Islamic Trade Financing:Islamic Trade Financing:Tools for Trade Competitiveness Tools for Trade Competitiveness
Presentation by:Presentation by:Asnulhadi Yeop AzizAsnulhadi Yeop AzizWholesale BankingWholesale Banking
for:for:
Seminar on Islamic Banking & Capital Market: Seminar on Islamic Banking & Capital Market: Products & InstrumentsProducts & Instruments
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Islamic Trade Financing: An overview
Types of Products & Instruments & Shariah Principles/contracts
Letter or Guarantee
Letter of Credit
Working Capital Financing
Islamic Accepted Bills (AB-i)
Islamic Export Credit Refinancing (IECR)
Prospects & Challenges
Presentation Outline
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Trade FinancTrade Financing : An Overviewing : An Overview
Manufacturer (Exporter)
Buyer (Importer)
Merchandise
Payment
•Advanced Payment
•Documentary Collection
•Open Account
•Letter of Credit
Modes of Payment:
Which comes first?
Trade FinancTrade Financing : An Overviewing : An Overview
RECEIVABLE RAW MATERIAL
CASH
FINISHED GOODS
Cash Operating Cycle of both Exporter & Importer
Trade Finance ToolsTrade Finance Tools
Bank Guarantee Letter of Credit Overdraft Trust Receipt Bankers Acceptance
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Bank GuaranteeBank Guarantee
Bank
Guarantee
Manufacturer (Exporter)
Buyer (Importer)
Merchandise
Payment
Bank GuaranteeBank GuaranteeTypes of Guarantee
1.Tender Guarantee/Bond 4. Customs Guarantee
2. Performance Guarantee 5. Utility Payment Guarantee
3. Advanced Payment Guarantee 6. Others
Islamic Bank Guarantee
•Based on the principle/contract of Kafalah or Dhamanah (guarantee)
•Operationally, there is no difference between conventional and Islamic guarantee where bank charges commission/fee (ujr) for the guarantee.
•Certain Islamic banks adopt pro-rated commission (i.e. based on actual number of months)
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Differences Between Pro-rated vs Per annum Commission
Amount : RM200,000-00
Commission : e.g. 1% p.a.
Tenor : 6 months
Pro-rated Basis Per Annum Basis
Commission : RM2,000-00 RM1,000-00
Letter of CreditLetter of Credit
Written undertaking by a commercial bank to seller (beneficiary) to effect payment on behalf of the buyer if terms & conditions of the LC (i.e. terms of credit) have been complied with.
Advantages
•Provides importer with credit backing & eliminates buyer risk to exporter
•Importer may get better pricing & payment terms
•Importer is assured documents presented are as per requirement and duly examined by experts in the field as per UCP500.
•Exporter may get sale proceeds faster (via negotiation of LC)
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Letter of Credit- The MechanicsLetter of Credit- The Mechanics
EXPORTER IMPORTER
ISSUING BANK
ADVISING/ NEGOTIA-
TING BANK
2. Issue LC
1.Apply LC & place 100%
deposit
3.Advise LC
4.Client provide document &
receive payment
5.Forward document
7.Client receive
document
6. Payment reimbursement
Letter of CreditLetter of CreditIslamic Letter of Credit•Based on the principle/contract of Wakalah
•If deposit is placed upfront by client, it will be placed under wadiah.
•Customer will pay commission/fee (ujr) for the service
•Operationally, no difference from conventional LC.
•Main advantage: No interest payment on Settlement Period.
Settlement of LC
•via upfront wadiah deposit placement
•via Murabahah Working Capital Financing
•via Equity Financing namely Mudharabah or Musyarakah financing.
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Letter of CreditLetter of Credit
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DIFFERENCES IN COSTS BETWEEN CONVENTIONAL & ISLAMIC LC
Assumption
LC issued on 1 Apr 2006 and expires on 30 May 2006
Beneficiary : In the USA
LC Amount : USD100,000-00
Foreign Exchange : 3.60
Amount in MYR : RM360,000-00
Commission : 0.1% p.m.
Tenor : 2 Months
Foreign Interest : 6%
SWIFT Charge : RM25.00
CONVENTIONAL LCRM
ISLAMIC LCRM
Commission(RM360,000 X 0.1% X 2)
720-00 720-00
Interest from date of negotiation to date of reimbursement @ 8 days + 10 remittance days(RM360,000 X 6% X 18/365
1,065-21 -
SWIFT Charges 25-00 25-00
TOTAL CHARGES 1,810-21 745-00
Working Capital FinancingWorking Capital Financing
The money that is required to circulate within a business in order to finance its business/operating cycle. (It can also be used to settle LC)
Nature
•Short period – according to business/operating cycle
•Self-liquidating
•Financing relates to specific asset (eg stock, receivable)
Forms Overdraft Trust Receipt
- Document of trust signed by importer, the strength on with bank allows the
importer to obtain release of the merchandise but making payment at a later date. Bankers Acceptance (Import/Export)
- Usance Bill of Exchange drawn by client on the bank for acceptance/discount.
The proceeds will be utilised to finance the merchandise imported.
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Financing of Purchase/Import - Financing of Purchase/Import - MurabahahMurabahah
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BANK CLIENT
SUPPLIER
1. Bank appoints Client as Purchasing Agent
2. Purchase
Order
3. Supply of
goods
4. Payment
of Purchase
Price
5. Sale of Goods
6. Payment of Sale Price on Maturity
Sale Price = Cost + (Cost X Profit rate X Tenor) 36500
Islamic Accepted Bills (AB-i) Islamic Accepted Bills (AB-i) (Purchase/Import)(Purchase/Import)
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BANK CLIENT
SUPPLIER
1. Bank appoints Client as Purchasing Agent
2. Purchase
Order
3. Supply of
goods
4. Payment
of Purchase
Price
5. Sale of Goods
6. Payment of Sale Price on Maturity
Securitisation of Securitisation of the Debt : AB-i. the Debt : AB-i. Sale of AB-i to Sale of AB-i to another party is another party is under Bai’ Daynunder Bai’ Dayn
Financing oFinancing of Sales/Exports - f Sales/Exports - Bai’ Dayn Bai’ Dayn
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BANK CLIENT
SUPPLIER
2. Supplier
will pay on end credit
term
1. Client sells
goods
3. Sale of Debt
4. Payment via cash
5. On maturity, Client collect debt and pay to Bank
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BANK CLIENT
SUPPLIER
2. Supplier
will pay on end credit
term
1. Client sells
goods
3. Sale of Debt
4. Payment via cash
Islamic Accepted Bills (AB-i) Islamic Accepted Bills (AB-i) (Sale/Export)(Sale/Export)
Securitisation of Securitisation of the Debt : AB-i. the Debt : AB-i. Sale of AB-i to Sale of AB-i to another party is another party is under Bai’ Daynunder Bai’ Dayn
5. On maturity, Client collect debt and pay to Bank
AB-i (Purchase or Sale)AB-i (Purchase or Sale)
Transactions Allowed to be Securitised under AB-iTangible and non-haram goods (eg. raw materials, semi-finished goods or finished goods)Selected services – 1.Purchase of computer software licence,
2.Companies involved in trade-related logistic services such as warehousing, forwarding & shipping, or
3.Purchase of electricity such as Independent Power Producer
(Exemption given on case to case basis)
(Source: BNM AB-i Guideline)
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Working Capital FinancingWorking Capital Financing
Trust Receipt & Bankers Acceptance (BA)
Financing for Purchases/Imports & Islamic Accepted Bills (AB-i)
Tenor 30 – 180 days 30 – 180 days
Payment of Interest/Profit
UpfrontRequires Overdraft Facility
On maturity (in arrears)Coincides with operating cycleNot requires Overdraft FacilityLower effective rate
Financing Amount 100% under Trust Receipt
Round Down to nearest thousand for BA
100% of invoice amount
Acceptance Commission
Available under BA Facility None even under AB-i Facility
Cost Cost Comparison Comparison Between BA and AB-iBetween BA and AB-i
BANKERS ACCEPTANCE - CONVENTIONAL
Invoices RM384,429.00
Discount Rate / Accepted Commission 3.0%, 0.5%
Tenor 120 Days
Discounted Amount RM384,000.00 x 3.0% x 120/365 = RM3,787.40
Acceptance Commission Amount RM384,000.00 x 0.5% x 120/365 = RM631.23
OD Rate BLR + 1.5%
Upon Issuance BA Draft Amount = RM384,000.00
Current Account/ OD Debited RM631.23 + RM3,787.40 + RM429.00 =RM4,847.63
Up front Charges RM4,847.63
OD Interest RM4,847.63 x 7.5% x 120/365 = RM119.53
Upon Maturity RM384,119.53 (BA Amount + OD Interest)
Overall Charges RM388,967.16 (Upon Issuance + Upon Maturity)
Cost Cost Comparison Comparison Between BA and AB-iBetween BA and AB-i
ACCEPTED BILLS - ISLAMIC
Invoices RM384,429.00
Profit Rate 3.5%
Tenor 120 Days
Profit Amount RM384,429.00 x 3.5% x 120/365 = RM4,423.57
Upon Issuance BANK PURCHASE PRICE = RM384,429.00BANK SELLING PRICE = RM388,852.57
Upon Maturity RM388,852.57 (Bank Selling Price)
Overall Charges RM388,852.57 (Upon Issuance + Upon Maturity)
Islamic Export Credit Refinancing Islamic Export Credit Refinancing Scheme (IECR)Scheme (IECR)
Special government scheme to promote export of Malaysian
manufactured products, agriculture products & primary commodities via
participating commercial banks.
IECR Pre-shipment and Post-Shipment
AB-i uses the prevailing profit rate in the market while IECR allows
banks to resell the debt to EXIM Bank at a special rate. EXIM Bank will
notify the refinancing rate from time to time.
Uses the principle/contract of Bai’ Dayn.
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Islamic Trade FinancIslamic Trade Financing : ing : ProspectProspect
Trends in Islamic Trade Financing in Malaysia
In Malaysia, Islamic Trading Finance has gradually gained acceptance due to the distinct advantages.
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0
5000
10000
15000
20000
25000
30000
35000
Jan'02 Jan'03 Jan'04 Jan'05 Jan'06
Islamic BillFinancing
ConventionalTrade Bills
Source : BNM
GROWTH OF TRADE BILLS IN MALAYSIA
(in RM’Mil)
Islamic Trade FinancIslamic Trade Financing : ing : ChallengesChallenges
1. Differential in views of Islamic scholars on Bai’ Dayn
Scholars in the Middle East have different views on bai’ dayn.
2. Interest on Remittance Days of LC
Establishing LC where no interest is payable on remittance days.
3. Differential in Rates between BA and AB-I
Currently, AB-I rate is lower than BA rate due to the liquidity in Islamic Banking. The
position may be different in the future.
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