IB1005
DEPOSITS AND FINANCING PRACTICES
OF ISLAMIC FINANCIAL INSTITUTIONS
CHAPTER 12 : TRADE FINANCING
COMPILED BY
HAMDAN HJ IDRIS, BSc Econs, MBA (Islamic Banking & Finance)
Certified Professional Trainer (MIM)
Industry Expert
INCEIF
HJ MAHMUD HJ BUNTAT, MBA(AUOL, UK), DBM (Swansea Inst., UK), CIL (UIA)
Part-time Lecturer (INCEIF)
Former Head of Islamic Banking Division, OCBC Bank (Malaysia) Bhd
Chapter 12 – Trade Financing

Refers to the various forms of financial support
and financial transactions used in international
trade.

The facility is used to mitigate the financial risks
for both exporter and importer.
•
Banks may assist by providing various services
such as letter of credit, collection of payment
upon presentation of certain documents or
advancing payment on the basis of export
contract.


In many countries, trade finance is often
supported by quasi-government entities known
as export credit agencies that work with
commercial banks and other financial
institutions.
Bank as Collection Agent

Once the terms of contact have been agreed, the
two parties have to appoint a bank on their
behalf to effect transactions.

To seller/exporter the bank can act as their
collecting agent.

To the buyer/importer the bank can act as their
paying agent.
Collection Basis
CONTRACT
Exporter
(Kuala Lumpur)
MERCHANDISE
1.
Exporter ships the merchandise
and presents documents to
his Bank for collection of payment
DOCUMENTS
3. Agent Bank, Tokyo on scrutinizes documents. Informs
Importer of arrival of import documents and requests
importer to pay if documents are on
sight basis or accept if documents are on usance basis
2.
BANK ABC
KUALA LUMPUR
(Exporter banker)
Importer
(London)
(Tokyo)
4. Importer makes payment to the
Agent Bank and take possession
of documents
MEMO OF BILL
PAYMENT
Exporter’s Bank checks documents and sends
them to Agent Bank in Tokyo for collection
DOCUMENTS
AGENT BANK TOKYO
Trade Financing Facilities
1. Letter of Credit-I (LC-i)
2. Trust Receipt-i (TR-i)
3. Shipping Guarantee-i (SG-i)
4. Letter of Guarantee-I (LG-i)
5. Islamic Accepted Bill-i (IAB-i)
Bills of Exchange
Drawn under BANK ABC MALAYSIA BHD
Letter of Credit No : 00183002 dated 8nd July 2009
0001/2009
No…………………
US$28,572.00
9th July
09
EXCHANGE for………………………………………………………………………………………………………20………
SIGHT
At………………………………………………………………………………………………………………………………..Pay
this First of Exchange ( Second being unpaid) to the order of XYZ Bank, Tokyo
US
Dollars : Twenty Eight Thousand Five Hundred Seventy Two Only
………………………………………………………………………………………………………………………………………..
…………………………………………………………………………………………………………………………………………
Value received and charge the same to account of
One Thousand units of Motor Parts
…………………………………………………………………….
…………………………………………………………………….
Jasa Trading Sdn Bhd
To…………………………………………………………………
Lot 101, Jalan Sungai Besi
…………………………………………………………………...
57000 KUALA LUMPUR
Tokyo Supplier Pt Ltd
Letter of Credit (LC)

LC is a secured means of acquiring prompt
payment for the sale of goods. With the
availability of LC facility, exporters can obtain
quick, secure and guaranteed payment of goods
from the banks.

Offers an acceptable compromise by providing
for payment to be effected against documents
representing the goods and making possible the
transfer of title to the goods from seller to the
buyer.
Letter of Credit-i

Provides the buyer with financial backing, better
pricing and repayment terms.

Eliminates commercial risk of non-payment to
the supplier.

Assured all documents are in order as payment
is made upon once the terms have been
complied.
Stage1: Opening
a Documentary Credit
CONTRACT
Exporter
(Tokyo)
1. The importer and the exporter sign a
sales contract providing for payment
through a letter of credit
4. The advising bank informs the
exporter that the letter of credit
has been issued
2.
-
Importer
(Kuala Lumpur)
The importer instruct Bank ABC ,KL.
The Issuing bank-to issue a letter of
credit in favor of the exporter
APPLICATION
FOR CREDIT
DOCUMENTS
3. Bank ABC, Kl asks Agent bank to advise
the credit to the exporter
AGENT BANK TOKYO
ADVISING BANK
CREDIT
BANK ABC
KUALA LUMPUR
ISSUING BANK
Stage 2 : Negotiation
EXPORTER
MERCHANDISE
IMPORTER
Importer
(London)
1.
Exporter ships the merchandise
4. Importer makes payment to the
And presents documents to
Bank and take possession
Negotiating Bank Tokyo
3. Bank ABC, KL scrutinizes documents.
of documents
for negotiation
If documents
are in order, it will advise the
importer and release
the shipping documents upon
DOCUMENTS
payment by the importer
MEMO OF BILL
PAYMENT
2.
Negotiating Bank negotiates and pays the
exporter if all documents comply with
the terms of Credit and debits account of Bank ABC, Kl
and sends documents to Bank ABC. KL
AGENT BANK TOKYO
NEGOTIATING BANK
DOCUMENTS &
ADVICE OF DEBIT
BANK ABC
KUALA LUMPUR
ISSUING BANK
Shariah Concepts for
Letter of Credit-i

The issuance of LC-i can be based on the
Shariah principles of:1. Wakalah (Agency)
2. Murabahah (cost plus basis)
3. Musharakah (joint venture / profit /loss
sharing)
Al-Wakalah LC-i (Agency)
1. The bank effectively acts a customer.
2. Before granting the facility, the will generally
insist on a deposits from the customer up to the
total cost of the goods in questions.
3. The deposits will be placed with bank under the
Al-Wadiah Yad–Dhamanah principle.
3. Upon establishing the LC-i, the bank will pay
the proceeds (from the deposit) to the
negotiating bank.
4. The bank will then release the documents to the
customer, charging the customer a fee for its
services.
Al-Murabahah LC-i (Cost plus)
1. The customer will negotiate his LC-i requirements
with the bank on the basis he will purchase the
goods from the bank under Al-Murabahah
principle.
2. The bank will then establishes the LC-i and makes
use of its own funds to pay the negotiating bank.
3. The bank subsequently sells the goods at the
agreed profit margin. The customer is entitled to
settle his liabilities on an agreed deferred term.
Musharakah LC-i (Joint venture,
profit/loss sharing)
1. On establishing the LC-i, the customer will
place a deposit (under the Al-Wadiah Yad
Dhamanah principle) for his agreed share of the
cost of the goods in questions.
2. The bank then establishes the LC-i and pays to
the negotiating bank. The customer’s deposits
as well as the bank’s fund (for its share of the
cost of the goods) will be utilised
3. The documents are released to the customer,
who will dispose of the goods as agreed under
the Al-Musharakah agreement.
4. The profits derived therefore will be shared
between thebank and the customer as agreed.
Contents/Documents
with Letter of Credit (LC)
1. Date of application.
2. Stamp Duty of RM3.00 is placed and cancelled.
3. Whether the LC is to be revocable, irrevocable,
transferable or revolving.
4. Whether the LC is to opened by mail or
telex/cable and whether telex/cable advice
to be the operative credit instrument.
5. Whether the advising bank is to add its
confirmation. If so, to insert the clause “Please
request your agent to add its confirmation.”
6. Full and correct name and address of the
applicant.
7. Full and correct name and address of the
beneficiary and that the beneficiary is not
domiciled in Israel.
8. Amount of the LC and the ISO currency code
are clearly stated.
9. Trade terms – whether CIF, C&F or FOB etc.
10. Whether the draft is to be drawn at sight or
usance. If drawn on usance basis, it should
state “30 days after sight” or “30 days after
date of bill of lading.”
11. Expiry date of the LC and the country in which
the LC is valid for negotiation are clearly stated
(UCP 500 Article 42).
12. Whether the draft is to be drawn against 100%
invoice value or for a lesser percentage. The
draft is to be drawn on the issuing bank [UCP
500 Article 9(a) and (b)].
13. Types of documents required
a) Signed commercial invoice
No. of copies required &
to indicate Import License no.
b) Certificate of origin
Name country of origin
c) Weight Note
No of copies required
d) Packaging list
No of copies required
e) Insurance
policy/certificate
FOB, CFR insurance to be
covered by buyer
f) Bill of lading/airway bills/
delivery order
Authority to claim goods
14. The brief description of merchandise and
quantity.
15. Shipment – Ports of origin and destination.
16. The latest shipment date (must not be more
than 21 days from expiry of the LC).
17. Whether partial shipments are allowed.
18. Whether transhipment is allowed.
19. Presentation period of documents.
20. Any special instruction, e.g payment of
charges.
21. Authorised signature of the applicant
22. Terms and conditions imposed.
23. Submission of relevant forms e.g KPWP.
Letter of Credit operations

LC established on 02-01-2009 to 30-04-2009
Beneficiary
Amount
Exchange Rate
Amount in RM
Commission
Period of LC
Profit rate
Postage
:
:
:
:
:
:
:
:
In Tokyo
US28,571-43
3.50%
RM100,000-00
0.1% per month
4 months
9%
RM37-00
Charges on Letter of Credit
Commission
 Profit rate from the date of
negotiation @ 8 days to-date
of payment plus 10 remittance
days

•
•
Postage (courier)
Stamp duty (application)
Total charges
RM4,000-00
443-84
37-00
3-00
40-00
4,483-84
Trust Receipt-i

Trust Receipt-i is a financing facility to finance
domestic or international trade documents drawn
against Letter of Credit-i (under Murabahah
concept) or Inward Bills for Collection-i (under
Wakalah concept).

It is facility granted to customers for financing
their short-term working capital requirement by
way of murabahah.
Process flow of Trust Receipt-i
1. The Bank appoints the customer as its agent
to purchase goods he requires on behalf of
the bank.
2. Upon delivery of the goods, the Bank pays the
exporter/supplier for the cost of the goods
based on the invoice value.
3. The bank will purchase the goods from the
customer at invoice value and resell them to the
customer on deferred payment terms at a price
inclusive of bank’s profit margin.

The Bank will purchase the goods from the
customer at invoice value and resell them to the
customer on deferred payment terms at a price
inclusive of the Bank's profit margin.

The deferred payment terms of sale of goods
granted to the customer constitutes a creation of
debt. This is secured in the form of Bill of
Exchange drawn by the Bank and accepted by
the customer and payable on maturity

The deferred payment terms of sale f goods
granted to the customer constitutes a creation of
debt. This secured in the form of Bill of Exchange
drawn by the bank and accepted by the customer
and payable on maturity.

The Bank holds customer's Trust Receipt-i
executed by him to signify his holding of goods
in trust pending sale of the goods.

Customer undertakes to settle the selling price
on the expiry date
Creation of Trust Receipt-i
Amount of Bill
Exchange rate
Amount in RM
Period of Financing
Profit rate
Date of Inception
Maturity
•
:
:
:
:
:
:
:
US28,571-43
3.5
RM100,000-00
90 days
9% p.a
01-03-2009
29-05-2009
The bill amount in USD28,571-43 will be
converted to MR based on rate of exchange
prevailing on the date payment is affected by the
LC-i issuing bank.
Trust Receipt Selling Price
Invoice face value
FV
Profit rate
r
Tenor (days to maturity)
t
Murabahah Selling price
Profit
SP – FV
100,000-00
9%
90
102,219-18
2,219-18
SP = FV x [1 + r*t/365]
Shipping Guarantee-i

A negotiable instrument be used by consignee to
take delivery of merchandise at the port.

The issuance of Shipping guarantee by the bank
to indemnifies shipping company against all
consequences and liabilities of any kind
whatsoever should there be any claim on its
rightful owners.

It is signed by the importer and counter signed
by the bank.

SG- i does not have any qualifying clauses as
regards to the value and time.

The liability of the bank ceases only upon
presentation of the original shipping documents
in exchange for return of SG-i or perhaps by the
law of limitation.

Under LG-i operation , the issuing bank would
normally advise that the shipping documents
should be presented to the negotiating bak for
negotiation within. Say 7 days from the date of
shipment To ensure speedy delivery all
documents be sent by courier service
Al-Kafalah Letter of Guarantee
(LG-i)

A customer requires a Letter of Guarantee-i
in respect of say a loan procurement.

The bank requires a deposits from the custmer
which is place under Al-Wadiah Yad–Dhamanah
principle.

The Bank provided Al-Kafalah LG-i by charging a
fee to the customers.
Islamic Accepted Bills (IAB)

IAB is a mode of financing available for imports
and domestic sales; in the primary market, IABImport is concluded on the basis of murabahah,
and IAB-Export is concluded on the basis of a
sale of debt (bai’ al-dayn).

IAB is also traded in the secondary market on
the basis of bai’al dayn.
IAB – Purchase/Import
The bank draws a Bill of exchange, which is a
Certificate evidencing the debt, on and to be
accepted by the customer.

The amount drawn is the full selling price
payable by the customer to the bank on the
maturity date of the financing.

The contract used is debt trading (bai al-dayn).
•
The document essentially involves the creation of
IAB as a security to finance working capital in
the form of cash purchase of raw materials at
cost which is sold back to the customer inclusive
of profit margin (murabahah), with the customer
acting as an agent to the bank.
•
Upon acceptance by the customer, the bank may
sell the bill to a third party (baial-dayan) at
adiscunt (not less than te cost ) based on an
agreed price.
Murabahah Selling Price
Invoice face value
Islamic cost of fund
icof
Accepted commission rate
Rate (spread)
acr
Profit rate
r
Tenor (days to maturity)
t
Murabahah Selling price
Profit
SP – FV
100,000-00
7%
2%
9%
90
102,219-18
2,219-18
SP = FV x [1 + r*t/365]
IAB DRAFT (Purchase/Import)
IAB NO: 001674
Br Ref No: LC 9993020224
BB53-1
ISLAMIC ACCEPTED
Payable at ABC BANK BHD KUALA LUMPPUR
............................................
For and on behalf of
IMPORTER SDN BHD
Authorised Signatories
Accepted on
3-8-2002
IMPORTER SDN BHD
To……………………………………………………….
…………………………………………………………..
At
Due Date:
1-11-02
90 days after sight without days of grace pay to the order of ourselves
THREE HUNDRED TWENTY SEVEN THOUSAND SEVEN
the sum of RINGGIT…………………………………………………………………
HUNDRED NINETY FIVE ONLY
……………………………………………
RM327,795-00
IMPORTATION INTO MALAYSIA
Drawn to finance……………………………………………………………………
of goods described in the record of the drawing/accepting bank.
For and on behalf of
ABC BANK BHD
30-2-2008
Dated……………………..
…………………………………………
NO SIGNATURE /WRITING BELOW THIS LINE
“001674” 40”140141:
39
IAB – Export/Sale

The exporter seeks finance from the importer by
preparing the export documents as required by
the sales contract/letter of credit.

The IAB-Exports is drawn to finance exports or
domestic credit sales and it is payable on a
specified future date.

The customer sells the debt arising from his
credit sales to importer/ local buyer to the Bank
at discount (bai al-dayn)
•
On the maturity date, customer will settle the
debt to the Bank. The IAB-Exports may be sold
in the secondary market.

A minimum amount of financing of RM50,000 is
typically required.

A bank discount the face value of the IAB issued
in the primary market, and may sell it to third
party in the secondary Islamic money market.
The discount

The discount rate offered by the Islamic money
market dealer is 4% (as per table below).

Debt trading is only applicable in Malaysia, as in
the middle East a debt is deemed money owed
and may not be traded to a third party at a
discount.
IAB proceeds
after discount
IAB face value
Discount rate
Tenor (days to remaining)
RM102,219-18
r
4%
t
60
Proceeds
P
101,547-05
P = FV * [1 - r*t/365]
for and on behaof
Hong Leong Islamic Bank
Authorised Signatories
Accepted on
1/3/02
IAB NO: 001674
Br Ref No:AdDayn77009901
PAYABALE AT EXPORT IMPORT ISLAMIC BANK
IAB DRAFT (Export/Sales)
BB53-1
ISLAMIC ACCEPTED BILL
EXPORT IMPORT ISLAMIC BANK
To……………………………………………………….
…………………………………………………………..
At
Due Date:
1/09/2008
180 days after sight without days of grace pay to the order of ourselves
One Hundred Thousand Only
the sum of RINGGIT…………………………………………………………………
……………………………………………
MYR100,000.00
SALES WITHIN MALAYSIA
Drawn to finance……………………………………………………………………
of goods described in the record of the drawing/accepting bank.
For and on behalf of
XYZ Corporation
…………………………………………
1/3/2008
Dated……………………..
NO SIGNATURE /WRITING BELOW THIS LINE
“001674” 40”140141:
44
For any queries
please call 019-3893846 or e-mail to:
mahmudbuntat@yahoo.com
Have a good day 
 May God bless you
Thank you & Wassalam

