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Murabaha for the purchase ordered

Credit Risk
Settlement Risk/ Default Risk Customer may not be able to honour the payment (loss of receivables) Risk Mitigation IIFS may request for urboun, a third party financial guarantee or pledge of assets. Direct debit from customers account, centralised blacklisting system, and penalty helps to deter the customers late payment behaviour. Some Sharia scholar considers the use of penalty as permissible. Default Risk The customer may purposely delay in payment to take advantage of the absence of penalty charges (cashflow mismatch) Risk Mitigation - Identify bad payers through creditchecking procedures - Impose penalty even though proceeds are donated to charity - Use of collateral. Collateral Risk The repossessed assets may be sold at discount (haircut) Guarantor Risk Shift in credit risk profile from customer to guarantor, if any (invested amount may not be recoverable)

Market Risk
Price Risk If customer cancels the AP, the IIFS has to sell the goods in the open market at a selling price that can be lower than the purchase price. The IIFS may require/ intensify marketing efforts to sell the cancelled purchase goods (low asset price). Alternatively, IIFS has to hold the goods and incur additional cost such as warehousing, insurance, or even damages (if the goods are perishable in nature). Risk Mitigation 1. The IIFS can purchase goods on sales return basis. 2. IIFS can request for hamish jiddiyyah or security deposit. This is normally required in the case of a binding promise.

Rate of Return Risk IIFS is exposed to increases in the going rate of return expected by the PSIA holder if the Murabaha contract is medium or long term. Risk Mitigation IIFS may use IMB with indexe d rentals instead of long term Murabaha

Operational Risk
Supply Risk When the customer chooses a supplier who is unknown to IIFS, could result in higher risks in terms of delivery performance, quality of goods, etc (delay or non deliverability, low quality) The appointment of customer (or his/ her relations) as Agent may give rise to conflict of interest such as the purchase not being conducted on armslength basis which may result in manipulation of price. (fraud) Sharia Compliance Risk Ascertain that ownership of the goods is properly transferred to IIFS prior to re-offer for sale (non recognition of income) Ownership Transfer Risk In cases where customer acts as Agent, the customer can use the goods in his possession but yet not owned without informing the IIFS. The IIFS runs the risk of the goods that could be damaged/ impaired during the period (loss in asset value) Quality Risk Additional cost to repair the goods. Risk Mitigation The IIFS can stipulate in the contract that it is not responsible for any preexisting hidden defects and preferably assign the right of recourse (if any) to the supplier for compensation. Documentation Risk Enforceability of documents against the customer for the remaining balance of selling price (net of urboun, if any) and/or recourse to the guarantor (if any) (litigation cost, loss of claims)

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