Trade Finance 57Warranties
As the Islamic financier will be the owner and seller of the assets (albeit
with those assets chosen by the customer and often purchased as its agent),
the sale of those assets will generally be subject tostatutory warranties,
which often cannot be excluded by contractual provisions.
Such warranties are a liability issue for the Islamic financier. However,
the taking on of a liability or risk in atransaction is the fundamental
justification for an Islamic financier to sell the assets at a profit/markup.
Often there will be contractual provisions imposing on the customer (as
agent of the Islamic financier) an obligation to ensure that the assets that it
acquires for the Islamic financier are in accordance with the stated
specifications, not subject to any defects, etc. These provisions are included
in order to form some basis for a claim against the customer, as agent, if the
customer, as purchaser, should bring an action for breach of warranty
against the Islamic financier. An Islamic financial institution should not,
however, presume that this would offer a watertight method of handling
this risk.
It will be important for the Islamic financial institution, therefore, to
assess the potential risk that goes with being the owner of the asset on a
case-by-case basis and see whether, for example, some of these risks can be
covered by insurance (and with the costs being built into themurabahasale
price).
Security over the financed assets
It would seem that the majority of the different schools would permit the
assets that have been sold by the Islamic financier to the customer to be
mortgaged or pledged to secure the deferred payment obligations. There can
sometimes be problems under local law in relation to the perfection and
release of the assets in a manner that protects the security interests of the
Islamic financier and also, at the same time, enables the customer to access
and use the charged assets in its business operations.
Early payment
What if the customer wants to pay the deferred payment obligation early? If
it was a conventional financing, a discount might be offered to the customer
(less, perhaps, breakage costs).
However, under Shari’a principles, the payment due by the customer is a
purchase price, which has been fixed when themurabahacontract was
entered into. It is not permitted in themurabahacontract to stipulate that
if the customer pays the deferred purchase price early, the purchase price
will be discounted. Sometimes, the Islamic financial institution may provide
a statement of understanding or intent expressing that, in this situation, it
would favourably consider reducing the purchase price. However, that