Trade Finance

1.L/C Under Cash Payment Transaction

The LC is opened against 100% cash coverage based on the customer’s request for an irrevocable LC (LC application) and to receive all the documents in the customer’s name in accordance with the terms set out for the LC. It is considered as a service being provided by the bank against fees and service charges. The customer undertakes to pay the cost of goods plus the bank’s related charges. Upon retirement of the LC document the LC transaction is reversed and the payment is effected by debiting the cash margin on the respective payment due dates. There is no change from the current processes, only the LC application is different.

2.L/C Under Murabaha

This product will follow the Islamic concept “Murabaha”. Murabaha is defined as a purchase & sale transaction wherein the first party (financing party) purchases, on the basis of a prior undertaking from the customer (the purchasing party) called Promise to Purchase, the asset subject of the Murabaha in its own name, and possesses it to resell it to the customer at its cost plus a profit margin agreed upon in the Promise.

The customer requests the bank to open, in the bank’s name, an irrevocable LC to receive all documents representing and evidencing title and possession of the described goods in accordance with the terms set out for the LC. This will be against the customer’s promise to purchase the imported assets/goods. When the customer approaches the bank for purchase of the assets/goods imported, the Bank and the customer sign the Murabaha contract in line with the pre-agreed terms and condition and settle the Cost of Goods Purchased and create Receivables under sold goods/assets.

The issuance of LC is considered as a service being provided by the bank against fees and service charges. Upon receipt of documents and retirement of the letter of credit, the LC transaction is reversed and the payment is effected by the bank to the supplier by debiting Cost of Goods Purchased.

3. L/C Under Wakala Murabaha Transaction

This product will follow the Islamic concept “Murabaha”. Murabaha is defined as a purchase & sale transaction wherein the first party (financing party) purchases, on the basis of a prior undertaking from the customer (the purchasing party) called Promise to Purchase, the asset subject of the Murabaha in its own name, and possesses it to resell it to the customer at its cost plus a profit margin agreed upon in the Promise.

The customer requests the bank to open, in the customer’s name and on its behalf, an irrevocable LC to receive all documents in the customer’s name in accordance with the terms set out for the LC. To allow financing of such goods, the sale contract should be executed only by the bank to enable the bank to take possession of the goods either physically or constructive.Shari’ah rule states that ‘it is not permissible to sell an object not owned by the Seller, the financer shall have to purchase the subject of Murabaha agreed between it and the customer in the financer’s name. Consequently, it should get the title and possession of the goods and only then sell it to the customer. However, as an exceptional circumstances, the customer or a third party may purchase the goods, on behalf of the financer as its undisclosed agent by signing the “Master Agency Agreement”.

The Master Agency Agreement (Wakala) is the solution to allow the bank to execute the purchase/sale contract with the supplier and to be the owner of the goods.