Credit Agreement — practice questions

Correct answer: D. Clauses 2/1 and 2/2: Credit is a transaction in which one party becomes indebted to the other. Direct cash credit arises at the outset (e.g. loans), whereas incidental credit arises only probably at the end of the transaction, as with suretyship, letters of guarantee, bills of acceptance and documentary credits. Institutions’ cash facilities include Qard Hasan, Musharakah, Mudarabah, Murabahah and lease financing, while incidental facilities result in a contingent commitment of the Institution, such as suretyship and letters of guarantee.

Correct answer: A. Clauses 2/2/1, 3/2/2 and 3/2/3: Cash facilities include transactions in which the Institution provides funds in cash (Qard Hasan, Musharakah, Mudarabah) or in the form of an asset or usufruct (Murabahah, lease financing). Musharakah and Mudarabah do not result in a debt owed by the client except in case of transgression or negligence; in Mudarabah the entire loss is borne by Rab al-Mal, and in Musharakah profits and losses are shared as agreed in the contract.

Correct answer: C. Clauses 2/4, 4 and 5/2: The decision to offer a facility and the facility agreement are means of mutual understanding and exchange of non-binding promises; the Shari’ah status of actual utilisation depends on the contract used. The client is free to use the facility within its validity or not, and if he refrains he owes no compensation; equally, the Institution owes no compensation if it rejects a request to utilise the facility. A commitment fee is prohibited (Clause 5/3/2/1).