An Overview of Shari'ah Issues Regarding the Application of the Islamic Letter of Credit Practice in Malaysia

Abstract

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.

A critical overview of Islamic Performance Bonds

“…As a result, the researcher has found that few articles in the UCP 600 contradict the Sharia trade guidelines, other researchers concluded the same results (Alwi et al, 2013;Lahsasna, 2013;Othman et al, 2010).…”

“…Whether it is conventional or Islamic, Performance Bonds are governed by the UCP 600 (Othman et al, 2010). The question that arises here is whether the UCP 600 & UN Convention (New York, 1995) is suitable to be applied to an IPB.…”

“…According to Article 7 section (a), the only condition for the bank to activate the payment to the beneficiary is when the latter presents documents to the nominated bank or the issuing bank and constitutes a complying presentation (Othman et al, 2010).…”

“…According to this context, the al-Murābaḥah performance bond is not compliant with Islamic trade guidelines, as the Islamic bank bears the seller's duty in this contract. So, banks have to ensure the good conditions of the shipped cargo if it is looking to match Islamic trade guidelines (Othman et al, 2010).…”

“…The correspondent bank's function in the IPB is similar to the correspondent bank's function in a CPB. 6. same documents are required in both types of banks (Othman et al, 2010). Second, other than names, there are no distinctions between Islamic and conventional banks (Alrabei, 2017).…”