56 Islamic Finance in Practice
happen contemporaneously (but not forgetting that there must be evidence
of legal title passing from the supplier to the Islamic financier and then from
the Islamic financier to the customer as purchaser), there is still the risk
that the customer could renege.
Usually, therefore, the notice that is originally issued by the customer to
the Islamic financier offering to purchase the assets on behalf of the Islamic
financier as agent will contain an undertaking or covenant to purchase those
assets from the Islamic financier. The Islamic financierwould, therefore,
have an action against the customer if it breached that undertaking or
covenant.
Often the customer will not want the supplier to know that it is acting as
the agent of the Islamic financier. This is often not due to legal concerns, but
rather because it may be difficult to explain to the supplier why it is selling
the goods to the Islamic financier rather than the customer. Accordingly, the
murabahaarrangements often will provide for the customer to act as
undisclosed agent of the Islamic financier.Letters of credit
The Islamic financier is the purchaser of the goods and, therefore, it is the
person that should be paying for the goods. If a letter of credit is required,
then the applicant would be the Islamic financier. If, however, the customer
is acting as the undisclosed agent of the Islamic financier, then the letter of
credit arrangements would involve the customer being the applicant.
However, as the customer is acting as the agent of the Islamic financier, it
would be entitled to reimburse any fees and expenses that it might incur as
the applicant of the letter of credit.
Often the Islamic financier will take into account these fees and expenses
when calculating themurabahadeferred payment price. It is also possible
to have set off provisions such that the Islamic financier can set off any such
reimbursement obligations against amounts due to it by the customer in
relation to themurabahasale price.Late payment
If a deferred payment is not made on the due date, it is not possible to charge
the equivalent of default interest. Normally there will be provisions saying
that if there is a delay in payment, then an additional amount will be
payable. The method of calculation will usually be by reference to an interest
rate benchmark. However, the provision will then stipulate that this amount
cannot be retained by the Islamic financier (at least to the extent it does not
cover real expenses rather than the lost use of money) but will be donated to
charity. Its purpose is more to do with encouraging the customer to pay on
time than to recompense the Islamic financier for the loss of use of money,
which would beriba.^1(^1) This late payment provision is also found in other Islamic finance agreements.