SS 37 · Financing operations

SS 37: Credit Agreement

What this standard is about

When a bank gives a client access to financing, the two sides first sign a credit agreement. This standard explains what such an agreement may contain. It covers two kinds of credit: direct credit, where money or assets change hands up front (like a benevolent loan or a murabahah sale), and incidental credit, where the bank only promises to step in if needed (like a guarantee or a documentary credit for imports).

A key part of the standard is the master agreement: a general framework that sets the terms for deals the two sides may do in the future. Signing it does not force anyone to do a deal. Each actual transaction is concluded separately, by offer and acceptance, and only then do the framework's terms apply.

Why it exists

Banks and clients often plan a series of transactions over months or years. Without a framework, every deal would need fresh paperwork from scratch. The credit agreement sets the ground rules once, so later deals are faster — while making sure no one is locked into a deal they never actually agreed to.

The key rules, simply put

Credit means any transaction in which one party becomes indebted to another.
Direct credit includes benevolent loans (qard hasan), partnership financing (musharakah, mudarabah), and asset-based financing (murabahah, leasing).
Incidental credit includes guarantees, letters of guarantee, and documentary credits — where the bank's obligation only arises if something else happens first.
Partnership financing (musharakah, mudarabah) does not create a debt owed by the client, except when losses result from the client's misconduct or negligence.
A master agreement for future transactions is a bilateral promise. It binds no one to enter any deal; each side keeps the option.
When the parties do enter a transaction, the master agreement's terms apply — but only as reconfirmed in that specific contract.
Financing facilities can be rescheduled or rolled over through new contracts, but in sale-based modes (murabahah, salam, istisna) the profit cannot be increased merely because of rescheduling.
The bank may take permissible guarantees to secure the client's commitments.

An everyday example

A trading company signs a credit agreement with an Islamic bank setting the terms for import financing over the next year. In March, the company needs goods worth $200,000. The bank and the company conclude a murabahah contract under the framework's terms. The framework itself never forced the deal — the March contract did.

Words to know

Qard hasan — a benevolent loan: money lent with no interest and no extra charge, repaid as borrowed.
Musharakah — a partnership where all sides invest and share profit and loss.
Mudarabah — a partnership where one side provides money and the other provides work; profits are shared.
Murabahah — a cost-plus sale: the bank buys an item and sells it to the customer at a disclosed cost plus an agreed profit, paid later.
Salam — paying in advance for goods to be delivered later.
Istisna — a contract to manufacture or build something to agreed specifications.
Documentary credit — a bank's written promise to pay a seller when shipping documents are presented; used in international trade.
Master agreement — a general framework setting terms for possible future deals, without obliging anyone to deal.

Source

AAOIFI Shariah Standard No. 37 — https://www.sbp.org.pk/assets/documents/circulars/ifpd/2024/C6-Annex.pdf