ISLAMIC EXPORT RE-FINANCE SCHEME (IERS) By Mujeeb Beig

Introduction  IERS has been prepared by SBP, as the Shari’ah Compliant alternative to the Export Refinance Scheme (ERS).  The aim of IERS is to provide financing at concessionary rate to the exporters.  FI’s can apply for sub-allocation of the Bank’s ERF limit subject to the maximum of 10%.  The list of eligible commodities to be exported, operations of the scheme in terms of procedures/documentation and submission of relevant statement are essentially the same as under ERS.

Salient Features of IERS Under the IERS the State Bank of Pakistan (SBP) shall provide finance to the FI’s on Musharakah (profit and loss sharing) basis. The branches shall be mandated to finance exporters (eligible under the scheme) through approved modes of Islamic Finance. (Which in case of FI’s branches is Murabahah at present)

Implementation Process FI would create a special Musharakah Pool with the following distinct features: Contribution: Equal contribution shall be made by FI & SBP in the pool. Utilization of Funds: Funds contributed by SBP shall be utilized specifically to finance Exporters eligible under the IERS, whereas funds contributed by FI’s Branches shall be applied prudently to finance normal business transactions. Assets already booked can be transferred to the pool.

 No adverse CIB report and no export overdue of more than one year.  Good track record on the stock exchange, OR  Having a rating of minimum B+ or equivalent by rating agencies approved by SBP for rating banks, as well as acceptable to the bank as per its own lending policy. OR  ROE for the last three years or period of operations, which ever is less, should be higher than the rate of finance prescribed by SBP under ERS. Eligibility Criteria for Companies to be Financed

Size of the Musharakah Pool: The pool should comprise of no less than 10 companies. (This condition has to be fulfilled by the end of first year of operation of the IERS) Sector Exposure of the Musharakah Pool: Exposure to one sector should not exceed 50% of the total exposure, especially when the pool consists of more than 2 companies. (This condition has to be fulfilled by the end of first year of operation of the IERS) Pool Management of IERS

Profit Sharing Mechanism: SBP will share in the overall profits (gross income less net of provision or reversals thereof) earned by the FI’s Branches on the Musharakah Pool in accordance with the profit sharing ratio calculated on daily product basis. Profit Sharing Ratio: The profit weight age will be fixed at the beginning of each month, keeping in view the ongoing rates announced by the SBP under Export Finance Scheme. Pool Management of IERS

Provisional Profit Payments:  FI’s will make provisional payment of the SBP’s share in the profit of the pool as per the last month’s declared rate on outstanding balance of Musharakah pool based on the weightages fixed at the beginning of the month keeping in view of the on going rates of ERS.  Profits shall be calculated every quarter based on the un- audited accounts of the Musharakah Pool.  Profit would be shared by the SBP & FI in accordance with the profit sharing ratio. FI shall pay profits to SBP by the 7th of the month following the quarter to which it relates. Pool Management of IERS

Annual Audit for the Musharakah Pool: The Musharakah pool would be audited by the external auditors of FI in order to certify that the term and condition of the scheme have been adhered to in totality and that the annualized earnings of the pool have been worked out correctly. Pool Management of IERS

Takaful Fund: Profits (as per the annual audit) in excess of amounts paid to the SBP on quarterly basis shall be deposited by FI within 7 days of its determination, in a special non- remunerative reserve fund viz. “Takaful Fund” with the SBP BSC (Bank). SBP shall refund amounts paid in excess of the profits as per the annual audit out of balance held in the Takaful Fund, if any. Pool Management of IERS

Loss Sharing: Loss suffered on the Musharakah pool as per the annual audited accounts shall be borne by the FI and SBP in the proportion of investment in the Musharakah Pool expressed on daily product basis. The share the loss, SBP will first be met out of credit balance in the Takaful Fund, if any. The loss not met from the Takaful Fund shall be borne by the SBP. Pool Management of IERS

Fines: SBP can impose fines on the FI’s for default in repayment of facility within the stipulated period that shall not be counted as expenses of Musharakah Pool. The Islamic Bank can recover these expenses from the exporters if imposition of such fines is on account of their failure to comply with the instructions of SBP/Islamic Bank. All other fines will be imposed by SBP as per ERS. Pool Management of IERS

IERS Manual The IERS Manual shall cover the Accounting Treatment, Procedures and Guidelines for implementation in Branches. Shari’ah Compliance Shariah Advisor of the Bank has approved the Islamic Export Refinance Scheme (IERS Product).