Long Term Loans To Employees

Published Date: 02 Nov 2017

Maple Leaf cements is the subsidiary of Kohinoor maple leaf Group of companies.

Maple leaf is one of the pioneer of cement industry in Pakistan

Maple leaf has mainly two products which is cement and clinker

Company is having capacity of producing 3360000 tons of cement.

The company supplies it products locally and also export it to African, Gulf, and other Asian countries

Values:

Being ethical

Being Responsible member of the business communities

Endeavors to ensure the highest standard of honesty

Showing integrity

Level of Company’s leverage:

The company is leveraged by 72% of the total capital including short term and long term liabilities of the company.

FINANCIAL STATEMENTS OF THE COMPANY

Analysis Of The Financial Statements Of The Company And Recommending The Sharia Compliant Methods

ASSET SIDE ANALYSIS

Long Term Investments:

Currently company is having term deposits with the conventional bank amount Rs 3.037 Million in the long term investment. The company takes the fixed interest on the deposits from the bank which is purely riba and not allowed in Sharia

1.1 Sharia Compliant Method—Mudarbah ( P/L)

The Company can Invest this Rs 3.037 amount with an Islamic Bank based on the principle of Mudarbah which will provide profit to the bank if any, and that profit will be free from Riba because the Islamic bank would act on the behalf of Maple Leaf Company and would utilize its amount in a business to earn the profit for it.

Company would act as an investor (Bai ul Maal)

The Islamic Bank would act as Manager (Mudaarib)

The amount of Profit sharing would be predetermined by the company and Islamic Bank

In case of the loss without the negligence of the of Mudarib, all lost would be beard by Maple Leaf Company, and Mudarib would not be entitled to any fees or profit.

The company may leave upon Islamic Bank to do any business from his money (unrestrictive Mudarbah) or may specify certain things (restrictive Mudarbah

1.2 Sharia Complaint Method—Sharia Complaint Stocks

Alternatively The company could invest the amount of 3,037 Million in buying the Sharia Compliant stocks which is also a long term investment where company can get dividend and capital gains by selling those stocks after the prices are up in the market. Sharia Compliant are those stocks which are issued by the company which does Halal Business. The company could invest in following sharia compliant stocks:

Meezain Bank Limited Shares

Engro Foods Limited Foods Stock

Glaxo Smith Kline

Hub Power

OGDCL etc

Long Term Loans to Employees:

These loans are provided to the company employees under the scheme of buying motor vehicles.

These are not interest free loans, these loans carry 6% to 12% interest.

These loans are secured against the lien on employees’ retirement

These loans are recoverable in 30 to 120 monthly installment

Sharia Complaint Methodology- Ijara Financing

This can also be done through the Ijara Financing where maple leaf cement company should provide the option of Operating lease in purchase of the cars and buildings to the employees where they would provide the beneficial rights of building and vehicle to the employees against payment of installlements that includes principle profit (Kibor+%) Since the transaction involves asset therefore it complies sharia rules. The Ijara financing contract would contain the following:

The period of Ijara should be mentioned in the contract

Rental specifications

Specification of the security deposits by the employees

Employees would be owner of the car against the security deposits at the end of the Ijara period

The damage or loss to assets would be beard by the company

The company would record the depreciation in its own book

Advances Made to Supplier

In FY 2012-2012 Maple leaf has made advance of Rupees 181.168 Millions for the purchase of chipsim which is an input material to the cement manufacturing process. This advance amount is under the normal business transaction made by suppliers to the cement manufacturers as per terms mutually agreed. Thus, no any impermissibility is seen in this.

Sharia Complaint Method:

This transaction between supplier and maple leaf cement company can be done through the Islamic mode Bai Salam, in which Salam buyer (Maple leaf) can approach to the salam seller (supplier) to supply the quantity of raw material at specified date in future (predetermined) against the spot payment. Following would be the key condition in bai salam contract between supplier and maple leaf.

Full payment of the buyer to the seller at spot

Only those goods can be supplied to maple leaf whose quality and quantity can be specified exactly

All details in terms of quality and quantity must be cleared and specified at the time of contract.

Specification in terms of delivery and date Salam’s price is less than the normal spot sale price so it gives incentive to the company to pay less and the price would be calculated as the benchmark (Kibor plus margin)

ANALYSIS OF THE LIABILITIES SIDE

Long Term Loans From Conventional Banks:

Maple leaf cement company is having long term loan of Rs. 2157.099 Million which it has borrowed from conventional banks which includes 199.062 Million from Habib Bank Limited, Rs 1200.217 Million from Allied Bank and Rs. 152.281 Million from HSBC.

The tenor of this loan is 4.5 year

Payment in semiannual installments

Mark up rate is 9.7%

Since the company is following conventional way of financing its assets which accounts the factor of Riba thus I recommend following sharia compliant method for this loan:

Sharia Complaint Method—Diminishing Musharika

Description of the purpose of taking loan is not provided in the annual report of the company so I assume that the company has secured this loan for the expansion of the capacity due to the high demand in the industry as most loans are taken by cement companies for expansion purpose. So I recommend bank to adopt the diminishing musharika with an Islamic bank such as Meezan Bank and proceed the contract in the following way:

Using as a financing instructment, Meezan Bank and Maple leaf can make a joint ownership agreement on plant purchase.

The ownership of the asset would be divided into a number of units

Maple leaf would periodically buy the units from the bank over specified period of time

In this way Maple leaf would be the sole owner of the assets at the end of the period

Maple leaf would be paying principle plus rents both paying in an installments

Liabilities against assets subject to finance lease:

This account has total amount of Rs. 242.625 Million, the ;ease agreement is based on financial leasing whose principle amount is payable in 12 equal installments. The lessor charges three month Kibor+2.25% on the leased asset amount. The asset would be transferred in the name of the lessee

Sharia Compliant Method--Ijara Leasing

An alternative way suggested by the Sharia for conventional leasing is Ijara leasing where islamic bank acts as lessor and customer (Maple Leaf) lessee. The lease will be purely an operating lease. The operating lease with the Maple leaf will be done in following way by Islamic bank:

The customer (Maple Leaf) will have beneficial rights for the use of asset

The customer (Maple Leaf) will pay period rent for the use of asset

The ownership will remain with the bank during lease agreement

The Islamic Bank will offer to Maple leaf to buy the asset at pre-agreed value given by bank which is mostly equal to the security deposits given by the lessee at the start of the contract.

Following are the Normal Ijara Features of Meezan Bank for Car Leasing:

Syndicated Term Finance

Currency, Maple Leaf Cement Company is owing the syndicated loan of Rs 1347 Billion which has been provided by the group of banks

The lead arranger of the loan is Allied Bank, lenders are other Commercial Banks and DFIs

Tenor of loan is 9 years including grace period of 2.75 years

The mark up rate on the loan is Three months Kibor plus 100 bps

The loan will be payable in 26 outstanding installments

Since the loan contains the mark up on the loan without due consideration which is against the principle of Islam and counts in Riba

Sharia Compliant Method—Sukook

The Alternative to this conventional finance of the assets, is issuing sukook for the amount that they have borrowed on syndicated loan

Maple Leaf Company can issue the Sukooks Bonds which is sharia complaint method of finance.

Maple leaf Cement Company will have to follow the securitization process

They will issue sukook certificate backed by the fixed asset for the fixed period of time

And the asset ( Special Purpose Vehicle) will be deducted from the assets side of the company

The sukook holders will have claim on the assets and they will be known as the owner of that asset

Maple Leaf Cement Company will have to provide rent for the use of the assets and that rent would be profit for the sukook holders

The company will have to repay the sukook holders either by keeping period fund in the provident account or sell out the asset and repay the sukook holder from the cash flows of the sale of the asset.

Short Term Borrowings:

The company has total amount Rs. 3249.384 (Cash and running finances Rs.3224.011 Million and Temporary bank overdraft Rs. 25.373 Million) in this account, the company has borrowed this short terms loan from various conventional banks for working capital requirements under mark up arrangements. These facilities carry mark-up at the rate ranging from 11% to 24% per annum payable quarterly.

4.1 Sharia Compliant Method: Murabaha

As the company is paying mark up on this short term loan which is purely riba and impermissible in Sharia.

Alternatively Maple Leaf can fulfill its working capital requirement needs using various products offered by Islamic Banks including Mrahaba (a sale transaction in which cost is disclosed to the customer and profit is charged on disclosed cost) so the company can make differed payment to the bank.

This is best for the company for the inventory purchase maple leaf through sharia compliant mode of finance.

Accrued Mark Up: