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Murabaha for the purchase ordered

Credit Risk

Settlement Risk/Default RiskCustomer may not be able to honour the payment (loss ofreceivables)Risk MitigationIIFS may request for urboun, a third party financial guarantee or pledge of assets.Direct debit from customers account, centralised blacklisting system, and penaltyhelps to deter the customers late payment behaviour. Some Sharia scholar considers theuse of penalty as permissible.

Default RiskThe customer may purposely delay in payment to take advantage of the absence of penalty

charges (cashflow mismatch) Risk Mitigation- Identify bad payers through creditcheckingprocedures- Impose penalty even though proceeds are donated to charity- Use of collateral.Collateral RiskThe repossessed assets may be sold at discount (haircut)

Guarantor RiskShift in credit risk profile from customer to guarantor, if any (invested amount maynot be recoverable)

Market Risk

Price Risk If customer cancels the AP, the IIFS has to sell the goods in the openmarket 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 Mitigation1. The IIFS can purchase goods on sales return basis.2. IIFS can request for hamish jiddiyyah or security deposit. This is normally required inthe case of a binding promise.

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Rate of Return Risk IIFS is exposed to increases in the going rate of return expectedby the PSIA holder if the Murabaha contract is medium or long term. Risk MitigationIIFS 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 ornon deliverability, low quality) The appointment of customer (or his/ her relations) as Agentmay give rise to conflict of interest such as the purchase not being conducted on armslengthbasis which may result in manipulation of price. (fraud)

Sharia Compliance Risk Ascertain that ownership of the goods is properly transferred toIIFS prior to re-offer for sale (non recognition of income)Ownership Transfer RiskIn cases where customer acts as Agent, the customer can use the goods in his possessionbut yet not owned without informing the IIFS. The IIFS runs the risk of the goods that couldbe damaged/ impaired during the period (loss in asset value)

Quality Risk Additional cost to repair the goods.Risk Mitigation The IIFS can stipulate inthe contract that it is not responsible for any preexisting hidden defects and preferably assignthe right of recourse (if any) to the supplier for compensation.

Documentation RiskEnforceability 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 ofclaims)