Murabaha Monthly, Episode 6: Powers of Attorney

For this month's instalment, Ayah Snober, an associate in our Islamic Finance team, takes a debut guest slot on Murabaha Monthly to discuss how Banks may utilise powers of attorney within commodity Murabaha facilities to alleviate the administrative burden on parties when carrying out periodic commodity trades during the facility tenor.

Floating Rate Facilities

Let's cast our minds back a few months to Episode 1 of this series where Zahir Nayani broadly discussed three types of commodity murabaha facility: (1) fixed rate products, (2) floating rate products; and (3) hybrid products.

Turning specifically to floating rate products, we are aware that these facilities typically comprise a series of shorter, back-to-back, purchase contracts. Often these purchase contracts are entered into on a three-month basis, but they can be longer or shorter depending on the agreed terms. For ease and for the purposes of this article let's stick to three months.

Trade Notices

In order for any purchase contract to be entered into under a master murabaha agreement (MMA) between the bank and the client various 'trade notices' need to be signed and completed.

These trade notices may include the following:

• A utilisation notice or transaction request sent from the client to the bank confirming that the client wishes to utilise the facility and enter into a purchase contract and confirming the proposed high-level terms of that contract

• An offer letter and acceptance sent from the bank to the client offering to sell the commodities to the client and specifying the terms of the purchase contract. The client is then required to accept the offer.

• Agency: in addition, the bank may be appointed as the client's agent to on-sell the commodities back to the market and this will typically also involve the execution of an agency confirmation notice or instruction letter.

It is important to bear in mind that the MMA will typically contain strict deadlines by which the above trade notices need to be sent.

As you can see, there is in theory quite a large administrative burden on all parties when entering into a new purchase contract each quarter. For example, if the parties have entered into a five-year facility, this can result in the execution of circa. 75 notices throughout the term. This structure also requires the client or the client's signatories to be readily available in the days leading up to the conclusion of a new purchase contract in order to ensure everything is signed on time.

Powers of Attorney

Now albeit somewhat onerous, if the client is available and willing each month to sign and return all trades notices by the strict deadlines under the MMA, then the parties should have no issues (other than time lost)!  Given that this process happens within the course of a few of days, the difficulty arises where signatories are unavailable either due to time differences, holidays or where they are simply busy in other capacities.

In order to mitigate the risk of notices not being signed in time, a tried and tested solution is the appointment of the bank as the client's attorney in respect of completion of the trade notices.

Under a power of attorney, either granted separately or built in as a mechanism in the MMA, the client may appoint the bank as its attorney to approve and execute all trade notices and enter into the purchase contracts on its behalf.

Taking this one step further, banks and clients may also be in a position to negotiate a 'paperless purchase contract' clause into the MMA which essentially agrees that purchase contracts can be concluded in a paperless manner without needing to physically sign the notices. Therefore, the bank, as attorney, can carry out the trades with ease each quarter without needing to fill in or sign any trade notices. The client can rest assured that the bank will still have an obligation to confirm the terms of the proposed purchase contract before the trades take place as well as confirming once a purchase agreement has been entered into.

So concludes the latest instalment of Murabaha Monthly – join us next month when Karl Bradford, Legal Director in our Corporate team will delve into the interplay between commodity Murabaha facilities and corporate acquisitions.