As I concluded the last article on the agent requiring the goods to be inspected by an independent survey firm as its responsibility, I somehow knew the question which will be raised. And it is about the extra cost for such examination. The question did arrive in my email.
It was also stated that at times such third-party inspection may pave the way for corruption, citing a particular country where all imports were made conditional upon such inspection some time ago with a certain fee-sharing arrangement between the company and the ruling elite. Well, this was a one-off incident and did not last long and as such cannot be cited to undermine the importance of third-party inspection prior to shipment, wherever deemed necessary.
Coming back to our topic, let me put a live example before you to be the judge, my dear readers.
A Dubai-based company Ruz Trading, a wholesale trader of basmati rice, carries out bulk imports from various sources established over a couple of decades with sound and trusted trading partners based in South Asia. The rice is then supplied locally and re-exported to neighboring Gulf countries, primarily to Saudi Arabia.
The company requested the Islamic bank it deals with to increase the trade finance lines since it has located a new source to import the world-famous Vietnamese ST20 rice for the first time since it is equated to basmati rice and should be in demand. The bank approved the Wakalah–Murabahah facility and appointed the company as its undisclosed agent to undertake the purchase through an independent broker firm representing the exporter but based in Hong Kong.
The requirement was to establish the sight letter of credit (LC) in the broker’s name for about US$500,000 for the first consignment of 700 metric tons. It was said that based on the performance by Ruz Trading over a reasonable period of time, the Vietnamese exporter may consider the credit lines for Ruz Trading.
Although the Islamic bank’s relationship manager had advised caution on dealing with a new supplier, Ruz Trading got the sight LC established by the Islamic bank in the company’s name since it was acting as the bank’s undisclosed agent. The new rice consignment arrived on time and the excited owners of Ruz Trading got the containers cleared from the port by utilizing the bank’s Murabahah facility.
Nonetheless, upon off-loading the containers at the company’s warehouse, unfortunately it turned out that the consignment comprised of rice of the lower-quality ST25 whereas Ruz Trading had placed the order for most superior ST20 variety. The price difference between both of them was close to US$250 per metric ton which aggregated to US$175,000. This was the straightaway loss on the consignment.
Had Ruz Trading paid attention to the Islamic bank’s relationship manager and appointed an independent surveyor for pre-shipment inspection of the consignment, it would have incurred a cost of less than 1% of the LC amount as the inspection fee and the survey company would have found out that the goods do not conform to the specification of the rice stated in the LC.
In fact, the inspection clause would have acted as a deterrent, thus thwarting any attempt by the exporter to ship inferior-quality rice and cause harm to the buyer.
After explaining the aforementioned incidence, is there a need for me to do a comparison between the loss Ruz Trading encountered as the Islamic bank’s agent, and the fee it would have paid for the pre-shipment inspection of rice?
Would anyone provide me with the Shariah treatment to the said situation and who should be held responsible to bear the loss — the Islamic bank or Ruz Trading? I shall be waiting for your input. Have a nice week.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the senior advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next week: Discussion on the subject of Wakalah shall continue.