Understand Islamic financial instruments
 Describe the Islamic financial instruments that are
available in Malaysia:
 Al-Wadiah, Mudharabah, Musyarakah, Bai Bitaman
Ajil, As-Salam, Murabahah, al- Ijarah, Wakalah,
Kafalah, Ar Rahn, Qardul Hassan, Hiwalah, Al Dayn.
Some of the Muslim countries like Pakistan, Iran,
Malaysia, U.A.E, Jordan and Sudan have
introduced many Islamic financial instruments in
order to mobilize the idle resources for long-term
productive and development activities on the
basis of Islamic principles.
Islamic finance is emerging as a rapidly growing
part of the financial sector in the Islamic world.
Islamic finance is not restricted to Islamic
countries, but is spreading wherever there is a
sizable Muslim community.
All Islamic banks and IBS banks have set up Shariah
Committees to guide them on Shariah matters and to make sure
that they function in a manner that is in line with the Shariah.
In addition, the advice of the Shariah Advisory Council which is
the highest Shariah body set up at Bank Negara Malaysia, can
be sought to ensure uniformity in views and practices.
The members of the Shariah Committees and the Shariah
Advisory Council are academicians and Shariah experts in
Islamic banking and finance.
Mudharabah is a profit sharing
arrangement between two parties, that is,
an investor and the entrepreneur.
 The investor will supply the entrepreneur with
funds for his business venture and gets a
return on the funds he puts into the business
based on a profit sharing ratio that has been
7. The term mudarib: a user of the capital of an
 The term rabb al-mal: the investor
 The mudarib, regarded as an entrepreneur,
contributes management input, itself viewed as a
form of capital.
The principle of Mudharabah can be applied
to Islamic banking operations in 2 ways:
Between a bank (as the entrepreneur)and the
capital provider (customer)
II. Between a bank (as capital provider) and the
▪ Losses suffered shall be born by the capital provider.
Islamic Banking offer investment accounts to
 Under the arrangement, the deposits will be used
by the bank for investment purposes, whereby
the profit will be shared between the bank and
 At the same time, the investment account
holders bear part of the loss if the investments
were not profitable.
10. 1. You supply funds to the bank after
agreeing on the terms of the
2. Bank invests funds in assets or in
3. Business may make profit or incur
4. Profit is shared between you and
your bank based on a pre-agreed
5. Any loss will be borne by you. This
will reduce the value of the assets/
investments and hence, the amount
of funds you have supplied to the
Is used in the mobilization of demand and
 The bank is entrusted with the safe keeping of the
customers’ deposit - can be withdrawn at any time
upon demand by the customers.
Payments of dividends are not obligatory
but at the discretion of the bank since the
customer already benefit from the safe
custody of their money.
12. Wadiah means custody or safekeeping.
In a Wadiah arrangement, you will deposit cash or
other assets in a bank for safekeeping.
 The bank guarantees the safety of the items kept
13. Know the
and be clear of
your rights and
1. You place money in a bank and the bank
guarantees to return the money to you.
2. You are allowed to withdraw the money at
3. Bank may charge you a fee for looking after
your money and may pay hibah (gift) to you if
it consider fit.
4. This concept is normally used in deposittaking activities, custodial services and safe
Wadi’ah is a safe custody contract between the
depositor(customer) and the custodian(bank).
2 types of Wadi’ah
 Wadi’ah Yad Amanah ia a trust contract.
◦ The custodian is a trustee, the deposited asset must be WADI’AH
kept and cannot be used and also not liable for any loss/damage
unless due to his/her negligence.
 Wadi’ah Yad Dhamanah is a guarantee contract.
◦ The custodian can use and gained profit from the deposited asset
and the custodian is liable for any loss/damage to the deposited
Musyarakah refers to a partnership or a joint business
venture to make profit.
Profits made will be shared by the partners based on an
agreed ratio which may not be in the same proportion as
the amount of investment made by the partners.
Losses incurred will be shared based on the ratio of funds
invested by each partner.
The bank shares the cost of the project with the
entrepreneur based on an agreed proportion
 both parties have the right to participate in the management of
the project as well as to waive such rights.
The profit from the project will be shared according to an
 not necessarily the same as the share of the cost.
In the event of losses, these will be shared by both parties
according to an earlier agreed cost-sharing formula.
Musharakah is used by Islamic banks for
structured trade financing, real estate
financing, project financing, working capital
financing, asset financing, pre-export shipment
financing and Import financing.
19. A Murabahah transaction involves the sale of
goods at a price which includes a profit margin
agreed by both parties.
 However, in Murabahah, the seller must let the
buyer know the actual cost for the asset and the
profit margin at the time of the sale agreement.
Murabahah was originally an exchange transaction in
which a buyer purchases items from a seller at a
specified profit margin payable to the seller.
 It is assumed that the seller will reveal his costs accurately,
such that the profit-margin can be agreed accurately.
 Hence this type of sale is a form of 'trust sale' since the buyer
must trust that the seller is disclosing his true costs.
Where a trader acts on behalf of another party in buying
goods, the murabahah mark-up may be seen as a
payment for the trader's service in locating, transporting
and delivering the goods.
A customer agrees to buy the goods from the bank
The bank in turn issues a letter of credit and settles
the payments to the negotiating bank using its
Later it sells the good at a marked-up price to the
customer, and the settlement by customer to the
bank is done either on cash or installment term.
The Islamic bank purchases an asset or equipment at the
request of a client and leases / rents it to the client a price
that includes a fair return for the bank.
 an arrangement under which the lessor leases equipment, building
or other facility to a client at an agreed rental as agreed by both
Lease contracts can be either an operating lease, where
the Islamic bank is essentially acting as warrantor of the
asset leased and a financial lease, where the client deals
directly with the supplier and the ownership titles remains
with the bank until it is transferred to the client.
The ijarah contract is essentially of the same
design as an installment leasing agreement.
Where fixed assets are the subject of the lease,
such can return to the lessor at the end of the lease
period, in which case the lease takes on the
features of an operating lease and thus only a part
amortization of the leased asset's value results.
In an financial lease approach, the lessee can agree at the outset to
buy the asset at the end of the lease period in which case the lease
takes on the nature of a hire purchase known as ijarah thumma al’bai
(literally, lease and ownership).
Refers to two contracts undertaken and subsequently as follows:
 Al-Ijarah contract (leasing/renting); and
 Al-Bai’ contract (purchase).
Under the first contract, the hirer leases the goods from the owner at
an agreed rental over a specified period. Upon expiry of the leasing
period, the hirer enters into a second contract to purchase the goods
from the owner at an agreed price.
Also known as bay mu'ajjal (deferred payment sale) in which
payment is made in installments some time after delivery of
the underlying goods.
The bank determines the requirements of the customer in
relation to the period and manner of his repayment (normally
Having done that, the bank purchases the asset and
subsequently sells it to the customer at an agreed price which
includes the actual cost of the asset to the bank and a profit
margin which varies according to the value and type of the
26. 1) You pick an asset you would like to buy.
2) You then ask the bank for BBA and promise to buy the asset from the bank
through a resale at a mark-up price.
3) Bank buys the asset from the owner on cash basis.
4) Ownership of the goods passes to the bank.
5) Bank sells the goods, passes ownership to you at the mark-up price.
6) You pay the bank the mark-up price in installments over a period of time.
This is a contract whereby a person (principal) asks another
party to act on his behalf (as his agent) for a specific task.
 where a person nominates another person to act on his behalf.
The person who takes on the task is an agent who will be
paid a fee for his services.
 A customer asks a bank to pay someone under certain
terms. The bank is therefore the agent for carrying out
the financial transaction and the bank will be paid a fee
for its services.
29. Banks normally charge fee for agency services rendered by them on behalf of their
clients. An agency contract could be specific or general; it could be both
commutative and non-commutative; the nature of activity to be undertaken
should be clearly defined to avoid any disputes.
The contract of Wakalah is about the provision of service.
 sale and purchase, letting and hiring, borrowing and lending,
assignment of debt, guarantee, pledge, gifts, bailment, taking and
making payments, litigation and relinquishment, admission and
acknowledgment of rights.
 Islamic banks use the concept of Wakalah in various Islamic
products such as Musharakah, Mudarabah, Murabaha, Salam,
Istisna´a and Ijarah.
 It is also used in payment and collection of trade bills, fund
management and securitization.
 For example, if Wakalah is for the sale or purchase of specific goods,
the kind, quality and other necessary attributes of the commodity
should be clearly Snurazani/PB303
31. Simple example – Takaful Insurance
It is essentially an agent-principal relationship, where the takaful operator acts
as an agent on behalf of the participants and earns a fee for services rendered.
 The fee can be a fixed amount or based on an agreed ratio of investment profit
or surplus of the takaful funds.
A Takaful company as the insurer/operator has the right to
employ the agent either on a full-time or part-time basis.
The agent is presenting the company in which these
selected people have to promote and develop the
products offered by their company as they are bound to
the contract of al-Wakalah.
It is under the agent’s responsibility to identify the
potential participant and disseminate information
regarding the concept and policy practiced in Takaful
They need to explain thoroughly to these people so they will get
comprehensive understanding and lead to no misconceptions.
The agent is obliged to convince people of its advantages
compared to the conventional in order to gain competitive
advantage and good credibility. This can also be a proof that
Islam has always provides a comprehensive ways of life.
An agent may also assist the Takaful company by collecting the
fund. Since they are representing their company, it is very
important for them to produce good image and build strong
relationship in effort to maintain good credibility and integrity of
Ar-Rahn,or mortgage or collateral, is defined in the
Islamic jurisprudence as “possessions offered as
security for a debt so that the debt will be taken from
it in case the debt or failed to pay back the due
It is an Islamic pawn broking that allows gold and
jewellery to be used as a surety against the credit.
In practice, the Bank will retain the gold as collateral, and charge fee
for safekeeping service. The gold will be valued at the prevailing
market price and the loan amount will be lower than the market
value of the gold.
The safekeeping period and fees is predetermined and agreed on by
both parties (Bank and Customer).
At the end of this period, the loan must be repaid to the bank and
the collateral reclaimed.
No interest is charged, but if the loan is not repaid within the
agreed period, the bank retains the right to seize and auction off the
gold used as collateral.
By definition, Ar Rahnu is an Islamic Pawn Broking
Facility whereby the Bank will grant the Customer
an interest free loan which is to be paid within
specific agreed upon period.
In return, Customer will surrender their jewellery
which is to be kept by the Bank. This is to ensure
that the loan will be paid either through normal
payment of the advance made or through auction.
In addition, the Customer has to pay for the monthly
safekeeping fees in order for the Bank to safe keep the
jewellery. The safekeeping fees are to be paid in full upon
expiry of the loan period, redemption or extension of the
facility (if applicable).
If the Customer is unable to pay the amount owing at the
end of the tenure, the Bank has the right to dispose the
jewellery in order to settle the loan amount together with
the safekeeping fees incurred.
Under this arrangement, a finance is given for a fixed
period on a goodwill basis and the borrower is only
required to repay the amount borrowed. However, the
borrower may, if he so wishes, pay an extra amount
(without promising it) as a way to thank the lender.
 A lender who lent RM5,000 to a borrower on Qard will expect the
borrower to return exactly RM5,000 to him at a later date.
Hibah means transfer of ownership of an asset to a person
without any consideration in return.
 It is a unilateral contract and also a benevolent act.
 In the Islamic financial system, an Islamic banking institution
normally applies the hibah concept to reward wadi`ah and qard
▪ In certain cases, there are also instances of giving hibah to
customers, such as hibah to customers who conduct timely
payments as scheduled.
▪ In the takaful industry, application of the hibah concept is used
in several family takaful products in which participants may give
hibah in the form of assigning the takaful benefit to the
nominee or recipient of hibah.
 Some of the Islamic banking institutions give hibah to wadi`ah
yad dhamanah depositors as token of appreciation for the
depositors’ confidence in the institutions.
 The Qard contract obliges a borrower to return the loan amount
to the lender without promising to pay any additional amount.
However, in current practices, a borrower sometimes gives hibah
to the lender at his own discretion when paying off the debts.
42. Basis of the Ruling
 Even though the act of giving hibah by the borrower to the
lender is recommended in Islam, it cannot be conditional
in the contract as it may amount to riba.
 Any addition to the amount of qard upon repayment,
whether in terms of amount, attributes, giving of an asset
or benefit, is permissible as long as it is unconditional.
 The ruling on giving hibah to a lender is similar to the ruling
on giving loan with benefit, which is prohibited if such
hibah is conditional in the contract, but it is allowed if it is
not made as conditional
44.  Also knows as “sales by order” or “future delivery”
 Salam is essentially a transaction where two parties agree
to carry out a sale/purchase of an underlying asset at a
predetermined future date but at a price determined and
fully paid for today.
 Seller agrees to supply specific goods to the buyer at a future date in
exchange of an advanced price fully paid at spot.
 Price is in cash but the supply of goods is deferred.
 Total payment is paid in advanced .
 Commodity- agricultural products, fungible or generic
goods. E.g. Paddy rice, wheat, corn etc
45.  The idea behind such a ‘prepayment’ requirement has to
do with the fact that the objective in a Ba’i Salam contract
is to help needy farmers and small businesses with
working capital financing.
 Since there is full prepayment, a Salam sale is clearly
beneficial to the seller.
 As such, the predetermined price is normally lower than the
prevailing spot price.
 This price behavior is certainly different from that of conventional
futures contracts where the futures price is typically higher than
the spot price by the amount of the carrying cost
46. Purpose of Salam
 To meet the needs of small farmers who need
money to grow their crops and to feed their family
up to the time of harvest.
 To meet the need of working capital
 To meet the needs of liquidity problem.
 To meet the need of traders for import and export
 beneficial to the seller - he receives the price
 beneficial to the buyer - price in salam used to be
lower then the price in spot sales.
o Salam may be used by Islamic banks for trade
financing in pre-shipment export finance, project
financing, commodity financing and agricultural
48. Original Salam
1. “ Pak Hassan have 5 acres of land that could be cultivated with paddy. He
could produce 5 tonne of paddy in 6 months. However, Pak Hassan does not
have enough money to start the project. He approaches an Islamic bank for
2. The bank bought 5 tonne of paddy from Pak Hassan using a Salam contract
at a price of RM 1.20/kg. The market price of paddy was RM1.80/kg. Therefore
the bank paid the total selling price (1.20 x 5,000 kg = RM6,000) to Pak
Hassan on Day 1.
3. Pak Hassan used this money to start his project. The project cost was RM
3,500. After 6 months. Pak Hassan delivered 5 tonne of paddy to the Islamic
bank.” Pak Hassan would gain a gross profit of RM 2,500 (Salam price –
4. The Islamic bank could make profit by selling the paddy in the market at
RM1.80/kg. Then, the bank would enjoy a gross profit of RM3,000 [(1.80
1.20)x5000 kg]. Snurazani/PB303
49. Both parties in Salam will face the risk of price movement. If the
price of paddy goes up, Pak Hassan would have to forego the
opportunity of making higher profit because he has sold the paddy
to the bank at the salam price, while the bank may enjoy a higher
profit than the above. On the other hand if the paddy price goes
down to say RM1.00/kg, then Pak Hassan will be in a comfortable
position because he has already sold to the bank at RM1.20/kg. The
bank will now face the risk of loss because it could not recover
This is one type of trade financing in Islamic Banking
system through issuing letter of guarantee. The
customers are required to place certain amount of
deposits with the bank as collateral to the guarantees.
 BIMB offered BG-I.
 It is an irrevocable written obligation issued by Bank Islam to pay an agreed
sum, in case the customer defaults in fulfilling his obligation.
 This product is issued under the Kafalah contract, BG-I is Bank Islam’s
irrevocable undertaking to guarantee performance of financial standing of a
 BG-I is not a financing instrument.
Islamic banks use Al Kafalah to issue Bank and Shipping guarantees.
Al Kafalah is a contract made between the Bank and another party
whereby the Bank agrees to discharge the liability of a third party in
the case of default by the third party.
 As a surety, the third party will give the bank some form of collateral and pay a
small fee for the services.
Under the Kafalah Shipping Guarantee, the Bank gives a surety to
the owner of the shipping vessel, to discharge goods to the importer
pending receipt of the original bill of lading.
Under the Kafalah Bank Guarantee, the bank guarantees the
company's standing to facilitate any business activities that may
require such guarantees.
The transfer of debt from the transfer or (Muheel) to the
payer (MuhalAlaihi). The transfer of right, on the other
hand ,is a replacement of a creditor with another creditor.
To transfer a debt from one person (debtor) to another
with the same price, it comes to consequence than the
liability of the debtor is abolished. In other words, the first
obligator is freed from any financial obligations.
53. Nature: A has a debt owing to him from B and A himself owes a
debt to C. All three agree that C, instead of realizing his due
from A, and A his due from B, C shall realize his duties from
Refers to debt financing, i.e. the provision of
financial resources required for production,
commerce and services by way of sale/purchase of
trade documents and papers.
Only documents evidencing real debts arising from
bona fide merchant transactions can be traded.
It is a short-term facility with a maturity of not more
than a year.
Bai' Al Dayn refers to the sale of a debt arising from
trade and services transaction in the form of a deferred
payment sale. The customer sells this debt to the Bank
at a discount.
57. Additional Info….
Used by Islamic banks for home financing, real estate
financing, project financing and equity financing
Provides a method through which the bank keeps on
reducing its equity in an asset against periodical payments,
ultimately transferring ownership of the asset to the client.
The rental payments to the bank reduce with the bank’s
diminishing equity in the asset until no further rental
payment has to be made.
For example, the Bank may contribute 90% and the Buyer 10% of the purchase
The client makes the promise to purchase the bank’s share and purchases the
units at different stages. Over a period of up to 20 years, the client will make
monthly purchase instalments through which the Bank will sell its share of the
home to buyer.
The bank leases out its share to the client for the use of the property with the
option to buy it, the bank receiving agreed rental payments for the use of the
Periodically, the client purchases a pre-agreed percentage of the bank’s share in
the property, thereby increasing the client’s ownership in the property and
reducing the bank’s share by a similar amount.
Another trading mode where specific goods or an asset is made against a
purchase order for deferred delivery.
Istisna’a may be used by Islamic banks in:
construction projects, industrial equipment, plants and machinery, ships, aircraft and
various capital goods, contract financing, asset financing, and trade financing to enable
a client exporter to purchase raw materials.
 Total payment can be done upfront or at the end
or by installment .
 Commodity- construction or manufacturing
products i.e. it is unique goods. E.g. Buildings, set
of table, car, gate etc
The bank agrees to construct and to sell the project to be constructed at
the bank’s selling price to the client and thereafter it requests a third
party to construct the project.
Upon completion, the contractor will handover the project to the Bank or
the Bank will authorize the contractor to deliver the project directly to
customer. The payment can be flexible depending on the agreement
between the bank and the client.
62.  Being a construction or manufacturing contract,
Istisna’ is very suitable for project financing.
 Example: Commercial or residential buildings,
road construction, aircraft and vessel construction
The seller could either manufacture the commodity on his
own or he could find another sub-contractor to do the job.
The contract of Istisna can be cancelled before the
manufacturer starts the work.
How? – Parallel Istisna
Client asks the bank to construct a house for him with clear
specification . The cost to construct the house is RM300,000.
The bank agrees and signs an Istisna’ contract with the client. (The
bank is the seller in the first Istisna’. The selling price that the bank
charges is RM450,000 – i.e. Cost of construction plus profit to the
The bank then finds a contractor for the construction and asks him
to handle the project.
The contractor agrees and signs an Istisna ’ contract with the bank.
(Now the contractor is the seller in the second Istisna ’. The
contractor charges the full construction cost, say RM400,000 ).
Upon completion, the contractor delivers to the bank and the bank
delivers to the client.
How? – Parallel Istisna
 Payment in this contract could be very flexible .
 Banks would release progressive payment i.e. payment
according to stages of completion of construction.
 Being the seller in the first Istisna ’, the bank is liable to
any non-completion of the house or any non-conformance
to specification risk.
 Therefore, it is very important to have a project
management team to ensure the selection of projects to
be financed using Istisna’ is carefully made.
Refers to the buying and selling of foreign currencies
Refers to commissions or fees charged for services.
Shari’ah credit cards consist of three permissible contract structures:
 Kafalah, Wakalah and Qard.
Under Kafalah, the card issuer guarantees payments on behalf of the cardholder
to merchants and other third parties
UnderWakalah, the card issuer is considered an agent of the card holder, he pays
the merchants on behalf of the card-holder; with a promise to provide the card
holder with a loan to pay the amounts resulting from the use of the credit card.
Under Qard, the card issuer acts as the lender to the card holder withdrawing
cash from the card issuing bank and the card holder is liable to immediately
return the amount of funds utilised.
Sukuk were broadly used by Muslims in the middle ages as papers
representing financial obligations originating from trade and other
However, the present structure of Sukuk are different from the Sukuk
originally used and are akin to the conventional concept of securitization,
a process in which a special purpose vehicle (SPV) is setup to acquire
assets and to issue financial claims on the assets, the ownership of the
underlying assets is then transferred to a large number of investors
through certificates representing proportionate value of the relevant
The AAOIFI standard indicates that the underlying business contract or
arrangement for Sukuk must be consistent with Shari’ah.
As an asset-backed security with a stable income, Sukuk may be seen as
an Islamic equivalent of bond.
However, fixed income interest bearing bonds are not permissible in
Islam, hence Sukuk should comply with investment principles within the
Islamic law, which prohibits the charging, or paying of interest.
Sukuk is an Islamic financial certificate that provides an investor with
ownership in an underlying asset.
The issuer of a Sukuk sells an investor the certificate, who then rents it
back to the issuer for a predetermined rental fee.
The issuer also makes a contractual promise to buy back the bonds at a
future date at par value.
The claim embodied in Sukuk is not simply a claim to cash flow but an
A Sukuk basically represents either a proportional or an undivided
interest in an asset or pool of assets.
The degree of asset ownership rights subsequent to ownership interest
carries the right to a proportionate share of cash flow or other benefits
and risks of ownership.
Sukuk may have similar characteristics to conventional asset-backed
bonds but are structured in accordance with Shari’ah and may be traded
in the market.
Sukuk should be considered as a new asset class with a relatively
attractive pricing. Income from securities must be related to the purpose
for which the funding is used, and not simply comprise income that may
be attributed to any form of interest; and securities should be backed by
real underlying assets, rather than being simply paper derivatives.
The accountabilities of the respective parties involved in Sukuk
transactions should be defined in a transparent manner in the contract.
Sukuk should be a means for the equitable distribution of wealth by
allowing all investors to benefit from the true profits resulting from the
enterprise in equal shares.
Sukuk may have similar characteristics to conventional asset-backed
bonds but are structured in accordance with Shari’ah and may be traded
in the market.
Conventional bonds the issuer is contractually obliged to pay regular
interest to bond holders on specific dates; the amount of interest is
determined as a fixed or a floating percentage of the capital, and bond
issuer guarantee the return of principal when redeemed at maturity,
regardless of whether the enterprise was profitable or not.
However, Sukuk are basically investment certificates consisting of
ownership claims in a pool of assets where holders are entitled to share
in the revenues generated by the Sukuk assets and share in the proceeds
of the realization of the Sukuk assets.
 Expected returns on Sukuk are tied to the returns earned through the
 Another distinguishing feature of a Sukuk is that in instances where the
74.  The market for Sukuk is now maturing and different Sukuk structures
have been emerging over the years; they can be of many types
depending upon the type of Islamic modes of financing and trades
used in its structuring.
 The AAOIFI issued standard for different types of Sukuk, classifying
some of these Sukuk as tradable and others as non-tradable based on
the type and characteristics of the issued Sukuk.
 The most important and common among those are Murabahah,
Mudarabah, Mudarabah, Ijarah, Salam and Istisna’a.
 There are also other diversified and mixed asset Sukuk that emerged
in the market such as hybrid Sukuk, where the underlying pool of
assets can comprise of Murabahah, Ijarah as well as Istisna’a.
75.  Used by Islamic banks for export/import financing
 L/Cs are not treated as a as a guarantee but rather as a fee based
banking service to facilitate trade.
 Islamic banks usually issue L/Cs on the basis of Wakalah, Murabaha or
 All operations must fulfil the requirements of the Shari´ah.
 The processing of L/Cs usually involve two banks, the L/C opening
bank and the correspondent bank to whom the L/C is sent for advising
When using the Wakalah concept, the bank acts as
the agent of the importer;
 he deposits with the bank the full amount of the L/C to
cover the import transaction and the bank opens the L/C;
 after shipment of goods and submission of stipulated
documents by the exporter, the bank makes payment
using the client’s deposit.
 The bank charges a fee/commission (Ujrah) for its
In the case on LC using Murabaha, the procedures
of Murabaha still apply except that payment to the
bank is not deferred.
 the Islamic bank opens the L/C and
 after shipment of goods and submission of stipulated
documents, it makes payment to the exporter, using the
bank’s own funds
 It takes delivery of the goods on arrival and sells the
imported goods to the client
 the bank recovers its cost and gets a small commission for
services rendered as an agent.
 The client repays the bank on a deferred basis as agreed.
In the case of a Letter of Credit with Musharakah
 the client deposits with the bank an agreed share of the
cost of the imported goods, representing the client’s share
in the transaction.
 After shipment of the goods and submission of the
stipulated documents, the bank makes full payment to the
exporter, using the client’s deposit and the bank’s own
funds for the balance.
 After the imported goods are sold at the market price, the
bank and the client share the profit at a pre-agreed ratio.
 The client may also purchase the bank’s share of the
imported goods at the market price
Islamic banks are allowed to charge a handling commission/fee, as a
service charge to for processing L/Cs, documentation and payments; the
amount various according to the service and to the L/C amount involved.
For example, the bank can also charge its client an issuing commission,
plus other charges such as postage, an advising fee, or a confirmation
fee. These fees are usually not relative to the amount of the L/C and its
The bank may also charge an amendment fee in case the exporter
requires amendments to the L/C terms. It may also charge a commission
for accepting the Bill of Exchange, as it becomes the bank’s obligation to
make the payment on the due date.