CHAPTER 26 - ISLAMIC TRADE FINANCE
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Islamic trade finance is Sharia compliant banking (Sharia
Rules), Islamic Trade Finance is very similar to Conventional Trade Finance,
the key difference in Islamic Trade Finance is, a bank will provide a letter of
credit, guaranteeing import payments using its own funds for a client based on
sharing the profit from the sale of the item.
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So one can conclude that the major difference between
Conventional and Islamic Trade Finance is payment and financing. Both
Conventional and Islamic Trade Finance can operate in the same Platform or
Application.
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Even though Islamic Trade Finance services are more time
consuming. Islamic Trade Finance has been in a rise and it is very popular in
Middle Eastern Countries and also in the Countries where they practice Islam as
a Religion. Where they think taking Interest (Riba) for Money is Sinful (haraam)
Islamic Trade Finance Products (Subjective)
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Wakala (Agency), Musharaka (Partnership) and Murabaha (Cost
Plus Profits) functionality is associated with the financing of Letter of
Credits (LC) opened by customers. Some would feel even other Islamic Finances
like Mudarabaha, Ijara, Wadiah etc coud be used in Trade Finance. But Wakala,
Musharaka and Murabaha are the most common Islamic Trade Finance Products
Wakala Islamic Letter of Credit (Subjective)
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Through the principle of Wakala the Issuing Bank (IB) act as
the AGENT of the customer, the
customer will ask the bank to issue the ILC by providing a written instruction
to the seller. Then, the bank will ask the customer to place the amount of the
price of the goods in place the contract amount in LC in the bank as security.
Next, the bank creates the ILC in favour of the Importer and collects its
commission and other charges involved. After negotiation of the document, the
issuing bank will pay the negotiation bank utilizing the customer’s deposit.
Later, the bank releases the document to the buyer and charge fee for its
services under the principles of Ujrah (fee).
Musharaka Islamic Letter of Credit (Subjective)
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Through principle of Musharaka, the IB issues the ILC and
both the Bank and customer involves ( PARTNERSHIP
) to the purchase price under ILC. Next they will share the profit of the
business venture based on the pre-agreed profit sharing ratio. But, losses are
borne proportionate to the capital contribution. Likewise, to the Wakala ILC,
the first procedure involve in establishing the Musharaka ILC begins with the
customer informs the IB of his ILC requirement and negotiates the term of Musharaka
financing for his requirement. Then, the customer deposit enough money with the
bank for his share of the cost of good to be purchased or imported as per the
Musharaka agreement which the IB accepts under the principle of “Wadiah Yad
Dhamanah”. Later, IB create the ILC and pays the proceeds to the negotiating
bank, Utilising the customer’s deposit as well as its own shares of financing.
After that, IB releases the documents to the customer. Lastly the customer
takes possession of the goods and disposes of these in the agreed manner.
Murabaha Islamic Letter of Credit (Subjective)
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Under this principle the IB will provides a financing
facility to customer that unable to pay the purchase price to the exporter.
Then the bank will resells the good at a higher price agreeable to the
customer. The new price will include mark-up of certain profit. In summary, the
procedure start when the customer informs the IB of his ILC requirement and
request the IB to purchase or import the good by executing an “aqd” in writing.
The IB as an agent will purchase the goods. Later, the IB will sells the goods
to a new customer at a sale price comprising its COST and PROFIT margin under the principle of Murabaha for
settlement on a deferred time.
