Islamic Finance

Working Capital 69

asset shares, plus the rental charged to the client on the bank’s share of the

asset leased to the client.

The bank may use a simpleijara muntahiya bit tamleeklease as well for

this purpose, as described above. One reason why banks sometimes may

preferijara muntahiya bit tamleekto diminishingmusharakais that while

using the former, the bank retains ownership of the asset until the very end

of the lease term, and this means that in case the client/lessee defaults on

the rental, the bank has the option of selling off the asset in the market,

which helps it cover its position somewhat better. In contrast, with

diminishingmusharaka, ownership of the asset is jointly held by the client

and the bank (in accordance with theirpro ratacontribution towards the

asset’s purchase); hence in case the client defaults on the rent and the bank

seeks to liquidate the asset to close its position, there is the possibility of the

bank facing extra legal costs and wrangles,vis-a` -visforcing the asset sale (if

required).

For WCF-1,murabahaprobably remains the most popular tool used by

banks, given its fixity of return. An important issue to always keep in mind

relating to the use ofmurabahais that it can only be used by the bank for

the sale of tangible goods (ie. WCF-1 needs only). Other needs, in particular

cash requirements to pay salaries or utility bills, etc, cannot be addressed

bymurabaha, since it is not possible to “buy” salaries or utility bills or other

cash-based items and sell them on at a mark-up, given that earning cash-

on-cash is clear riba. Neither is it possible to useijara,istisna’a,or

diminishingmusharakafor WCF-2 needs. However, the need for “cash in

hand” for WCF commitments is a very frequent and an ubiquitous need for

many businesses.

Finance for defined costs−WCF-2

Salam

What solutions, then, are available for WCF-2? One possibility is that for

WCF-2 needs (such as salaries, utility bills, advertising costs, or other

monetary costs, etc.), a sale-based solution using the contract ofsalammay

be used (instead ofmurabaha) such that the client gains access to finance in

an indirect way, via asalamcommodity trade.

Salamis a deferred delivery sale, in which the price is paid in full upfront,

while the commodity is delivered later on at a specified time and date. For

the purpose of WCF, the bank contracts to buy asalam-eligible commodity^1

from the client as seller, and the value of commodities being sold (ie. the

salamprice) is usually equal to the amount of finance sought by the client

for his liquidity needs. So if a business requires $20,000 to pay its staff’s

(^1) Not all goods aresalam-eligible. Typically, fungible goods such as agricultural commodities (wheat, barley,
etc.) or standardized manufactured products are suitable candidates to be the subject ofsalam, since they
are usually easily and generally available in the market.