ISLAMIC EXPORT RE-FINANCE SCHEME (IERS)

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ISLAMIC EXPORT RE-FINANCE SCHEME (IERS)

• By
• Mujeeb Beig

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Introduction

• IERS has been prepared by SBP, as the Shariah
  Compliant alternative to the Export Refinance
  Scheme (ERS).
• The aim of IERS is to provide financing at
  concessionary rate to the exporters.
• FIs can apply for sub-allocation of the Banks
  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.

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Salient Features of IERS

• Under the IERS the State Bank of Pakistan (SBP)
  shall provide finance to the FIs 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 FIs branches
  is Murabahah at present)

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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 FIs
  Branches shall be applied prudently to finance
  normal business transactions. Assets already
  booked can be transferred to the pool.

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Eligibility Criteria for Companies to be Financed

• 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.

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Pool Management of IERS

• 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)

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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 FIs 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.

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Pool Management of IERS

• Provisional Profit Payments
• FIs will make provisional payment of the SBPs
  share in the profit of the pool as per the last
  months 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.

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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.

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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.

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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.

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Pool Management of IERS

• Fines
• SBP can impose fines on the FIs 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.

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