The Letter of Credit (LC) serves as an instrument of payment in international trade. Its aim is to facilitate trade between seller and buyer in different countries. To date, the Islamic banking environment promotes the use of the Islamic LC as a method of financing in international trade, particularly to Muslims and to the general public as a whole. Thus far, this facility is offered not only by Islamic banks, but also by all commercial banks. It is basically governed by the same rules of the UCP 600 that regulate the conventional LC. Realising the peculiarity in the application of this conventional rule to the Islamic LC, this paper focuses on the aim of harmonising the practice of the Islamic LC with the requirements of Shar  ah principles where elements such as interest (riba) and uncertainty (gharar) are prohibited. It begins by giving the background of the Islamic LC in Malaysia. Next, it discusses the definition and types of Islamic LCs, murabahah (cost-plus sale), wakalah (agency) and musharakah (partnership), as the issuance of the Islamic LC is based on these three concepts. In addition, it highlights comparisons between these three concepts. Furthermore, the focal point of discussion is on Shar  ah issues in the practice of the Islamic LC, such as governing rule, subject-matter, interest, INCOTERMS and insurance, contract ('aqd), discrepancy fee, and exclusion of risk of goods in the Islamic LC. Discussion of these issues leads us to identify whether they are in compliance with Shari'ah principles. In relation to this, various proposals are suggested to harmonise the rules applicable to the Islamic LC and Shari'ah principles.

The term letter of credit (LC) is not uncommon in international trade as it is the most frequently used method of payment by seller and buyer in their sales contract. LC serves its significant role by facilitating payment between buyer and seller from different countries, who are always prejudiced towards each other on the issue of payment, especially when the deal involves a huge amount of money. By using LC, the seller and buyer will be represented by their own bankers whose function, among others is to issue an LC for the buyer and pay on presentation of seller’s documents which strictly comply to LC requirements. It is well-known that LC is governed by the principle of autonomy or also referred to as the principle of independence1 which indicates LC, being a contract of payment is totally separate from the underlying sales contract. Banks are concerned with documents only and not with the goods. LC transaction can be governed by the Uniform Custom and Practice for Documentary Credit, known as the UCP through express incorporation which provides the rules relating to LC matters and is adopted in almost all LC transactions. This paper discusses the nature, background and significance of principle of autonomy in LC transaction. In elaborating the provisions on the principle of autonomy in the UCP 600, comparisons between relevant articles in the UCP 500 are highlighted. The discussion also focuses on relevant case law and on the application of the autonomy principle in conventional and Islamic LC. The paper concludes with the finding that Malaysian bankers fully subscribe to the principle of autonomy as outlined by the UCP 600.

The nascent Islamic finance industry is still facing the challenges of uncertainties in legal regimes, Sharī’ah interpretations, the right of investors, and remedies in default circumstances. The event of Sukūk default is one of the significant challenges faced by the Islamic capital market. The recent Dana Gas Sukūk default triggered by Sharī’ah compliance interpretations has shown the extent of danger that moral hazards could cause to the entire Islamic finance space. Scholars have argued that the Sharī’ah-compliant arguments witnessed in the industry were because of the nature of the capital market framework of any particular jurisdiction and were not significantly Sharī’ah issues. This study aims to carry out a brief comparative analysis of the default cases in Malaysia and the United Arab Emirates (UAE). The study compares the legal jurisdiction and regulatory framework in summary-background of the judges and court decision samples based on these structures and how they have influenced Sukuk default regulations in the jurisdiction. This study employs a comparative analysis by considering fundamental elements in the regulatory framework.