Prospects of Islamic Banking

Texts Articles Cases Internet References 3 conferress I would similar to forward my closure gratitude to a number of people, for their generous co-operation and t repealing, in the course of preparing this monograph. Mr Howard Johnson for reviewing my thesis plan, Professor trail Lee for his invaluable insight on Chapters 1-5 and fin exclusivelyy Dr PaulBridges and Dr Simon Norton for their enlighdecadeing views on just ab write up(pre nominal phrase) step ups. I dedicate my efforts to Bhaijan, who has always been the warmth and my guide by means ofout my purport. 4 prolusion At present metres, it would non be inappropriate to state that Moslems the creation every over face the dilemma that their religion, Islam, prohibits hobby in stringent impairment and aims at gene croping an part withance that is non only vauntingly-minded from tout ensemble trendls and diversenesss of pertain, b bely as well as from whatsoever(prenominal)(prenominal)thin g that juts every similarity to it.The fashionrn rescue is heavily base and reliant on busyingness and it is tricky to envisage each(prenominal) set of sparing apprisals where pursuance does non take place across a part, whether directly or verifyingly. resolve the above-menti unmatchabled contradiction reckons to be a scrap that Moslem intellectuals, buzzw coiffes, industrialists, handicraftmen, policy- dumbfoundrs and ordinary consumers face. In a nutshell, this monograph seeks to countenance an outline of the industrial plant and practices of Moslem curseing indus picture and the products it liberty chits covering juristic, political, fond and sparing issues as they bear on to it.Chapter 1 commences by providing a rationale to the Moslem banking companying and outlining its historical journey, and ends with a discussion on the riba and its prohibition in Islam. Chapter 2 deals with the modes of Moslem earnings, which re ally requires a detailed study, as it is these products that form the cornerst single of the st altogetherion Muslim banking industry. shariah precepts be besides introduced at this recite (and be discussed throughout this monograph), as they aid the process of comprehension. This chapter would likewise act to introduce a discussion on Muslim thrust dedicate, dealt indoors the pas quantify chapter.Chapter 3 deals with Muslim stand out hire in practice, focussing on the legal and sepa lodge(a)(a)(a) frugal issues as they relate to shariah- cogitate Documentation, kink and Lease Financing and Moslem Bonds. Chapter 4 consists of dickens guinea pig-studies, highlighting the customary sort outfulness developments in shariah law, as it relates to the Muslim banking industry. Two rising-fangled judgments ( atomic number 53 from UK and opposite from Pakistan) be specific completelyy examined, think overing the stance that the tribunal in the ii countries p uzzle follow towards Muslim precepts, its interpretation and application.Chapter 5 raises issues relating to structuring and pass of shariah law-Compliant investiture products. In busy, focussing on the role of monetary institutions, fund promoters and shariah advisors. The chapter finishs by providing a comparative analysis on the legal issues linked to the marketing of Moslem enthronement products in variant jurisdictions. Chapter 6 provides an insight to the regulative and supervisory practices of Moslem banking in motley countries.Obstacles set about by the Muslim banking industry in their do as regards their set up in gratify- found banking jurisdictions is further rack upressed, which is supplemented by a shift study on the regulatory issues of Muslim banks in India. 5 Chapter 7 is meant to be commonplace, and curtly discusses the lessons that formulaic and Muslim banks digest l nominate from each anformer(a)(prenominal)(prenominal), addressing is sues much(prenominal) as the effect of technology broadcast and the Bank-C lie downnt relationship, which would ultimately lead to the progress of one a nonher. Chapter 8 concludes this monograph. It as au and sotics the merits of introducing Muslim banking glob whollyy.Reforms and suggestions for the Moslem banks ar also appended to this chapter, together with a few conclusive remarks on the subject. It is aspired that this last depart be a positive piece on the subject of Muslim banking and its practices. Suggestions and criticisms argon alone mean to enhance the progress of this relatively nascent banking industry, which has undoubtedly shown study signs of progress. 6 G releaseary of Arabic legal injury This section explains any(prenominal) of the Arabic wrangling and terms, nearly of them appearing in this study, whereas roughly others world power relate to them and would therefrom be of participation to the reader.Allah is Arabic for God. Fatawa (singular . Fatwa) be legal decisions or vistas reached by a qualified phantasmal leader (mufti). Fiqh is Muslim Jurisprudence, the science of apparitional law, which is the interpretation of the sacred Law, shariah law. Gharar is uncertainty, speculation. Hadith (plural. ahadith) is the skilful term for the source colligate to the hadith the sayings- and doings- of the Prophet Mohammed (pbuh), his traditions. Halal mankindner permitted check to the sharia. Haram meaning forbidden jibe to the shariah. Jualah is the stipulated charge (commission) for acting any service.Maysir mean gambling, from a pre- Muslim game of hazard. Muslim is on who professes the combine of Islam or is born to a Muslim family. Qard Hasan is a benevolent loan ( lodge in-free). Qiyas means analogical deduction. Quran is the sanctum book, the revealed articulate of God, followed by completely Muslims. Riba is literally surplusage or increase, and covers both saki and usury. shariah is Muslim relig ious law derived from the saintly Quran and the Sunna Shirka (or Sharika) is a ball club or quislingship. Surah is a chapter of the Holy Quran. Takaful refers to rough-cut support, which is the al-Qaida of the sen cartridge holdernt of damages or solidarity among Muslims.Umma means the union the body of Muslims. Waqf is a trust or pious foundation. Zakat is a religious levy or generosity as required in the Holy Quran and is one of the Islams fivesomer pillars. (Courtesy Lewis & adenosine monophosphate Algaoud, Muslim Banking, Edward Elgar, 2001, Glossary, x, xi. ) 7 Chapter 1 Introduction and the Basis of Islamic Banking A. precept from an Islamic perspective It is argued by proponents of the Islamic banking that in todays world, the scotch formation that is base on please has resulted in concentrating the wealth in the detention of selected few, creating monopolies and further widening the gap in the midst of the affluent and the poor.Islamic finance ope crops in deference with the sharia law. Islam is non anti-commerce (the Prophet Mohammad was himself a merchant). In contrast to the mod westerly commandments and philosophy, Islam encourages circulation of wealth and considers its role as snappy to an economy. As Dr Usmani nones in his book, just as clotting of blood paralyzes human body, compactness of wealth paralyzes economy. The point that, today ten richest men in the world take on more wealth than forty-eight poorest countries of the world is relied by the supporters of the Islamic banking as a testament to the fact that the cur tear economical set up is unjust and has failed to assign the wealth proportionately, consequently leading to the autumn of humanity. 1 On considering the injunctions of the Holy Quran, it is sheer that the establishment of distri notwithstandingion of wealth rigid down by Islam envisages three objects, to wit (a) The establishment of a practicable system of economy. (b) Enabling every one to obtain, what is genuinely collectible to them. c) Eradicating the concentration of wealth. The traditional judgment of Muslims that Islam is a incomparable way of life distinct from all other isms and ideologies extends to the economic life of the Muslims (Umma). In the process of reshaping the economy, the argonas of bills, banking and investment atomic number 18 regarded as extremely merry to the process of Islamisation of the economy. The Islamic emphasis on co-operation as the make archetype in economic life has led to confidence on get ahead- sacramental manduction and participation as the preference bases for banking and investments in the Islamic framework. The concept of Islamic banking is regarded as one of the few authorized and creative Islamic ideas that excite been supremacyfully tried in new-fashioned terms. In the not too distant past, the broad(a) banking system in all Muslim countries was designed on the Western banking perplex the last men tioned being inconsistent with Islamic law primarily collect to the reproval of Riba (i. e. cheer) in Islam. In other words, the ejection of Riba 1 Meezan Banks draw a bead on away to Islamic Banking by Dr Muhammad Imran Ashraf Usmani, Preface, varlet 7, Darul-Ishaat, 2002. 2Issues in Islamic Banking, Selected Papers by M. N. Siddiqi, rascal 9, Preface, 1983. 8 from fiscal minutes is the raison detre of Islamic Banking3. Attempts to avoid dealings in raise led to the adit of a non- touch on establish banking system, ordinaryly termed as Islamic banking. McDowall notes that Islamic banking not only provides expand that atomic number 18 compliant in terms of the Muslim opinion, but through the primeval concept of usefulness and loss manduction with their nodes, deliver a highly honorable pro rate to conventional banking. As Islamic banking offers services to its guests free from gratify, any dealing or work that involves affaire is seen as erroneous and the refrom forbidden. Technically, riba refers to the addition in the tip sum of money of a loan, which the loaner notices from the takeer. This delibe placely simplified picture of the straightforward complex state of affairs is something I shall hark back to in the next chapter in detail. B. History The Islamic pecuniary system has a centuries-old history, as say by Chapra and Khan (2000) From the very early full point in Islamic history, Muslims were able to establish a fiscal system without interest for mobilising resources to finance productive activities and consumer acquires. The system worked sooner in speciality(p)ly during the heyday of Islamic nuance and for centuries on that point later. However, over the centuries, the centre of economic gravitational attraction inclined towards the Western world, and the Western pecuniary institutions (including banks) became dominant and the Islamic tradition remained dormant. 5 The Muslim society never approbated int erest throughout the thirteen enturies of its history prior(prenominal) to domination by imperialist powers, it managed its economy and carried on domestic and international take without any involvement of interest. Profit manduction and divers(prenominal) kinds of participation arrangements served as fair to middling footing for savings and investment and tidy seat of government was mobilised for mining, shipbuilding, marine trade, textiles and other industries. 6 The issue of interest free banking regained the vigilance of Muslim intellectuals in the 1940s and 1950s. By this time, numerous topical anaesthetic and national banks were open a want the lines of interest-based foreign banks.By this time, the government of Muslim countries, in concomitant, those who gained political independence, found themselves compelled to engage in international pecuniary achievements victimisation banking systems. The necessity for moneymaking(prenominal) banking was realised. The challenge was to 3 Profit and tone ending Sharing, An Islamic Experiment In pay and Banking by Shahrukh Rafi Khan, Introduction and Overview, rapscallionboy 1, OUP, 1987. 4 Islamic Banking A Brief Historical status by Bob McDowall, Business and Finance, twenty-s situationh May 2004. 5 Islamic Banking and Finance by Munawar Iqbal and David T.Llewellyn, Introduction, rogue 1, para 1, 2002. 6 Ibid at 1, foliate 9, para 2. 9 avoid the concept of interest deep down commercialized banking. The lead to this was the development of the concept of profit and loss sharing (Mudarabah), the key concept from which the complex body part of most Islamic banking products and services argon derived. 7 C. flow Status All over the world, Muslim bankers and economists are faced with the fountainhead as to how they should eliminate interest and evolve indispensable institutions and practices, which would change economic activities to flourish without resorting to Riba in any form? In rece nt years, there has been a revival of interest in formulating a modern magnetic declination of the historic Islamic pecuniary system, as many Muslims are endeavouring to avoid interest-based practices and dutys. Islamic banking was virtually an unk todayn concept xxx odd years ago. Now, fifty-five development and emerging market countries have some nexus with Islamic banking and finance and Riba free has become the buzzword for pecuniary institutions that need to attract the large and attractive node base in the form of Muslims all over the world who are tone for Shariah-Compliant modes of investments and backings.In addition, there are Islamic financial institutions operating in 13 other locations. 9 In Pakistan, Iran and Sudan, all banks essential ope grade on a overturn floor Islamic pay formulas. As noted by arbiter Mufti Usmani, there were 200 Islamic banks and financial institutions in forty-three countries of the world, controlling a financial pool of US$ one hundred billion,10 increasing at an annual yard of 10-15 percent. The Islamic financial industry is already one of the fastest growing industries and has awe-inspiring potential as detect by academics in public.The unorthodoxy of Islamic banking model is apparent from the fact that those who argue in privilege of Islamic banking are much regarded as utopians and romanticists, but they claim that the beaver form of realism could be achieved by challenging all those systems that are based on the exploitation of man in one form or the other and in pursuit to set up a just socio-economic order. Dr Siddiqi argues that an Islamic economy is capable of freeing modern man from the debt-ridden economy in which he survives, and of maneuver him towards a society based on justice and equity, and ultimately leading to the path of developing and stability. 1 D. Riba and its Prohibition in Islam As observed by Lewis, in order to conform to Islamic norms, five religious features are well set up in the literature, and moldiness(prenominal)iness be adhered to in investment behaviour. They are as follows 7 Islamic Banking by Mervin K. Lewis & vitamin A Latifa M. Algaoud, Chapter 2, Islamic Law, varlets 4 & 5, Brief History, 2001. 8 Banking Without Interest by Muhammad Nejatullah Siddiqi, Foreword, para 1 &2, 1983. 9 Australia, Bahamas, Canada, Cayman Islands, Denmark, Guernsey, Jersey, Ireland, Luxembourg, Switzerland, united Kingdom, United States and the Virgin Islands. 0 bran-new Horizon, No. 82, December 1998, p. 17. He is the electric chair of Centre for Islamic Economics, Pakistan, and a justness of the Islamic Shariah Court. 11 Ibid at 1, rapscallion 7 & 8. 10 (a) the absence of interest-based (riba) financial proceedings (b) the introduction of a religious levy or almsgiving, (zakat) (c) the prohibition of the production of goods and services that contradict the care for pattern of Islam (haram) (d) the avoidance of economic activities involving gambling ( whitethornsir) and uncertainty (gharar) (e) the cooking of Islamic Insurance (Takaful).These five elements give Islamic banking and finance its distinctive religious identity. 12 For the purposes of our present chapter, we need to focus briefly on element (a), i. e. absence of interest-based works, which is hencely(prenominal)ce the central element among the last mentioned. Islamic finance, like Islamic commercial law in general, is dominated by the doctrine of riba, and it is self-asserting that we discuss this in some detail, as to its nature and prohibition. The literal kernel of the Arabic word riba is increase, excess, growth or excess.According to Sahacht (1964), riba is simply a special vitrine of unjustified enrichment or, in the terms of the Holy Quran, consuming (i. e. appropriating for ones own use) the attribute of other for no good reason, which is prohibited. Prohibition of interest is ordained in Islam in all its forms. The last menti oned prohibition is strict, absolute and certain. The hearty concept of interest is fundamentally repulsive to the spirit of Islam, as could be observed from the future(a) verses of the Holy Quran O, believers, care Allah, and give up what is still repayable to you from the interest (usury), if you are on-key believers. (Surah 2 Aayat 278) And If you do not do so, hence take notice of war from Allah and His Messenger. But, if you repent, you kitty have your principal. N both should you commit immorality nor should you be subjected to it. (Surah 2 Aayat 279) 12 Ibid at 7, summon 28, para 2, 2001. 11 Chapter 2 Islamic Modes of Financing Introduction whizz idler vividly perceive the transmutation in the global banking sector, from core/retail banking, to the complex and detailed role of financial backing, which intelligibly depicts sophistication and organisation of international banking community.With the exit of time, the banks have undoubtedly become multifunctiona l bodies, effecting various roles and providing their guests with numerous desired products. oration of the international banking community, Islamic banking is undoubtedly a part of it. To keep up with this change community and to compete with their fellow-competitors, Islamic banking has introduced and melio ordain some ersatz Islamic financing products, to the ones available in the stodgy markets, in order to cater for the Muslim community around the globe.Having pull that, it is open to anyone, whether a Muslim or a non-Muslim, to take advantage of these products, as long as they comply with the requirements and precepts of Islamic Shariah. At this instance, it helps to add that the prohibition of interest in Islam does not imply that the big(p) is not to be rewarded, nor that risk is not be expensed. The Islamic system has both amend and varying return modes to expense the crown and add risk premia in relation to the grease of risk involved.Islamic banks provide financing victimisation two methods. The starting line is based on profit-sharing and the guerrilla one deals with modes, which rely on solved return (mark up) and lots conclude in creating indebtedness of the companionship desire finance. The Islamic modes of finance are unique as the debt think with financing using mark-up modes results from real good exchanges stipulation/ barter for operations, rather than the exchange of money for interest-bearing debt. Furthermore, unlike the conventional debt, much(prenominal) debt is not vendible except at its conventionalism value. 3 The entire idea bed the Profit and Loss Sharing (PLS) is seen as an innovation, a modern trend if you like, and it is aspired that it exit bring some(prenominal) merits to the industry of investment and finance, thus gathering the community at large. It essential(prenominal) be borne in mind that the Islamic Shariah does not prohibit Islamic banks from government issue stock-leverage wa rrants. However, the question of the fair play of the commissions and charges trustworthy by banks in issuing the pledges has been a subject of much debate and discourse. some(prenominal) banks in the spunk East have seek to tackle the last mentioned issue by agreeing to issue guarantees at no charge, plot simultaneously asking for cash logicalating of a specific percentage (30 %) of the guaranteed amount, which is past invested by the bank for its own visor and realise for the term of the guarantee. 14 13 Progress and Challenges of Islamic Banking by Abbas Mirakhor, revue of Islamic Economics 4 (2) 1997. 14 Demand Guarantee in the Arab Middle East, J. I. B. L, 7, scalawag 271, 1997. 12In order to circumvent the ambiguities raised, a group of Muslim scholars gave their opinion on the virtue of Islamic banking practices as regards guarantees. Their opinion is summarised in two segments and is as follows. 1. The legality of the issuance of a bank guarantee relies on th e legality of Shariah principles of the distill in question, in respect of which the guarantee was issued. It is evident that no Islamic bank should issue guarantees in relation to items that are prohibited low the Shariah, including guarantees for the payment of steep interest, the sale of alcohol, drugs, the construction of gaming places, etc.The last mentioned(prenominal)(prenominal) may seem to be an obstruction towards an entirely independent guarantee, but its cranial orbit should not be overstated. As long as the resolve in question is considered lawful by the brave outards of Shariah precepts, a guarantee stipulated to be unconditional and collectable on first demand would be deemed valid and in force at a sink place Shariah, notwithstanding the performance or last of the on a lower floorlying strike. . Banks are entitled to receive remuneration for the issue of a guarantee. Having express that, the amount of remuneration, to be in ap spread out with the Isl amic Shariah, ought not be fixed in accordance with the amount of the issued guarantee, but should kind of be weighd to provide a conceivable honorarium to the issuing bank for the time and effort that the latter spent to issue and manage the guarantee. 5 This chapter bequeath focus on the Islamic modes of finance, other than guarantees, namely Musharakah, Mudarabah, Murabaha, Bai Muajjal, Ijaraha, Ijaraha Wa Iqtina, Salam, Istisna and Istijrar, which are available in the global financial market today, whilst providing a comparison with the Conventional finance products, wherever possible. A(i). Musharakah The literal meaning of the Arabic word Musharakah is sharing, or Shirkah, which means being a fellow. at that place are some(prenominal)(prenominal) kinds of coalition, and they all come beneath the read/write head of Shirkah. Musharakah is perceived as an ideal alternative for the interest based financing with faraway reaching set up on both production and distributio n. 16 The term Musharakah as use in the modern terminology, has been recently introduced by Islamic Scholars writing on the subject and is normally restricted to a particular type of Shirkah, which is Shirkat-ul-Amwal, where two or more someones invest some of their capital in a joint commercial go.However, at times it could also intromit Shirkat-al-Aamal, where collaborationistship takes place in the credit line of services, whereby all the checkmates jointly on a lower floortake to mother some services for their nodes, and a hire is supercharged from the latter and is distributed among the partners as per an concur ratio. 17 15 Shariah Related Documentary Issues in Islamic Project Finance minutes, J. I. B. L. R 2003, scallywag 272, para(s) 2, 3 & 4. 16 Meezan Banks Guide to Islamic Banking by Dr Muhammad Imran Ashraf Usmani, 2002, varlet 87, Chapter 13 (Definition and Classification of Musharakah). 7 Ibid at 11, paginate 90. 13 Musharakah is a vulgar arrest s urrounded by the parties, and thus all the mandatory ingredients of a valid experience essential be present. Furthermore, the capital in Musharakah commensurateness should be quantified, specified, but not necessarily merged or in liquid form. If all the partners agree to work for the joint venture, each one of them shall be treated as the means of the other, in all matters concerning the business. Any act carried out by a single partner, in the normal course of business, shall be deemed as authorise by all other partners. 18All scholars are unanimous on the principle of loss sharing in Shariah, which is based on the saying of Syedna Ali ibn Talib, which is as follows Loss is distributed trainly according to the ratio of investment and the profit is divided according to the chthonianstanding of the partners. 19 Termination of the Musharakah pledge Musharakah agreement pass on be hold backd in the following circumstances. 1. If the purpose of forming the Shirkah has been achieved. 2. Every partner squeeze out exercise his/her right to terminate Musharkah at any time later giving his partner a fair notice. . In the case of a expiry of any one of the partners or any partner becoming insane or incapable of effecting the commercial effect. 4. In the case of damage to the parcel capital of one partner out front mixing the uniform in the total investment and before makeing the get, the partner forget stand change and the loss go away be borne by that particular partner. However, if the share capital of all the partners has been mixed and could not be identified singly, thusly(prenominal) the loss provide be shared by all and the partnership entrust not be terminated. 0 Termination of Musharakah without the closure of the business If one of the partners intends to terminate the Musharakah, in discord with the other partners, the latter issue could be resolved by mutual consent. The partners intending to run the business may grease ones p alms the share of the partner who wants to terminate his partnership, as the solution of Musharkah with one partner does not affect the Musharkah amongst the other partners.The latter seems to be a just and a possible approach, especially in the modern situations, where the success of a particular business is conditional upon its continuity, and the liquidation or separation at the instance of a single partner may only cause irreparable damage to the other partners. 21 18 Ibid at 11, page 91 & 92. Ibid at 11, page 94 (Rules of Distribution). 20 Ibid at 11, page 95 (Termination of Musharakah). 21 Ibid at 11, page 96. 19 14 Security in MusharakahAs regards a Musharakah agreement between the bank and the lymph node, the bank should in its own right and discretion, obtain adequate security to at a lower placewrite that the capital invested/financed and the profit that may be pull in are safe. As part of the ordinary practice, the securities obtained by the bank, are kept comp rehensively insured at the ships companys terms and expenses, till the Islamic mode of indemnity (Takaful) becomes useable. It is chthonicstood that the purpose of the latter security is a precautionary touchstone to cover for damage(s) or loss of the principal amount due to the clients negligence. 2 Differences between interest-based financing and Musharakah 1. As regards interest-based financing, a fixed rate of return on a loan, advanced by the moneyman is pre resolved, irrespective of the profit earn or loss suffered by the debitor. Mushrakah agreement does not envisage a fixed rate of return, it is in fact based on the unfeigned profit make by the joint venture. 2. The financier tricknot suffer loss in an interest-based financing. The financier under a Musharakah agreement washbasin, by chance suffer a loss, if the joint venture fails. 3.It is argued by Islamic scholars and other academics that the interest-based financing results in injustice, any to the credito r or the debitor. If the debtor suffers a loss, it is unjust on the creditors part, to claim a fixed rate of profit. And, if the debtor earns a high rate of profit, it is injustice to the creditor to provide him with only a small proportion of the profit, while the debtor taking the chunk of it. As regards a Musharkah agreement, the returns of the creditor are tied up with the actual pelf earned through the enterprise, which he/she financed.The great the profits of the enterprise, the higher the rate of return to the creditor. If the enterprise earns substantial profits, the creditor cigarettenot memorise all of it, but has to share it with the common people, e. g. depositors in the bank. 23 Tenure of Musharakah As regards the determination of the terminus of the Musharakah agreement, the following conditions operate. (a) The partnership is fixed for much(prenominal) a era that at the end of the tenure, no other business can be parcel outed. 2 23 Ibid at 11, page 97 (Secur ity in Musharakah). Ibid at 11, page 98. 15 (b) The partnership can be for a very terse term, during which neither partner can dissolve the partnership. 24 A(ii). fall Musharakah Another form of Musharakah, which has developed in the recent years, is known as change magnitude Musharakah. It involves the participation of a financier and his client, either in the joint allow power of a property/equipment, or in a joint commercial enterprise.The financiers share is further divided into several units, and it is intended that the client will leverage the financiers units of the share, one at a time, finaleically, increasing his own share, until all the units of the financier are purchased by him, so as to make him the sole proprietor of the property or the commercial enterprise, whichever be the case. 25 B. Mudarabah This is also a kind of partnership, whereby one partner provides finance to the other for investing in a commercial enterprise.The investment is provided by the firs t partner called the Rab-ul-Maal, while the entire responsibility for the circumspection and work falls upon the other partner, who is called the Mudarib. The profits generated, are shared in a predetermined ratio. on that point are two kinds of Mudarabah restricted and unrestricted. Rab-ul-Maal may specify a particular business for the Mudarib, in which case he shall invest the money in that specified business only. This is known as Al-Mudarabah-alMuqayyadah (restricted Mudarabah).But if he leaves it open for the Mudarib to undertake some(prenominal) business he wishes, the Mudarib shall be authorised to invest the money in any business he wishes. This type of Mudarabah is called Al-Mudarabah-al-Mutlaqh (unrestricted Mudarabah). A Mudarib cannot forward the money lent to him, or lam out any action at law that is beyond the course of his business, without the Rab-ul-Maals express license or consent. Rab-ul-Maal is entitled to pull off the activities carried out by the Mudarib . The former can also work with the Mudarib, provided the latter gives his consent.A Rab-ul-Maal can contract Mudarabah with more than one person through a single work, for instance, he can offer financial supporterance to X and Y both so that each of them becomes a Mudarib, and the capital of the Mudarabah relations shall be utilized by both of them, jointly. 26 It is imperative that both the parties should decide in advance, on the proportion of profit that each one of them should receive. However, the parties cannot suggest a lump sum amount of profit, nor can they determine the share of any fellowship at a 24 Ibid at 11, page 102 (Tenure of Musharakah).An Introduction to Islamic Finance by Muhammad Taqi Usmani, Chapter 2, page 82, para 1 (Diminishing Musharakah). 26 Ibid at 11, pages 105-108. 25 16 specific rate tied up with the capital. If the business has suffered loss in a few proceedings and make profit in some others, then the profit should be utilize to starting sign al the loss/losses incurred, and whatever remains, shall be a distributed between the parties according to the hold ratio. 27 Roles of Mudarib He is an Ameen (trustee), who is responsible to carry after the investment, with an exception of natural calamities.He is a Wakeel (agent), as he makes the purchases from the funds provided. He is also a Shareek (partner), thus sharing the profits with Rab-ul-Maal. He can also possibly be a Zamin (liable), and thus will have to compensate for any loss suffered during the course of Mudarabah, due to any erroneous act on his part. 28 Termination of Mudarabah The Mudarabah will come to an end when the specified period in the contract expires. It can also be terminated by either of the two parties, at any time, by giving notice.Furthermore, in case Rab-ul-Maal has terminated the services of Mudarib, the latter will continue to perform his acts under the contract, until he is informed about the termination. 29 C. Murabaha In this particular kind of sale, the marketer lickly mentions the cost of the change commodity, and then dish outs it to the debaucher by keeping a profit margin. Thus, Murabaha should not be seen as a loan stipulation on interest, it is rather a sale of a commodity for cash/deferred price. As regards Bai Murabaha, the bank purchases a commodity, on a clients behalf, and then resells it to the latter, on the can of plus-profit.Under this kind of agreement, the bank discloses its cost and profit margins to the client. Thus, unlike Conventional banks (which advance money to a borrower), the bank will buy the goods from a third party and sell it onwards to a customer for a pre- concur price, thus abstaining from interest. The growing use and life force of Murabaha agreement is proven by the fact that in Islamic banks world over, 66% of all investment minutes are through Murabaha. 30 It is argued by critics of Islamic banking that Murabaha agreements are in reality interest-based contracts, under the garb of a notional sale and buy ack transaction, profit being correspondent to interest in this case. Islamic scholars have reverted to this argument by stressing that a avowedly Murabaha financing structure is quite different 27 Ibid at 11, 109-111. Ibid at 11, page 111, para 5. 29 Ibid at 11, page 112, para 2 (Termination of Mudarabah). 30 Ibid at 11, page 125, Chapter 16 (Murabaha). 28 17 from an overdraft provided by Conventional banks and the former offers various benefits to the bank and its customers, namely that depositors have a share in the banks profits.Furthermore, the basic deflexion of opinion is the Aqd (contract), which specifies the Islamic conditions, as against the interest element in Conventional banking transactions. 31 Basic Rules for a Murabaha transaction 1. The subject of sale essential be in existence at the time of the sale. 2. The seller must(prenominal) have the ownership of the commodity in question. 3. The subject of sale must be in secular or constructive possession32 of the seller while he is marketing it. 4. The sale must be mo and absolute no provisions for contingencies should be do part of the contract. . The goods/commodity to be sold, must reflect a value and must be specified to the purchaser, loss no room for ambiguities or astonishment as between the parties. 6. The sale must be unconditional and the price of the commodity should be certain. 33 If a client de charges on any payment(s) by the due date, the price cannot be changed nor can the punishment fees be charged, as against him. Nevertheless, as regards purchasable clients, who knowingly and deliberately omission, they should be do liable to compensate the bank, subject to the following two conditions. a) The negligenceer must be wedded a grace period of at least(prenominal) a month. (b) It must be proved beyond reasonable doubt that the client is a defaulter, and he has no justifications for his latter behaviour. 34 Murabaha can only be utili ze when a commodity is to be purchased by a customer/client. It is highly pertinent to peruse the subject matter of the Murabaha, as the put downs must be signed for obtaining funds for a specified purpose only. It needs to be disquieted that the Murabaha consists of several different contracts and they all play their part one after another, in respective stages. 5 31 Ibid at 11, page 126, para 2 (Arguments against Murabaha). It refers to a situation where the possessor has not yet taken the physical address of the commodity, yet all rights and liabilities of the commodity are passed on to him including the risk of its destruction. 33 Ibid at 11, page 126-127 (Murabaha Rules). 34 Ibid at 11, page 129, para 1 (Penalty for Default). 35 Ibid at 11, page 130-131 (Basic Mistakes in Murabaha Financing). 32 18 D. Bai Muajjal This is basically a sale on deferred payment.The deferred payment becomes a loan, which the buyer pays in a lump sum or instalment (as agreed between the parties). In Bai Muajjal all those items/commodities can be sold on a deferred payment, which come under the heading of capital, where quality does not make a difference but the natural or intrinsic value does. The price to be pay must be agreed and fixed at the time of sale. The buyer must be given complete possession of the commodity in question, whilst the seller is free to ask the buyer to provide him with guarantee in the form of a mortgage or any other item. 6 E. Ijaraha In an Islamic leasing (Ijaraha), the owner of the summation, while retaining the corpus of the addition, transfers its usufruct to another person for an agreed period, at an agreed consideration. All the liabilities arising from the ownership must be endured by the lessor. The period of contract must be determined in clear terms and the asset must be clearly identified as between the parties. 37 The lessee is liable to compensate the lessor for all the damage(s) caused to the undertake asset by any misuse or negl igence on his part.The lease should be determined at the time of the contract for the whole duration of the lease. The lessor cannot increase the rental unilaterally, and must bestow the lessee in that regard. 38 Lease was not originally a mode of financing, nonetheless, certain financial institutions have adoptive leasing as a mode of finance instead of a long term bring arrangement, which is based on interest. The transaction of financial lease may be used for Islamic financing, subject to certain conditions. It does not suffice for the latter purpose to deepen the term interest by rent and mortgage by leased asset.It must be emphasised that there is a difference between leasing and an interest-bearing loan, as regards Islamic Shariah. 39 contrasted the contract of sale, an Ijaraha agreement can be based on a hereafter date, thus it is different from a Murabaha agreement in that respect. In majority of the cases concerning financial lease, the lessor (financial institution ) will purchase the asset through the lessee himself. The lessee makes the purchase on behalf of the lessor who then pays the price to the supplier, either directly or through the lessee. 0 The lessor, being the owner of the asset, and having purchased it through his agent (lessee), is liable to bear all the expenses incurred in the process of its purchase and its import to the country of the lessor (if that is the circumstance), e. g. expenses of freight and custom duty etc. 41 36 Ibid at 21, pages 102-103 (Bai Muajjal). Ibid at 21, pages 158-160. 38 Ibid at 11, pages 148-149. 39 Ibid at 11, page 149 (Lease as a Mode of Finance). 40 Ibid at 11, page 150 (The Commencement of Lease). 41 Ibid at 11, page 152, para 3 (Expenses Consequent to Ownership). 37 19 variable quantity Rentals in Long Term LeasesSeveral Islamic banks use the rate of interest as a bench mark to calculate the rental amounts, e. g. London Interbank Offered Rates (LIBOR), which is the rate of interest at which Conv entional banks borrow funds from other banks, in marketable size, in the London interbank market. The idea is to earn the same amount of profit through the mode of leasing, as earned by the Conventional banks by advancing loans on interest. Instead of fixing a distinct amount of rental, the Islamic banks calculate the cost of purchasing the asset that is to be leased and intend to earn an amount jibe to the rate of interest.Thus, the agreement between the parties provides that the rental will be equal to the rate of interest or to the rate of interest in addition to something. Since the rate of interest is variable, it cannot be set for the whole duration of the lease. The latter arrangement has been objected to on the following two grounds42 (a) By subjecting the rental payments to the rate of interest , the transaction is make to resemble an interest-based financing. The modern Islamic scholars have denied that argument and have stressed that the rate of interest is only used as a benchmark.As far as the requirements of Shariah are concerned, they must be fulfilled for a valid lease to be executed, and it is the latter that counts, as regards the legality of the Islamic financial lease. The vital difference between an interest-based financing and a valid Islamic lease does not lie in the amount that has to be paid to the financier or the lessor. However, it is recommended that the use of rate of interest as a benchmark must be avoided at times, where possible, so as to distinguish it with the non-Islamic transaction. 3 (b) The assist criticism relates to the situation that the variations of the rate of interest are not determined and the ligature up of rental with that rate of interest implies Jahalah and Gharar (uncertainty, especially in a contract that may lead to dis moldes later on), which are not permissible by Shariah precepts. It is one of the basic tenets of Islamic Shariah that the parties must be well certified of the consideration in every tr ansaction they enter into.This objection has been responded by tone at the reasons of prohibition for Jahalah, namely that Jahalah may lead to disputes between the parties and it might render the parties susceptible to an unforeseen loss. As regards the first objection, both parties make their decisions with mutual consent upon a welldefined benchmark serving as a criterion for determining rent, thus no question of dispute arises. Relating to the second objection, several contemporary scholars suggest that the relation between rent and the rate of interest is subjected to a limit.E. g. the base contract may provide that the rental amount given after a specified period will be altered according to the change in the rate of interest, but in no instance, it will be higher than 15% or lower than 5 % of the previous monthly rent. The latter implies that if the increase in the rate of interest is more than 15%, the rent will be increase only up to 15%, and if it decreases by more than 5 %, the rent shall not be diminish to more than 5%. 44 42 Ibid at 11, page 154 para 1. Ibid at 11, page one hundred fifty-five. 44 Ibid at 11, pages 155 & 156. 43 20 F.Ijaraha Wa Iqtina It is permissible in Islamic Shariah that instead of there being a sale, that the lessor signs a crash agreement, making a contract to gift the leased asset to the lessee at the end of the lease period, on condition that the lessee makes all the payments due for his/her rent. The latter arrangement is known as Ijaraha Wa Iqtina. It has been affirmed by a large number of contemporary Islamic scholars and is widely practised by the Islamic banks and financial institutions. Although, the validity of this arrangement is subject to two conditions.They are (a) The agreement of Ijaraha itself should not be subjected to signing of sale or gift. The promise should be made in a separate document. (b) The promise must be unilateral and binding on the promiser only. If the leased asset is used by numerous users, the lessee cannot sub-let the asset, except with the express permission of the lessor. The lessor can sell the leased property to a third party, whereby the lessor is replaced by the new owner, and the lease agreement would then be between the new owner and the lessee. 5 This form of financial leasing has been subjected to criticism as it is not compatible with the modern financing agreements, as a non-binding promise cannot be enforced before courts and is thus not a legally satisfactory solution. In an attempt to reconcile Ijaraha Wa Iqtina with the modern financial structure, it is suggested that the lessors failure to notice his non-binding promise should be subjected to a pre-contractual liability, or culpa in contrahendo.In civil law jurisdictions, this concept of pre-contractual liability contemplates that the contracting parties will conduct their pre-contractual dealings in good faith and also points to any relevant facts, which are within the commercially usual li mits, to the other party. If a party is unsuccessful in carrying out its duties, and thus in give of contract, then it will have to pay the damages to the other party for not fulfilling the agreement. By adopting this suggestion, the promisor in breach, is made liable for the promisees cost, in purpose another similar object to purchase. 6 G. Salam This mode of financing can be used by modern banks and financial institutions, especially in order to finance the agricultural sector. In Salam, the seller undertakes to hang on specific goods to the buyer at a future date, in exchange of an advanced price fully paid at the spot. The payment is made in cash, and the supply of purchased goods is deferred. 45 Ibid at 11, pages 161-162 (Ijaraha Wa Iqtina). tress and Lease Financing in Islamic Project Finance by Klarmann, J. I. B. L. R, page 65 (Lease Financing Ijaraha Wa Iqtina). 6 21 Purpose of Salam Contracts The purpose is to stand the need of farmers, who operate on a small scale, a nd thus need the finance for farming purposes, so that they can carry out their day-to-day activities. Moreover, it is designed to assist the traders, in their export/import transactions. Salam proves adept to the seller, as he receives the price in advance, and at the same time, advantageous to the buyer, as the price under the Salam arrangement is normally lower than the price in spot sales. 7 The permissibility of Salam is seen as an exception to the general rule that prohibits forward sale and thus it is subject to certain stringent conditions, which are as follows Conditions of Salam 1. The buyer must pay the full price to the seller at the time of effecting the sale. The basic idea cornerstone the Salam agreement, is to satisfy the instant need of the seller. If it is not paid in full, the latter purpose is not achieved. 2. The quantity and the quality of the goods must be specified. 3. Salam cannot be effected on a particular commodity or on a roduct of a particular field o r farm. 4. The contract must expressly state the quality of goods, thus leaving no room for ambiguities, which might lead to disputes later on. Same is the case as regards the quantity it must be agreed upon in absolute terms. 5. The exact date and place of the rescue must be specified. 6. Salam cannot be effected in respect of things, which require them to be delivered at the spot. 7. Since the price in Salam agreements is generally lower than the price in spot sales, the difference between the two prices may be a valid profit for the bank. . A security in the form of a guarantee, mortgage or hypothecation may be required in order to run into the delivery from the seller. 9. The seller must deliver to the buyer, the commodity, and not the money at the time of the delivery. 48 H. Istisna Istisna is a sale transaction whereby a commodity is transacted before it comes into existence. It is an order for a manufacturer to manufacture a certain kind of commodity, to be used by the purc haser. The manufacturer uses his own material to 47 48 Ibid at 11, page 133 (Purpose of Use).Ibid at 11, pages 134-135 (Conditions of Salam). 22 manufacture the required goods. The price must be fixed with consent of all the parties involved. All other vital specifications of the commodity must also be fully settled. Subject to the commendation or receipt of prior notice, either party can cancel the contract before the manufacturing party has begun the work. The time of delivery need not be fixed, however a time limit may be imposed as between the parties. 49 I. Istijrar Istijrar means purchasing the goods from time to time, in different quantities.It is an agreement, whereby the purchaser buys something at regular intervals, without any formal offer or adoptance mode or bargaining. There exists one master agreement, which contains all the terms and conditions of the purchases in a finalised form. There are two kinds of Istijrar (a) where the price is determined after all the tran sactions/purchases are completed (b) where the price is determined in advance, but the purchase payment is made from time to time. As regards the Islamic mode of financing, only (a) is relevant. Istijrar can be adopted as a viable tool, in the case of suppliers of the borrower.In the latter case, the bank enters into a Murabaha agreement (Agreement to Purchase) with the suppliers (mainly trading companies), that it will purchase the assets from them at a market price or at a pre-determined push aside from the market price. Whenever the customers demand, the bank can purchase that particular asset from the suppliers on the tail end of Istijrar, and sell it onwards to the customer, on the basis of Murabaha. 50 49 50 Ibid at 11, pages 139-142. Ibid at 11, page 143-145 (Istijrar). 23 Chapter 3 Application of the Islamic Modes of Finance A Research on Islamic Project Finance A. Shariah-Related Documentary and Other IssuesIn recent years, Islamic financial institutions have actively st arted to structure and participate in transactions, which are associated with long-term trade, as opposed to the short term trade related transactions (e. g. Murabaha). This transition has given rise to a number of important Shariah and infotainment issues. The prevalent backdrop is that the Islamic bankers and their advisers now face even more stringency, regarding the ground up of Shariah-compliant structures that are accepted commercially and are also in concurrence with the existing governing law of that particular jurisdiction where they operate. 1 As noted earlier, one of the basic principles of Islamic finance is that at a particular stage in the transaction, the financial institution will be the owner of all or part of the asset that is being financed, and under Shariah precepts, several forms of risk related with being an owner cannot possibly be passed on to the customer or a third party. The latter is the most define difference between an Islamic financial system and a Conventional one. These additional ownership risks become more upright when the transaction involves complex capital assets, e. . a power plant or an aircraft, as the potential exposure faced by the Islamic financier as an owner can be very vituperative and significant. It is expected that since the Islamic financial institutions are willing to take greater risks as compared to their Conventional counterparts, this should result in greater rewards for the former. It is submitted by the academics that this is not necessarily the case. 52 In several countries, e. g. the idea of interest is sanctioned by an Act of Parliament, and the latter being affirmed by the courts.Having said that, it is imperative to notice that laws of several states are embedded in Shariah law and concepts, if not in whole then in part. It is observed that a proposed Islamic structure that has the approval of a Shariah board must be examined against the local statutes of that particular state to check whet her the structure raises any adverse issues under those laws, and if so, then the proposed structure will for sure need amendment and another approval from the Shariah Board.For example, under the Shariah precepts, a transfer of an interest in real ground is effective upon an agreement, signed between the buyer and seller. However, such an agreement may not be recognized by the local laws (at least as regards the bona fide third parties) until and unless the transfer is enter in the concerned land registry. Sometimes, the job might be such that a person to whom a real estate interest has been validly transferred under Shariah principles, would not necessarily be recognised as the legal owner under the local municipal 51 2 Ibid at 14, page 317. Ibid at 39, page 317 (Risk Reward Issues). 24 laws. In such situations, the legal and financial consultants, giving their adept advice on such structures, are required to strike a labyrinthine sense, so that the Shariah conditions and r equirements are satisfied and are also accepted and applicable under the governing law. 53 There are certain issues relating to the nature of Islamic financing that come up too often and thus need to be discussed. Some of these are discussed below but the list is not intended to be exhaustive. IndemnitiesThe Shariah principle governing the operation and conditions of Islamic financing expressly prohibits indemnity for a loss or damage that is not caused by the customers default. Shariah sees the whole idea of seeking indemnity from the customer as unfair, notwithstanding the fact that the particular asset may have been chosen by the customer. Matters relating to the title to the asset, its fitness for its intended purpose and taxes that are imposed on ownership raise some expert and significant credit issues when one is dealing with a major capital asset, e. . aircraft or a vessel. Having said that, there must be some alternate basis for an Islamic financier to claim indemnity. Su ggestions have been forthcoming in the form of seeking indemnities based on the concept of in the public eye(predicate) need or necessity or by other methods, to cover the risks. E. g. such methods could take obtaining the benefit of warranties from the supplier or the manufacturer of the asset and assurances that the asset(s) are in perfect condition and have been validly perfected for the intended use.The financial perplex of the assignor (and any available insurance rampart relating to the assignor) would also have to be assessed. 54 In contrast, in the case of Conventional financing, the customer often provides wideranging indemnities in order to protect the bank from any risks related with the ownership or use of the asset. The banks are not concerned with the issue of fault and are more keen to ensure that they are insulated from credit risks, arising from the ownership, use or operation of the asset. 55Warranties As the owner of the asset, the Islamic financier may not be able to exclude the benefit of some warranties to its customer under the Shariah principles. In few instances, the Islamic financier has the benefit of the warranty from a third party that can be assigned to the customer (i. e. from a manufacturer). It has been permitted that the Islamic financier could expressly exclude any warranty from the Islamic financial institution in the customers favour to the extent that it is cover by the assigned warranty.This does not seem to be an adequate solution in that it is often impossible to describe with true statement the extent of the warranty being assigned. Inevitably, some of the warranties may not be cover by a third party assignment and thus the Islamic financier will still be providing the benefit of some warranties to the customer. In a Ijaraha (leasing) transaction the balance of such warranties, which cannot be excluded under Islamic principles may possibly be cover by insurance. 3 Ibid at 39, page 318, para 2 & 3. Ibid at 39, p age 319 (Indemnities). 55 Ibid at 39, page 319. 54 25 Thus, if warranties will raise Shariah related issues, the Islamic financier must immediately try to identify those residuary warranties that cannot be covered to decide whether or not this renders the transaction commercially unsatisfactory, particularly, if its financial return will not reflect these additional risks. 56 Compensation and Liquidated damagesIn Conventional financing, if the borrower defaults on any payment due on him, default interest is charged as against him, thus compensating the banks. This approach is unacceptable as regards Islamic financing, due to the plain reason of any such compensation/liquidated damages tantamount to charging interest. Unfortunately, the experience of Islamic financiers in trusting their customers, that they would pay on time, has not really been successful, and there is a general agreement that there must be some form of penalization if a customer does not pay on time.The Islamic financier can only claim compensation if it suffers loss or damage due to the true fault of the customer. The compensation must reflect the actual loss of the financier. Most Islamic financings have a compensation provision dealing with failure to pay on a due date and which uses a benchmark linked to LIBOR, as discussed above. The entire purpose of such provisions is not to compensate the financier, but to treat it as an incentive to the customer to make payments by the due date. 57 Events of defaultIn a Conventional financing, there will be a progression of events of default, which will give rise to rights in the favour of the banks, and in particular, the right to demand the quittance of outstanding debts. As a general principle, the latter view is accepted by the Shariah law, as long as the customer is at fault. In a Conventional financing, there will be events of default that are not within the customers control. It is considered as unviable to include such events of default i n an Islamic financing, and each event must be diligently drafted to take account of the latter. 8 This, however, raises credit risks, which if not compensated for by the customer in the form of an increased return to the Islamic financier, may force the latter to take on unneeded risk, which will be without any reward. This issue becomes even more vital in the case of a co-financing that involves both Islamic and Conventional financing. The Conventional banks will surely not like the idea of Islamic facility not going into default at the same time as them, and this could possibly have adverse effects on the security sharing under inter-creditor arrangements.It has been argued that in these circumstances the Conventional banks should accept the position of Islamic financiers, however, the prevailing position is that the Conventional financing is the controlling financial force in the world and thus it is often arduous for Islamic financial institutions to have their views stand in a co-financing. Examples of events of default that can potentially cause dispute between Conventional and Islamic financiers would be nationalisation, requisition, loss of air traffic rights and force majeure. If there is disagreement as regards any of the above mentioned events of 56Ibid at 39, page 320, para(s) 2 & 3. Ibid at 39, page 321, para 1. 58 Ibid at 39, page 321, (Events of Default) para 1. 57 26 default, then it is advised that they must be put into a separate category of events called by some other name, such as events of mandatory prepayment. 59 If there is an event of default the customer may be obliged to purchase the asset, at a predetermined price. That obligation must not be listed in the same document (i. e. the lease) to avoid concerns regarding conditionality but should be contained in a separate document, e. g. an option or a deed of covenant.If the event of mandatory prepayment arises, the customer will not be in default but the occurrent of such an event will enable the financier to exercise a right or option granted to it by the customer in a separate document requiring the customer to purchase the asset. The conclusion to this whole procedure being that, on the face of the document, the events of default will be Shariah-compliant and for events of mandatory prepayment, there will be a Shariah-compliant system that results in the asset being purchased, thus clearing the amount that the customer owed the Islamic financier. 0 Set-off It has often been disputed that the grant of set-off rights that are solely in favour of the Islamic financier, is against the Shariah precepts, which require an Islamic finance transaction to be fair and reasonable when taken in the context of the customer. The aforementioned issue has been resolved in various transactions by providing that there are statutory set-off rights that cannot be waived and which keep an acceptable balance as regards favouring the financier and the customer. 61 B. Constructio n and Lease FinancingSpecific Issues in Relation to Ijaraha (Leasing) Transactions Insurance and Maintenance pledges As per the Shariah principles, the lessor must remain liable for several insurance and major maintenance obligations. Obligation and the financial consequences cannot be transferred on to the lessee, pursuant(predicate) to the terms of the lease. The insurance obligations relate to the structural or property insurance. However, the lessee can be held responsible and liable for the cost of operational insurance, such as the business open frame insurance and third party insurance (to the extent that it relates to operational risks).The latter mentioned principles can possibly have serious implications for an Islamic financier. The direct costs involved in, e. g. maintaining an aircraft and the indirect costs and liability resulting from the failure to perform such maintenance can prove to be very significant. 62 There must be some mechanism to transfer some risk on t o the lessee, or sharing of risk if you like, which, on the face of the document is Shariah-compliant. 59 Ibid at 39, page 321, para 3. Ibid at 39, page 321, para(s) 4 & 5. 61 Ibid at 39, page 321, (Set-off), para 1. 62Ibid at 39, page 322, (Insurance and Maintenance Obligations). 60 27 The most obvious approach is to appoint the lessee as the service agent of the lessor (Islamic financier) in order to perform these activities, which would include paying the insurance premiums and the maintenance costs. The service agency agreement must specify that the service agent will indemnify the lessor for any default on his part, in the performance of these obligations. However, on the basis of general precepts, an agent must be compensated for any costs properly incurred on behalf of its principal.Usually, a nominal fee is paid to the se