Question

Discuss all the possible sources of short-term financing currently prevailing in Pakistan? 

Answer 1

Short-time period finance is cited as financing needs for a small length usually much less than a year. It basically means the financing of commercial enterprise from quick-term sources which are for a duration of 30 to 270 days and the same enables the organization in producing cash for the running of the commercial enterprise and for running fees which are typically for a smaller amount. It involves generating cash by means of online loans, lines of credit score, and bill financing. It is likewise called Working Capital Financing and is used for inventory, receivables, etc. This sort of financing is generally required in the commercial enterprise technique due to their irregular coins flow into the enterprise or due to their seasonal commercial enterprise cycle.

·       Introduction:

Short-time period finance is cited as financing needs for a small length usually much less than a year. It basically means the financing of commercial enterprise from quick-term sources which are for a duration of 30 to 270 days and the same enables the organization in producing cash for the running of the commercial enterprise and for running fees which are typically for a smaller amount. It involves generating cash by means of online loans, lines of credit score, bill financing. It is likewise called Working Capital Financing and is used for inventory, receivables, etc. This sort of financing is generally required in the commercial enterprise technique due to their irregular coins flow into the enterprise or due to their seasonal commercial enterprise cycle.

·       Reason:

Ø  For the smooth running of Business.

Ø  Goods can be sold on credit.

Ø  To hold stock of raw materials.

Ø  To raise production at a short notice.

Ø  To allow cash flow during operating cycle

 

Commercial Papers

Commercial paper is a form of quick-term promissory be aware issued with the aid of corporations with a minimum credit score score of A- for long-term and A2 in brief-term preparations. These contraptions are commonly used for financing running capital necessities.

In Pakistan the SECP has notified the

·       eligibility,

·       duration and size,

·       mode of issue,

·       expenses,

·       investors.

Furthermore, they have also specified the role and responsibilities of the issuer, the issuing and paying agent (IPA) and the credit rating agency (CRA). The guidelines also include the procedure for issue and standby facility with financial institutions. The guidelines also specify that the maturity period of a Commercial Paper would range from as short a duration as 30 days and as long as one year. This would, however, be conditional that the equity of the issuing company would be not less than Rs100 million as per its latest audited balance sheet.

Example:

A retail firm is looking for short-term funding to finance some new inventory for upcoming summer season. This interest rate can be adjusted for time, depending on the number of days the commercial paper is outstanding.

 

Promissory Note

A Promissory Note also referred to as loan agreement, is used to document that one party promises to pay a sum of money to any other birthday party at a later date. This obligation generally results from a loan to the promising birthday party. Creating a Promissory Note or loan agreement is regularly recommended for tax and document-maintaining reasons. This shape is also known as: mortgage agreement, secured loan agreement, demand observe. A Promissory Note, or Note Payable, is a contract among a party who has borrowed money from every other celebration that has lent the cash. This report outlines the terms of reimbursement in writing, and is signed through both events. In addition to instances of borrowing money (private or business loans), a Promissory Note can also be useful in instances of large purchases whereby the consumer can't pay the whole buy fee upfront and promises to pay the the rest of the rate at a later date.

 

 ·       What to Include in a Promissory Note:

Ø  The names and addresses of the lender and borrower.

Ø  The amount of money being borrowed and what collateral is getting used.

Ø  How often payments may be made and in what quantity.

Ø  Signatures of both parties, so as for the be aware to be imposable.

Example:

Ikram lends his friend PKR 1,000 and he agrees to repay by December 1. The full amount is due on that date, and there is no payment schedule involved. There may or may not be interest charged on the loan amount, depending on what they've agreed.

 

Bill of Exchange

A Bill of Exchange is a tool in writing containing an unconditional order, signed by way of the maker, directing a sure character to pay on demand or at a hard and fast or determinable destiny time a positive amount of money only to, or to the order of, a certain man or woman or to the bearer of the instrument.

·       Parties:

Ø  Drawer: who makes the bill.

Ø  Drawee: who is directed to pay.

Ø  Payee: Person to whom the payment is to be made

·       Essentials of Bill of Exchange:

Ø  It must be in writing.

Ø  It must contain an unconditional order to pay.

Ø  It must be signed by the drawer.

Ø  The drawee must be a certain person.

Ø  The payee must be a certain person.

Ø  The sum payable must be certain.

Ø  The sum payable must be in Pak rupee

 

 

 Example:

Mr Dawood is a manufacturer of shoes and Mr. Yasir is a retail trader of shoes. Mr. Yasir (the buyer) wishes to buy shoes from the manufacturer but has no money. He is agreed to accept a bill of exchange for 90 days, if the goods are sold to him on credit basis. So both the parties agreed. Mr. Dawood supplies goods to Mr. Yasir worth PKR 100,000/- for a 90 days credit and draws upon him a bill for the full value of goods for 90 days.

 

Letter of Credit

A Letter of Credit (LC) is a written challenge given via a bank on behalf of an Importer to pay the Exporter a given amount of cash inside a precise time, imparting that the Exporter offers documents which comply with the terms laid down inside the Letter of Credit. Letters of Credit may be for any amount, in any freely traded forex, and, issue to the presentation of compliant documents, may be payable. The bank will pay; or, payable at constant determinable time i.e. After a detailed term, e.g. At 30, 60, ninety or a hundred and eighty days of sight or Bill of Lading date the bank can pay.

Ø  Buyer / Importer who requests a bank to issue a Letter of Credit.

Ø  Seller / Exporter who finally ships the goods and receives the payment on fulfillment of terms and conditions laid down in the Letter of Credit.

Ø  The Issuing Bank: The issuing bank (Importer’s Bank) issues the L/C and makes the payment on behalf of importer as per the terms and conditions prescribed in L/C. The exporter may negotiate with the buyer to select a particular bank for issuance of the L/C and may ask the Advising Bank if it has a corresponding bank in the buyer’s country and suggest that bank to the buyer as the issuing bank.

Ø  The Advising Bank: Advising bank is usually in the country of the seller. The Advising Bank advises the exporter / seller that an L/C is received from the issuing bank and provides information on terms and conditions of the L/C. The advising bank is not responsible for any payment under L/C.

 

Short-Term Loans offered by Banks in Pakistan

Short-term loans are facilities presented for the duration of fewer than 12 months. These are typically used by the organizations to finance their operating capital necessities. These short-time period loans are meant to finance inventory, account receivable, and seasonal commercial enterprise needs. In Pakistan, many banks provide short-term loans. The most distinguished three banks are.

a)    Faysal Bank

1.     Overdraft – Running Finance:

Running finance or overdraft facility is a quick time period finance supplied to customers to satisfy their working capital wishes by permitting withdrawals from their account in extra of the credit stability maintained with the Bank

Available for working capital requirements e.g. purchase of stocks, raw material etc.

Ø  One-year tenor. (Renewable upon expiry).

Ø  Principal with multiple withdrawals and deposits to be adjusted on or before expiry.

Ø  Mark-up to be paid on monthly/quarterly basis.

Ø  Facility will be primarily secured against mortgage of property and/or hypothecation of stock

 

2.     Pledge Financing:

The pledge financing facility is offered to the customer against delivery of goods to the Bank. The goods are held as security and are placed under the custody of the Bank’s approved Mucaddum. Drawing power is determined on the basis of value of the goods placed under pledge along with stipulated margin.

Ø  Available for procurement of various local commodities, including (but not limited to) purchase of rice, wheat, yarn etc. Page 8 of 10

Ø  Each drawdown is required to be adjusted within a stipulated period along with proportionate mark-up.

Ø  Drawdown is allowed on receipt of goods for pledge

Ø  To be adjusted within six months (maximum).

Ø  Mark-up to be paid on monthly or quarterly basis as per agreement.

 

3.     Short Term Trade Facilities

In order to facilitate trade business of SMEs, FBL offers a number of products to its customers one of it is Letter of Credit –Foreign & Inland: FBL offers to issue letter of credits (LCs) on behalf of SME clients for routing their imports through the Bank. A letter of credit (LC) is the assurance given by FBL to pay the beneficiary on behalf of the importer as per agreement, provided that certain documentary delivery conditions are met. Sight & Usance are two of the main types of LCs offered to the customers

Ø  Facility offered for Import of goods from foreign countries and also for local purchases, where the seller requires a surety of payment.

Ø  The assurance is given to pay at sight of the goods and the relevant documents are held by the Bank as security, until the same are retired by the applicant.

Ø  Where the assurance is given to pay at certain time or date on behalf of the customer. The imported goods are released to the applicant upon his acceptance to make the payment at maturity.

Ø  Tenor of Sight LC is 5 working days from date of presentation of documents and 180 days for usance LC.

Ø  Minimum Cash Margin is determined on case to case basis or as per requirement of SBP.

 

 

b)   Bank Alfalah

1.     Alfalah Istisna:

Bank Alfalah’s Islamic portfolio also offers Alfalah Istisna for working capital requirement. SMEs involved in manufacturing and construction, and require working capital (for wages, overheads and etc.) can opt for Alfalah Istisna to facilitate payments. This facility is an ideal option for SMEs whose substantial portion of overheads is related to production. Istisna is a special type of sale transaction where the buyer places an order with the seller to manufacture certain asset and upon delivery of the asset to the buyer the sale is completed

2.     Alfalah Tijarah Finance:

Falah Tijarah is a short term trade finance facility designed to meet the liquidity requirements of the Bank Alfalah Islamic Customers. It is designed under the supervision of the Shari’ah Board to enable our Customers to sell their finished goods stock, meet their working capital requirements and enjoy the benefits of cash sales. It is just like a normal trade transaction where a seller (the Customer) sells specified goods (Finished Goods) to a buyer (Bank Alfalah) on cash basis. Once the purchase transaction is complete Bank Alfalah will appoint the Customer as agent to sell the same goods in the market to third parties generally on credit basis and Customer will deposit the sale proceeds with Bank Alfalah.

3.     Alfalah Murabaha Finance:

Murabaha is one of the common Islamic finance contracts. It is particular kind of sale where the Bank Alfalah expressly mentions the cost of sold commodity it has incurred, and sells it to the Customer by adding some known profit. Thus, Murabaha finance is not a loan given on interest, it is a sale of commodity for cash/deferred price. Bank Alfalah Islamic offers this facility to its Customer looking for Short term financing solutions. 

  

c)    Meezan Bank

1.     Murabaha:

It is simply a sale transaction where the seller (Bank) discloses the cost and profit to the buyer at the time of execution of sale. The Bank purchases the product from market through its agent which may be a customer itself and subsequently sell it to customer on spot/deferred payment. Murabaha can also be allowed under Islamic Export Refinance Part I & II.

2.     Bai Salam:

It is Shariah-compliant alternative to bill discounting where instead of providing loan against the export order, Meezan Bank keeps the export bill as security and extends a fresh Murabaha financing facility to the customer or purchases FCY against Pak rupees from the customer on Salam basis at spot rates to cater to the financing requirements of the customer.

3.     Istisna:

It is a short term facility in which the Bank orders the manufacturer/ to manufacturer goods as per the specification of local/ export order. The goods are then delivered to the Bank. After taking the delivery, these goods are locally sold/ exported by the customer acting as Bank’s agent.