The MPA Standards were published on 23rd January 2019 by the International Islamic Financial Market (“IIFM”) in collaboration with the Bankers Association for Finance and Trade (“BAFT”) for Islamic trade finance related participation arrangements. The published standards are as follows:
(a) a template master unfunded participation agreement for trade finance transactions (the “Unfunded Participation Agreement”); and
(b) a template master funded participation agreement for trade finance transactions (the “Funded Participation Agreement”).
A participation is an arrangement between two banks/financial institutions whereby: (a) the granting or originating bank/financial institution (as a grantor) offers and (b) the participating bank/financial institution (as a participant) accepts a participation in a trade finance transaction on (i) an unfunded or (ii) a funded basis of an agreed amount.
When a grantor intends to share part of its exposure under an unfunded or funded facility for trade finance transactions with a participant, the Unfunded Participation Agreement and the Funded Participation Agreement (together the “Master Participation Agreements”) provide the framework for entering into one or more participation transactions between the grantor and the participant.
IIFM has published a structure memorandum and a guidance memorandum covering certain structural and operational aspects of the Master Participation Agreements. The structure memorandum and the guidance memorandum are intended to facilitate the adoption and use of the Master Participation Agreements by potential users.
The standards are approved by IIFM Shari’ah Board and are developed by IIFM in coordination with external legal counsel, Baker McKenzie, and are assisted by the joint IIFM BAFT Working Group consultation.
Key Features
1. The Agreement: Is master agreements in nature and provide mechanism to include general and specific terms and conditions to be entered into between Grantor and Participant.
It is not a transaction or product specific documents, but it is framework agreements to document multiple unfunded and funded participation transactions between parties.
Transaction documentation is not part of this Participation Agreement.
2. Agency (Wakalah) based structure: between the grantor (as agent) and the participant (as principal) prior to entering into a participation transaction.
3. Four parties involved in a participation transaction: the grantor: The participant, the obligor and the beneficiary/ the supplier of goods.
4. Permitted trade finance techniques for funded participation: A trade finance transaction in compliance with any type of Shari‘ah compliant modes of financing such as, Mudarabah, Musharakah, Ijarah, Murabahah, Musawamah, Salam, Istisna‘a and Wakalah is acceptable as the subject-matter of a funded participation transaction under this IIFM-BAFT (MFPA).
5. Justifications for the participant’s share in participation service fee and upfront fee: Examining transaction documents. Advising the grantor of any discrepancies. Preparation or issuance of any documents, reports or feasibility studies.
6. Amendment and restructuring: Assignment and transfer must be in compliance with the principles and rules of Shari’ah.
7. Governing law and jurisdiction: English law and English courts will have jurisdiction along with arbitration at the London Court of International Arbitration or the Dubai International Islamic Centre for Reconciliation and Arbitration. However, the governing law and choice of dispute resolution forum of this Agreement are at the option of the parties.
8. Footnotes & Shari’ah Approval: Extensive footnotes are included to provide guidance and explanatory information to the users. Such footnotes do not form part of the terms of the contract between the parties. It is approved by the IIFM Shari’ Board.
Objective
To provide solution to the problem of lack of credit line.
Improvement of risk coverage capacity and optimization of asset portfolio.
Assistance in expanding business within local and international network of banks and financial institutions.
Year of publication 2019
Use: Recently published, precisely 23 January 2019, and hence no usage survey conducted on it yet though IIFM is in receipt of interest from some institutions
Further features & clarification: A participation is an arrangement between two banks/financial institutions whereby: (a) the granting or originating bank/financial institution (as a grantor) offers and (b) the participating bank/financial institution (as a participant) accepts a participation in a trade finance transaction on (i) an unfunded or (ii) a funded basis of an agreed amount. When a grantor intends to share part of its exposure under an unfunded or funded facility for trade finance transactions with a participant, the Unfunded Participation Agreement and the Funded Participation Agreement (together the “Master Participation Agreements”) provide the framework for entering into one or more participation agreements between the grantor and the participant. Conventional financial institutions can use this Agreement and be a grantor provided a minimum Shari’ah requirements are addressed. See the operational guidance memorandum.
