ISLAMIC FINANCING & ACCOUNTING

IFE 735

USTZ. SHARIFAH FAIGAH BINTI SYED

ALWI

TITLE : LETTER OF CREDIT AND ISSUES

14 December 2014

NUR HAFIZAH BINTI MAKHATAR (2014205182)

CONTENTIntroduction

WHY use Letter of Credit

Advantages

Application of Letter of Credit

Issues

INTRODUCTION

• ISLAMIC LETTER OF CREDIT (ILC) IS A WRITTEN UNDERTAKING GIVEN BY THE ISLAMIC BANK TO THE SELLER (BENEFICIARY) AT THE REQUEST AND ON THE INSTRUCTION OF THE BUYER (THE APPLICANT) TO PAY AT SIGHT OR AT A DETERMINABLE FUTURE DATE, A STATED SUM OF MONEY WITHIN PRESCRIBED TIME LIMIT AND AGAINST STIPULATED DOCUMENTS WHICH MUST COMPLY WITH  TERM AND CONDITION. AN ISLAMIC BAN MAY OFFER ILC UNDER THE SOME SHARI’AH CONTRACT NAMELY MURABAHAH (COST-PLUS PROFIT), MUSHARAKAH (PARTNERSHIP) AND WAKALAH (AGENCY).

• UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDIT INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION 600 (2007 REVISION )

• IN MALAYSIA, ISLAMIC LETTER OF CREDIT WAS INTRODUCED BY BIMB IN 1983 WHEN THE BANK STARTED THE OPEARTION

• IN 1999, ONE OF THE PRODUCT OFFERED BY BANK MUAMALAT IS INTRODUCED WHICH IS WAKALAH LC

• ISLAMIC LC IS GOVERNED BY UCP 600 SIMILAR AS CONVENTIONAL LC.

WHY WE USE LC

• LETTERS OF CREDIT ARE MOST COMMONLY USED WHEN A BUYER IN ONE COUNTRY PURCHASES GOODS FROM A SELLER IN ANOTHER COUNTRY. THE SELLER MAY ASK THE BUYER TO PROVIDE A LETTER OF CREDIT TO GUARANTEE PAYMENT FOR THE GOODS.

• THE MAIN ADVANTAGE OF USING A LETTER OF CREDIT IS THAT IT CAN GIVE SECURITY TO BOTH THE SELLER AND THE BUYER.

ADVANTAGESADVANTAGES FOR SELLERS

• BY ASKING FOR AN APPROPRIATE LETTER OF CREDIT A SELLER IS REASSURED THAT THEY WILL RECEIVE THEIR MONEY IN FULL AND ON TIME. A LETTER OF CREDIT IS ONE OF THE MOST SECURE METHODS OF PAYMENT FOR EXPORTERS AS LONG AS THEY MEET ALL THE TERMS AND CONDITIONS. THE RISK OF NON-PAYMENT IS TRANSFERRED FROM THE SELLER TO THE BANK (OR BANKS).

ADVANTAGES FOR BUYERS

• WHEN A BUYER USES A LETTER OF CREDIT THEY GET A GUARANTEE THAT THE SELLER WILL HONOUR THEIR SIDE OF THE DEAL AND PROVIDE DOCUMENTARY PROOF OF THIS.

The application of Islamic Letter of Credit (Wakalah)

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Exporter

Importer

Isssuing bank Negotiating

Bank

LC- WAKALAH1. THE CUSTOMER REQUEST THE IB TO PROVIDE ISLAMIC LC FACILITY. THE BANK REQUIRE

THE CUSTOMER TO PLACE A DEPOSIT IN FULL AMOUNT OF THE PRICE, WHICH UNDER WADIAH YAD DHAMANAH PRINCIPLE.

2. THE ISSUING BANK PAYS THE PROCEED TO THE NEGOTIATING BANK BY USING CUSTOMER’S DEPOSIT.

3. THE NEGOTIATING CLAIMS THE REIMBURSEMENT

4. THE ISLAMIC BANK CHARGES THE CUSTOMER FEES AND COMMISION FOR ITS SERVICES BASED ON WAKALAH PRINCIPLE

5. THE GOODS SHIPPED TO THE IMPORTER

The application of Islamic Letter of Credit (Murabahah)

4 1

2

3

5

Exporter

Importer

Isssuing bank Negotiating

Bank

LC- MURABAHAH1. THE CUSTOMER REQUEST THE IB TO PROVIDE ISLAMIC LC FACILITY TO PURCHASE

GOODS UNDER MURABAHAH PRINCIPLE

2. THE IB APPOINTS CUSTOMER AS AN AGENT TO PURCHASE THE GOODS ON ITS BEHALF

3. THE IB ESTABLISH THE ISLAMIC LC AND PAYS THE PROCEEDS BY USING ITS OWN FUND BY NEGOTIATING BANK

4. THE ISLAMIC BANK SELL THE GOODS TO THE CUSTOMER AT A SALE PRICE (COST PLUS PROFIT) WHICH IS UNDER MURABAHAH PRINCIPLE FOR SETTLEMENT ON DEFFERRED

5. THE CUSTOMER TAKE POSESSION OF THE GOODS

DOCUMENT NEEDED

1. BILL OF EXCHANGE (DRAFT)

2. COMMERCIAL INVOICE

3. PACKING LIST PRIMARY DOCUMENT NORMALLY REQUIRED

4. CERTIFICATE OF ORIGIN (REQUIREMENT OF LC) - TO MAINTAIN SECURITY

5. TRANSPORT DOCUMENT (BILL OF LADING)

UCP 600

• THE UNIFORM CUSTOM AND PRACTICE FOR DOCUMENTARY CREDITS, 2007 REVISION , ICC PUBLICATION NO. 600 (UCP) ARE RULES THAT APPLY TO ANY DOCUMENTARY CREDIT INCLUDING TO THE EXTENT TO WHICH THEY MAY BE APPLICABLE, ANY STANDBY LETTER OF CREDIT EXPRESSLY INDICATE S THAT IT IS THE SUBJECT TO THESE RULES. THEY ARE BINDING ON ALL PARTIES THERETO UNLESS EXPRESSLY MODIFIED OR EXCLUDED BY THE CREDIT

ISSUES ON LCRIBA EXISTENCE

• ACCORDING TO THE RULE IN UCP600, THE NEGOTIATING BANK IS ENTITLEDTO CLAIM ACERTAIN SUM OF INTEREST TO COMPENSATE FOR THE LOSS SUFFERED BY THE NEGOTIATING BANK DUE TO THE DELAYFOR THE REIMBURSEMENT.

• THE AMOUNT OF INTEREST VARIES FROM ONE COUNTRY TO ANOTHER COUNTRY.

RECOMMENDATION

• IB CAN ELIMINATE THE CLAUSE WHICH IS LEAD TO RIBA AND GHARAR ACCORING TO ARTICLE 1 OF UCP WHICH GIVE AN OPTION TO THE BANKS WHERE CAN MODIFY AND EXCLUDE ANY CLAUSE WHICH NOT AGREE BY TRADING PARTIES AND BANKS

THE GOVERNING RULE

• THE APPLICATION OF ISLAMIC LC IS GOVERNED BY THE INTERNATIONALSTANDARDS RULES KNOWN AS UNIFORM CUSTOM AND PRACTICE – UCP600\

• IT IS WETHER UCP600 CAN GOVERN THE APPLICATION OF ISLAMIC LETTER OF CREDIT OR NOT (REMAINS A PROUCT OF THE PRACTIONERS AND EXPERTS OF WESTERN)

RECOMMENDATION

• THE UCP 600 STILL IN NEED TO BE EXAMINED CAREFULLY AND MODIFY THE RULES IN ORDER TO BE HARMONISE WITH SHARIAH PRINCIPLE

• ISLAM IS NOT PROHIBIT ANY RULE WHICH ARE FROM CONVENTIONAL PERSPECTIVE AS LONG AS IT IS NOT CONTRADICT WITH SHARIAH PRINCIPLE

DICREPANCY FEES

• DISCREPANCY FEESTHE AMOUNT IS CHARGED WHEN DISCREPANCIES OR ERROR FOUND IN THE DOCUMENT

• IT IS ACTUALLY TO EDUCATE THE SELLER TO BE MORE CAREFUL IN PREPARING THE DOCUMENTS AND TO REDUCE HIGH REJECTION RATES DUE TO ANY DISCREPANCY

• THE BANK HAS RIGHT TO CHARGE BUT , USUALLY IT IS EXCESSIVE

RECOMMENDATION

• BANK SHOULD NOT CHARGE REGARDING TO THE MINOR DISCREPANCY, BECAUSE IT WILL HARM THE BUSINESS

• GIVE REASONABLE CHARGE TO GIVE JUSTICE AND FAIR TREATMENT

CONCLUSION

• THE MAIN IDEA OF ISLAMIC LETTER OF CREDIT (APPLYING ISLAMIC BANKING CONCEPT ) IS TO ELIMINATE RIBA AND GHARAR IN TRADE TRANSACTION.

• DESPITE THE SIMILARITIES BETWEEN ISLAMIC LC AND CONVENTIONAL LC, ISLAMIC LC COULD NOT WORK IN THE SAME WAY AS CONVENTIONAL LC.

• INTRODUCTION AND IMPLEMENTATION OF THE ISLAMIC LETTER OF CREDIT GLOBALLY.(ESTABLISH SPECIFIC STANDARDS INTERNATIONAL RULES WHICH IN ACCORDANCE TO THE SHARIAH PRINCIPLE.)

narrated from Abu Said Al Khudri, the Prophet S.A.W. said:

“gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, like for like, and

hand-to-hand. whoever pays more or takes more has indulged in Riba. the taker and giver are alike (in guilt).

RIBA IN THE SUNNAH

THANK YOU