CHAPTER 26 - ISLAMIC TRADE FINANCE 

·         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.

·         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.

·         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)

·         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)

·         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)

·         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)

·         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.