamic banking contracts are carried out vide the mechanism of a sale contract, hence the facility agreements required to be executed are designed to incorporate the elements and conditions of Sale into the contracts.
The elements and conditions of sale include the parties, offer and acceptance and the transfer of ownership from one party to the other. These elements and conditions of sale are captured in the Asset Purchase and Asset Sale Agreements which illustrate the mechanisms of the contract of sale.The mechanisms of Islamic contract of Sale outlined in the Asset Purchase and Asset Sale Agreement are as follows:-

i)  the passing of the beneficial interest of the goods firstly from the Customer to the Bank
(under the Asset Purchase Agreement);



ii) immediately thereafter, the beneficial interest will pass from the Bank to the Customer (under the Asset Sale Agreement)

iii) the Asset Sale Agreement is the principal document that secures the interest of both parties. It describes the rights and obligations of both parties.

iv)the customer is obliged to pay to the Bank the sale price.

v) the Sale Price comprise of cost plus and agreed ceiling profit rate.

vi) the Sale Price is payable on deferred payment terms in the form of monthly installment payment throughout the financing tenure.


The above mechanism are in conformity with the Shariah Governance Framework (SGF) ( Section 1.1 states "An Islamic Financial Institution (IFI) shall ensure the aims and operations of its business are in compliance with Shariah principles at all times...".)

Appendix 7 (iii) of the SGF further states that "An IFI shall ensure that the pre-product approval process includes, among others, a review of the concept, structure, term sheet, documentations, policies and procedures, pamphlets, brochures and advertising materials, The documents shall
be approved by the Shariah Committee of the IFI."

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