ISLAMIC ACCEPTED BILLS (AB-i).

ISLAMIC ACCEPTED BILLS (AB-i).

Define what is AB-i:-

Islamic Accepted Bills (IAB) is bill of exchange drawn to finance domestic and foreign trade transaction and payable on a specified future date. In line with the Bank Negara Malaysia’s (BNM) circular in respect of the standardization of the generic name for Islamic banking products, the IAB is now to be known as Accepted Bills-I (AB-i). This financing facility were introduced in 1991 and have their guidelines for its establishment known as Guidelines on Accepted Bills-I issued by BNM. There are two types of AB-i facility, namely:-

i. Imports and local purchases (AB-i Purchase)

ii. Exports and local sales (AB-i Sale)

Purpose and why it is created:

AB-i purchase is a financing facility using the concept of Murabahah (cost plus profit), granted to the buyer or importer to finance their purchase of tradable goods that include raw materials, semi-finished and finished goods. Payments to suppliers will be made immediately by Bank and customer may match the deferred payment according to the aging of credit terms. Murabahah refers to the sale of goods at a price inclusive of a profit margin as agreed to by both parties. On the order hand, AB-i sale is a financing facility using the concept of Bai` Dayn (debt trading), granted to the seller or exporter to finance their sales or export of goods on credit terms that include raw materials, semi-finished and finished goods. Debt trading is a short-term financing facility whereby bank purchases the customer’s right to the debt, which is normally securitized in the form of Accepted Bills.

Salient features of AB-i drawn to finance purchases or sales shall have the following:-

1. It is payable in Ringgit Malaysia (RM) to the order of the drawer:

a) On a specified future date, without days of grace, such date being not earlier than twenty-one days from the date of acceptance;

b) In an amount of not less than RM50, 000; and

c) At the Head Office Central Office or Main Office of an Islamic bank or commercial bank in Kuala Lumpur.

2. It contains a statement that it was drawn to finance the purchase or sale of goods from or to:

a) a resident(s); or

b) a non-resident(s).

of which details are in the records of the drawing bank; and

3. It is drawn on a standard format as per specimen AB-i import or purchase as shown in Appendix 1A, for AB-i export or sale shown in Appendix 1B printed on security paper, the color of which shall be in any shade of green.

How to use it:

Before using this facility customers must first have an approved AB-i line. Request for approval to utilize facility must include submission of relevant documentary evidence of the underlying transactions, compliance to the terms of the facility and BNM guidelines. The way for using imports and local purchases facility as following:-

1) The bank appoints the customer as its agent to purchase goods he required on behalf of the bank.

2) Upon delivery of goods, the Bank pays the supplier at sight or upon maturity of credit term for the cost of goods based on the invoice value.

3) The Bank will purchase the goods from the seller or exporter at invoice value and resell them to the customer on deferred payment terms at a price inclusive of the Bank’s profit margin.

4) The deferred payment terms of sale of goods granted to the customer constitutes a creation of debt. This is securitized in the form of bill of exchange (AB-i) drawn by the Bank and accepted by the customer and payable on maturity.

5) Upon maturity, the customer pays the Bank the Selling Price.

Besides, using exports and local sales facility as following:-

1) Customer (exporter or local supplier) draws a usance bill when he sells on credit terms to the buyer (importer or local purchaser). He has to wait until maturity date of the bill before he obtains payment.

2) Customer who wishes to avail himself of this facility will prepare the export or sales documents as required under the sale of contract or Letter of Credit and present to the Bank to be purchased. The export documents shall be sent to the importer’s Bank.

3) As a substitute, the customer will draw a new Bill of Exchange (AB-i draft) on the Bank.

4) The Bank will purchase the AB-i draft or debt at a mutually agreed price and the proceeds (less Bank’s profit margin) will be credited immediately into the customer’s account.

5) On maturity, the customer pays the Bank the cost of goods (face value of the AB-i draft).

The AB-i draft also trade able in the secondary market through the money market dealers as it served as an investment instrument. Investors can purchase the instrument at a discount and on maturity, resell to the Bank for the face value. The discount rate of AB-i shall reflect the current market standing. The underlying Shariah transaction for trading in the secondary market is known as Bai` Dayn. The benefit using this all facility is low financing cost, fixed rate, single payment upon maturity, customer enjoys 100% imports or purchase financing and the profit margin will be paid at the tail-end also for exports or sale financing, customer enjoys higher financing value as compared to Bank Acceptance.

Parties directly related to the products:-

PRODUCT	PARTIES INVOLVED
Accepted Bill-s (Purchase or Import)	Importer and Drawing Bank
Accepted Bill-s (Sale or Export)	Exporter and Accepting Bank

Obligations of each party:-

No	PARTIES INVOLVED	OBLIGATION OF EACH PARTIES
1	Importer or Purchaser	Meet all requirements under BNM guideline. Make payment upon maturity date as agreed by both parties according to AB-i purchase.
2	Exporter or Seller	Meet all requirements under BNM guideline. Pay the amount in maturity date as already agreed by both parties according to AB-i sale.
3	Bank	As drawing bank:- If request of importer is approve, the Bank must draws the AB-i. Proceed the payment to exporter at invoice value for behalf of importer. The Bank cannot ask a payment or revoke if not on time yet. As accepting bank:- The Bank must accept the AB-i drawn by Exporter if meet the entire requirement. Credit account exporter as soon as the AB-i is accepted by the Bank.

Rights of each party:-

No	PARTIES INVOLVED	RIGHTS OF EACH PARTIES
1	Importer or Purchaser	Gets AB-i import financing facility as agreement with his bank. Right to know the price, other costs and the profit margin of the seller at the time of agreement of the sale.
2	Exporter or Seller	Gets AB-i export financing facility as agreement with his bank. Right to know the price after discount and other costs at time of agreement.
3	Bank	As a drawer and accepter of AB-i:- To obtain payment upon maturity from importer or exporter without delay. Receive or refuse to drawn or accept AB-i if not meet their adjustment. To trade AB-i in secondary market to get fund.

Cost to user:-

1) As a Exporter:-

§ Commission, Postage Courier for local or foreign, Interbank Giro, SWIFT and Stamp Duty

2) As a Importer:-

§ Commission, Handling Fee, Postage Courier for local or foreign, Interbank Giro, SWIFT and Stamp Duty.

-The exactly amount of the charge can refer to appendix 2A and 2B.

Cost to issuer:-

There are no cost to bank because all charge and fee is paid by customer (importer/exporter)

Risks and returns to the issuer:-

Bank may be facing a default payment by exporter or importer. The return to the bank will get a profit from the financing based on Murabahah concept and Bai Dayn too.

Risks and returns to the user:-

If the importer default to pay according to the contract, so the exporter have to make a responsibility to pay because already get financing from their bank. The return to exporter or importer is they can to run their business without any financing problem.

Other cost elements:-

There are no other cost states by the bank because all cost is ready state in the early contract and agreed by each party.

Pricing mechanism (formula)

The trading proceeds of an AB-i under Bai` Dayn shall be determined by the following formula:-

Where, P = Market price or sale proceeds

FV = Face or maturity value

r = Annual rate of profit (in per cent per annum)

t = Number of days remaining to maturity

-Example can refer to Appendix 3A.

The financial value of AB-i in case of purchases is calculated using the formula as follows:-

Where, FV = Face or maturity value

IV = Invoice value

r = Annual rate of profit (per cent per annum)

t = Number of days remaining to maturity

-Example can refer to Appendix 3B.

The official guidelines for its establishment.

As I already mention in early, Accepted Bills-i is a product issued by Bank Negara Malaysia. The purpose of these guidelines is to provide a uniform set of procedures, practices, conditions and limitations governing the creation and trading of Accepted Bills-i (AB-i) in Malaysia. These guidelines are applicable to AB-i denominated in Ringgit Malaysia (RM) drawn on a bank or seller and accepted by the bank or purchaser in Malaysia. The objective is to encourage and promote both domestic and foreign trade through an Islamic financing mechanism.