This document provides an overview of Islamic letters of credit. It discusses how they work under contracts like Murabahah and Wakalah, the parties involved, required documents, and issues like potential riba and discrepancies. The key points are: - Islamic letters of credit guarantee payment for international trades using Shariah-compliant structures like Murabahah and Wakalah. - They involve an issuing bank, negotiating bank, exporter, and importer, and require documents like invoices and transport documents. - While governed by UCP600, issues remain around potential riba and ensuring rules align with Shariah. Addressing minor discrepancies and excessive fees are also recommended.

1. 14 December 2014
NUR HAFIZAH BINTI MAKHATAR (2014205182)

2. CONTENT
Introduction
WHY use Letter of Credit
Advantages
Application of Letter of Credit
Issues

3. INTRODUCTION
• ISLAMIC LETTER OF CREDIT (ILC) IS A WRITTEN UNDERTAKING GIVEN BY THE
ISLAMIC BANK TO THE SELLER (BENEFICIARY) AT THE REQUEST AND ON THE
INSTRUCTION OF THE BUYER (THE APPLICANT) TO PAY AT SIGHT OR AT A
DETERMINABLE FUTURE DATE, A STATED SUM OF MONEY WITHIN PRESCRIBED
TIME LIMIT AND AGAINST STIPULATED DOCUMENTS WHICH MUST COMPLY
WITH TERM AND CONDITION. AN ISLAMIC BAN MAY OFFER ILC UNDER THE SOME
SHARI’AH CONTRACT NAMELY MURABAHAH (COST-PLUS PROFIT), MUSHARAKAH
(PARTNERSHIP) AND WAKALAH (AGENCY).
• UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDIT INTERNATIONAL
CHAMBER OF COMMERCE PUBLICATION 600 (2007 REVISION )

4. • IN MALAYSIA, ISLAMIC LETTER OF CREDIT WAS INTRODUCED BY BIMB IN1983 WHEN THE BANK STARTED
THE OPEARTION
• IN 1999, ONE OF THE PRODUCT OFFERED BY BANK MUAMALAT IS INTRODUCED WHICH IS WAKALAH LC
• ISLAMIC LC IS GOVERNED BY UCP 600 SIMILAR AS CONVENTIONAL LC.

5. WHY WE USE LC
• LETTERS OF CREDIT ARE MOST COMMONLY USED WHEN A BUYER IN ONE
COUNTRY PURCHASES GOODS FROM A SELLER IN ANOTHER COUNTRY. THE
SELLER MAY ASK THE BUYER TO PROVIDE A LETTER OF CREDIT TO
GUARANTEE PAYMENT FOR THE GOODS.
• THE MAIN ADVANTAGE OF USING A LETTER OF CREDIT IS THAT IT CAN GIVE
SECURITY TO BOTH THE SELLER AND THE BUYER.

6. ADVANTAGESADVANTAGES FOR SELLERS
• BY ASKING FOR AN APPROPRIATE LETTER OF CREDIT A SELLER IS REASSURED
THAT THEY WILL RECEIVE THEIR MONEY IN FULL AND ON TIME. A LETTER OF
CREDIT IS ONE OF THE MOST SECURE METHODS OF PAYMENT FOR
EXPORTERS AS LONG AS THEY MEET ALL THE TERMS AND CONDITIONS. THE
RISK OF NON-PAYMENT IS TRANSFERRED FROM THE SELLER TO THE BANK (OR
BANKS).
ADVANTAGES FOR BUYERS
• WHEN A BUYER USES A LETTER OF CREDIT THEY GET A GUARANTEE THAT THE
SELLER WILL HONOUR THEIR SIDE OF THE DEAL AND PROVIDE DOCUMENTARY
PROOF OF THIS.

7. The application of Islamic Letter of
Credit (Wakalah)
4 1
2
3
5
Exporter
Importer
Isssuing bank
Negotiating Bank

8. LC- WAKALAH
1. THE CUSTOMER REQUEST THE IB TO PROVIDE ISLAMIC LC FACILITY. THE BANK
REQUIRE THE CUSTOMER TO PLACE A DEPOSIT IN FULL AMOUNT OF THE PRICE,
WHICH UNDER WADIAH YAD DHAMANAH PRINCIPLE.
2. THE ISSUING BANK PAYS THE PROCEED TO THE NEGOTIATING BANK BY USING
CUSTOMER’S DEPOSIT.
3. THE NEGOTIATING CLAIMS THE REIMBURSEMENT
4. THE ISLAMIC BANK CHARGES THE CUSTOMER FEES AND COMMISION FOR ITS
SERVICES BASED ON WAKALAH PRINCIPLE
5. THE GOODS SHIPPED TO THE IMPORTER

9. The application of Islamic Letter of
Credit (Murabahah)
4 1
2
3
5
Exporter
Importer
Isssuing bank
Negotiating Bank

10. LC- MURABAHAH1. THE CUSTOMER REQUEST THE IB TO PROVIDE ISLAMIC LC FACILITY TO
PURCHASE GOODS UNDER MURABAHAH PRINCIPLE
2. THE IB APPOINTS CUSTOMER AS AN AGENT TO PURCHASE THE GOODS ON ITS
BEHALF
3. THE IB ESTABLISH THE ISLAMIC LC AND PAYS THE PROCEEDS BY USING ITS
OWN FUND BY NEGOTIATING BANK
4. THE ISLAMIC BANK SELL THE GOODS TO THE CUSTOMER AT A SALE PRICE
(COST PLUS PROFIT) WHICH IS UNDER MURABAHAH PRINCIPLE FOR
SETTLEMENT ON DEFFERRED
5. THE CUSTOMER TAKE POSESSION OF THE GOODS

11. DOCUMENT NEEDED
1. BILL OF EXCHANGE (DRAFT)
2. COMMERCIAL INVOICE
3. PACKING LIST PRIMARY DOCUMENT NORMALLY
REQUIRED
4. CERTIFICATE OF ORIGIN (REQUIREMENT OF LC) - TO MAINTAIN
SECURITY
5. TRANSPORT DOCUMENT (BILL OF LADING)

12. UCP 600
• THE UNIFORM CUSTOM AND PRACTICE FOR DOCUMENTARY CREDITS, 2007
REVISION , ICC PUBLICATION NO. 600 (UCP) ARE RULES THAT APPLY TO ANY
DOCUMENTARY CREDIT INCLUDING TO THE EXTENT TO WHICH THEY MAY BE
APPLICABLE, ANY STANDBY LETTER OF CREDIT EXPRESSLY INDICATE S THAT IT
IS THE SUBJECT TO THESE RULES. THEY ARE BINDING ON ALL PARTIES
THERETO UNLESS EXPRESSLY MODIFIED OR EXCLUDED BY THE CREDIT

13. ISSUES ON LC
RIBA EXISTENCE
• ACCORDING TO THE RULE IN UCP600, THE NEGOTIATING BANK IS ENTITLEDTO
CLAIM ACERTAIN SUM OF INTEREST TO COMPENSATE FOR THE LOSS SUFFERED BY
THE NEGOTIATING BANK DUE TO THE DELAYFOR THE REIMBURSEMENT.
• THE AMOUNT OF INTEREST VARIES FROM ONE COUNTRY TO ANOTHER COUNTRY.
RECOMMENDATION
• IB CAN ELIMINATE THE CLAUSE WHICH IS LEAD TO RIBA AND GHARAR ACCORING
TO ARTICLE 1 OF UCP WHICH GIVE AN OPTION TO THE BANKS WHERE CAN MODIFY
AND EXCLUDE ANY CLAUSE WHICH NOT AGREE BY TRADING PARTIES AND BANKS

14. THE GOVERNING RULE
• THE APPLICATION OF ISLAMIC LC IS GOVERNED BY THE
INTERNATIONALSTANDARDS RULES KNOWN AS UNIFORM CUSTOM AND
PRACTICE – UCP600
• IT IS WETHER UCP600 CAN GOVERN THE APPLICATION OF ISLAMIC LETTER OF
CREDIT OR NOT (REMAINS A PROUCT OF THE PRACTIONERS AND EXPERTS OF
WESTERN)
RECOMMENDATION
• THE UCP 600 STILL IN NEED TO BE EXAMINED CAREFULLY AND MODIFY THE
RULES IN ORDER TO BE HARMONISE WITH SHARIAH PRINCIPLE
• ISLAM IS NOT PROHIBIT ANY RULE WHICH ARE FROM CONVENTIONAL
PERSPECTIVE AS LONG AS IT IS NOT CONTRADICT WITH SHARIAH PRINCIPLE

15. DICREPANCY FEES
• DISCREPANCY FEESTHE AMOUNT IS CHARGED WHEN DISCREPANCIES OR
ERROR FOUND IN THE DOCUMENT
• IT IS ACTUALLY TO EDUCATE THE SELLER TO BE MORE CAREFUL IN PREPARING
THE DOCUMENTS AND TO REDUCE HIGH REJECTION RATES DUE TO ANY
DISCREPANCY
• THE BANK HAS RIGHT TO CHARGE BUT , USUALLY IT IS EXCESSIVE
RECOMMENDATION
• BANK SHOULD NOT CHARGE REGARDING TO THE MINOR DISCREPANCY,
BECAUSE IT WILL HARM THE BUSINESS
• GIVE REASONABLE CHARGE TO GIVE JUSTICE AND FAIR TREATMENT

16. CONCLUSION
• THE MAIN IDEA OF ISLAMIC LETTER OF CREDIT (APPLYING ISLAMIC BANKING
CONCEPT ) IS TO ELIMINATE RIBA AND GHARAR IN TRADE TRANSACTION.
• DESPITE THE SIMILARITIES BETWEEN ISLAMIC LC AND CONVENTIONAL LC,
ISLAMIC LC COULD NOT WORK IN THE SAME WAY AS CONVENTIONAL LC.
• INTRODUCTION AND IMPLEMENTATION OF THE ISLAMIC LETTER OF CREDIT
GLOBALLY.(ESTABLISH SPECIFIC STANDARDS INTERNATIONAL RULES WHICH IN
ACCORDANCE TO THE SHARIAH PRINCIPLE.)

17. narrated from Abu Said Al Khudri, the Prophet S.A.W. said:
“gold for gold, silver for silver, wheat for wheat, barley for barley, dates
for dates, and salt for salt, like for like, and hand-to-hand.
whoever pays more or takes more has indulged in Riba. the taker and
giver are alike (in guilt).
RIBA IN THE SUNNAH

18. THANK YOU