CHAPTER 5

METHODS OF SETTLEMENT DOCUMENTARY CREDIT

COURSE OBJECTIVES
After study this chapter, you will be able to: Understand the application of documentary credit. Understand the commonly used documentary credit and forms of payment in international trade. Explain various documents required for preparing documentary credit. Explain discrepancies and how to resolve it. Various financing of LC from an Islamic Bank.

RECAP
Documentary Collection
A procedure in which a bank in the importers country acts on behalf of an exporter for collecting and remitting payment for a shipment. In other words, Documentary Collection is a procedure for collecting and remitting payment for a shipment How to claim goods shipped?
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RECAP
Documentary Collection:
1. Documentary Against Payment (DAP)
Suitable for Exporter

1. Documentary Against Acceptance (DAA)

Appropriate for Importer

Documentary Collection vs Documentary Credit

DOCUMENTARY CREDIT / LETTER OF CREDIT A promise to Definition pay

A payment undertaking given by a bank to the seller and is issued on behalf of the applicant i.e. the buyer.
Exporter Importer

DOCUMENTARY CREDIT
Also known as Letter of Credit (LC). A payment term generally used for international sales transactions. It is basically a mechanism, which allows importers/buyers to offer secure terms of payment to exporters/sellers in which a bank (or more than one bank) gets involved.

Documentary Credit/Letter of Credit

Who apply for LC? Who issue LC? Importer Issuing bank Issuing bank

Who undertake to make payment?

THE APPLICATION OF DOCUMENTARY CREDIT (LC)

Before any application is submitted, a buyer needs to have a documentary credit facility lined with his bank, in fact before negotiation with the seller. Every bank has its own preprinted standard form. In the form mentions the terms and conditions that is in lined with the Uniform Customs and Practice (UCP), 1993 revision, ICC Publication No. 500 under Article 5. A typical form includes the followings: 1. Full name and address of applicant must correctly written so that may not face unnecessary delay or inconvenience. 2. full name and address of beneficiary (normally the seller) should be accurately stipulated in the documentary credit to avoid problem. 3. Form of notification of credit instruction or notification is a vital so as to the type of transmitting of credit i.e. either by a brief teletransmission message or full teletransmission in the form or telex, cable or SWIFT.

S.W.I.F.T
Society for Worldwide Interbank Financial Telecommunication The majority of international interbank messages use the SWIFT network. SWIFT transports financial messages in a highly secure way, but does not hold accounts for its members and does not perform any form of clearing or settlement.

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THE APPLICATION OF DOCUMENTARY CREDIT (LC)

4. 5. 6. 7. 8. Currency and amount of the Credit should be correctly and clearly in words and figures, e.g. USD One hundred (USD100). Form of documentary Credit it is revocable or irrevocable and does it require to be confirmed or otherwise? Form of Payment under Article 10(a),UCP, all credit must clearly state the types of payment available such as sight payment, deferred payment, acceptance or negotiation. Method of Drawing the BE either to be drawn at sight or at tenor or not to draw any BE. Specification of Import Licence needs to ensure if there is any requirement to have a licence for importation of certain goods. The buyer should ascertain whether such specific import licence is required. Mode of Transportation how goods to be transported by road, railway, air or by sea.

9.

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THE APPLICATION OF DOCUMENTARY CREDIT (LC)

10. Port of Shipment/Port of Destination applicant should indicate the place to be despatched and final destination such as Port Klang, Malaysia to Port Of Wales, UK. And to indicate from country to country e.g. Malaysia to Japan. Risk to be Covered by Insurance applicant needs to take up insurance or the beneficiary as both parties agreed. Marine insurance needs to be clearly stated with details of the goods shipped. Details of Documents Required As stated in Article 4, UCP, all parties are concerned with documents. Normal documents asked for, are BE, invoices, insurance and other commercial documents. Shipment Date buyer needs to ensure the time of arrival so as he will able to meet the customers request, thus he has to agree with the exporter time of shipment and the 12 date must be before the expiry date of the credit.

11.

12.

13.

THE APPLICATION OF DOCUMENTARY CREDIT (LC)

14.

15.

16. 17.

Expiry Date/Place of Credit The credit needs to have an expiry date for the presentation of documents or else it may cause some problems. Time for Presentation of Documents needs to stipulate the expiry date for presentation of documents for payment, acceptance or negotiation. If no such date the documents must be presented not later than 21 days under Article 43(a), UCP Whether Partial Shipment allowed means buyer needs to have his goods in one shipment or more shipments. Whether Transhipment is Allowed means under Article 23(b), UCP 500 as unloading and reloading from one vessel to another during the course of ocean carriage from the port of loading to the port of discharge stipulated in the credit 13

THE NATURE OF DOCUMENTARY CREDIT (LC) Parties in Documentary Credit (LC)

Applicant (buyer/importer) Issuing bank Beneficiary (seller/exporter) Advising bank Paying bank Negotiating bank Reimbursing bank

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Advantages / Disadvantages of Documentary Credit (LC)

Advantages to seller: The seller does not have to worry about the credit standing of his buyer If seller has any doubt about the credit standing of the issuing bank, he can get his buyer to issue a confirmed LC In case of irrevocable LC, it cannot be cancelled or amended unless he gives consent The seller needs not to worry about the custom requirements of the buyers country. As long as he complies with the terms and conditions of the LC, he can expect to get paid If the seller is a middleman, he can make LC as security and request his banker to advance him money or issue another LC

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Advantages / Disadvantages of Documentary Credit (LC)

He can get his buyer to establish a transferable LC In case of a sight LC, he can expect to receive his payment almost immediately .

Disadvantages to seller: In the case of revocable LC, it may be amended or cancelled at any time without his prior consent If there are discrepancies, he may face delays in receiving his payment There is always the remote chance of the issuing bank becoming insolvent The seller needs to have some knowledge of the working of documentary credit.

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Advantages / Disadvantages of Documentary Credit (LC)

Advantages to buyer: o Payment will only be made by the bank provided all the terms stipulated in the LC are complied with. He can take comfort that the documents he requires will be tendered to him o He can stipulate in the LC the time by which the goods must be sent to him. This will ensure that he receives the goods in time for his purpose o If he needs financing, he can arrange for a deferred LC or he can arrange for his banker to provide him credit.

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Advantages / Disadvantages of Documentary Credit (LC)

Disadvantages to buyer: In the case of irrevocable LC, he is not able to cancel or amend the LC unless the beneficiary, the issuing bank and confirming bank (if any) agree He has to bear the cost of establishing the LC There is always the possibility that the exporter may not ship the actual goods that he wants The banks are not responsible for checking the goods as the banks only deal with documents.

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PRE-DOCUMENTARY CREDIT (LC) PROCEDURES

TRADE ENQUIRES Applicant must know his counterpart. Ability to deliver and trustworthiness. Financial standing must be good. GENERAL PRECAUTION Applicant must ensures compliance of credit with the contract. Terms and conditions. Avoid excessive detail in credit. Avoid using unclear instruction like first class, well known, independent and qualified.

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PRE-DOCUMENTARY CREDIT (LC) PROCEDURES

Specifying Documents All parties to the operation of documentary credit deal with documents and not goods or performance to which the documents relate. Ensure it meets specific need. Ensure its commercial value. Consideration on Determining Terms and Conditions Compliance to contract. Credit is not meant to ensure goods ordered is received accordingly. Credit is just an instrument to match with payment against documents. Seller trust-worthiness.
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OPENING AND ADVISING OF LETTER OF CREDIT (LC)

SELLER/ BENEFICIARY
1. Sales contract

BUYER/ APPLICANT

4. Credit advise to Beneficiary

2. Application of L/C

ADVISING/ NEGOTIATING BANK

3. Issuance and advising

ISSUING BANK

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Negotiation of Documents and Reimbursement

SELLER/ BENEFICIARY
7. Bank pays beneficiary 6. Presents documents for negotiation
5. Goods shipped directly

BUYER/ APPLICANT
10. Docs. Released to applicant
11. Applicant Makes payment

ADVISING/ NEGOTIATING BANK

8. Documents sent to Issuing bank 9. Issuing bank reimburses to negotiating bank

ISSUING BANK

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CASE EXAMPLES AND APPLICATIONS

The scenario: Goods or transaction is via Letter of Credit (LC) The bank comes in as a financier. The importer requires the financial assistance and import services or facilities of its local bank. The import transaction: Crystal Sdn Bhd (CSB), a trading company dealing with crystals and semiprecious stones, imports 1 container load of goods (natural crystals and semi-precious stones for ornaments) from Salvador, Brazil. The exporter is Brazil Corporation Ltd (BCL). The goods have been confirmed by fax by BCL and CSB has accepted the transaction for US$80,000.

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The terms stated by BCL are: Sight LC or cash payment to be remitted to its bank in Brazil, Brazil National Bank (BNB). Goods will be shipped C&F (Port Klang, Malaysia) Insurance to be arranged by buyer (CSB) The terms stated by CSB are: Goods to be authenticated by the Brazil Gemstone Institute, stating that they are natural semi-precious stones and crystals mined/produced in Brazil. Goods must arrive Port Klang Malaysia by December 15 2003
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STEP ACTION OR ACTIVITY TAKEN 1 CSB decided to import 1 containers of crystals and semi-precious stones from BCL. Upon checking with MITI, it was confirmed that no special permit required. CSB went to its bank, Maybank Islamic Bhd (MIB) (CSB has a trade line facility with MIB of RM500,000). CSB applied for sight LC for US$80,000 (RM304,000), to be addressed/forwarded to BNB in Brazil and favouring the beneficiary Brazil Corporation Ltd. Shipment terms C&F Port Klang. Latest shipment date : November 15 2003 (as goods must reach Port Klang on or before Dec. 15 2003 so to allow for 1 months journey)

ACTION PERFORMED BY CSB

CSB (importer)

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STEP TAKEN 3

ACTION OR ACTIVITY

ACTION PERFORMED BY MIB (importers bank)

MIB checked CSBs account. Still has RM400,000 available trade line. Processed CSBs LC application. Couriered the original copy of the LC to BNB in Brazil. At CSBs request, confirmed a forward exchange rate for US$80,000 for CSBs account. Give duplicate copy to CSB. Went to insurance company to arrange for insurance policy (marine cargo policy) for the shipment of goods.

CSB (importer)

BNB received LC. Notified BCL. BCL intended to BNB (exporters negotiate the LC, and make all arrangements to bank) ship the goods.

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STEP TAKEN 6

ACTION OR ACTIVITY

ACTION PERFORMED BY

BCL made arrangements to ship the goods. BCL Produced the shipping documents to BNB. BNB processed the claims by BCL. After it has ascertained that the various conditions stipulated in LC and terms of the importer have been duly met by BCL, it paid US$80,000 into BCLs account.

BNB processed the claims by BCL. Paid the BNB US$80,000 to BCLs account, then made arrangements to courier the shipping documents (including bill of lading) to MIB and claim US$80,000 from MIB.

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STEP TAKEN 8

ACTION OR ACTIVITY

ACTION PERFORMED BY

MIB received the shipping documents from MIB BNB. Notified CSB and arranged to debit CSBs account and remit US$80,000 to BNB. CSB requested MIB to release the shipping documents. After confirming with CSB that it was satisfied with the documents received and that CSB was ready to take delivery of the goods, it processed CSBs application for a Trust Receipt of 90 days to accommodate CSBs temporary financing period because the US$80,000 has to be remitted to BNB to honour the LC arrangement. After CSBs TR of 90 days had been approved/processed, MIB remitted US$80,000 to BNB in Brazil.

The ship, SS Majesty, arrived Port Klang safely on December 10, 2003.

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STEP TAKEN 10

ACTION OR ACTIVITY

ACTION PERFORMED BY CSB

CSB took the shipping documents. Went to Port Klang to declare the goods to Customs Dept in Port Klang and took delivery of the goods for its showrooms and sales outlets.

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The 90-day TR matured on March 16, 2004. CSB CSB paid for it on Feb 20 2004 well before the maturity date. By doing so it saved a little on interest payable. MIB liquidated the TR account of CSB so that MIB CSB has again to date an available line of RM304,000 to use for other future imports/purchase.

12

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FORMS OF DOCUMENTARY CREDIT/LETTER OF CREDIT There are two forms of documentary credit, namely: Revocable credit Irrevocable credit Article 6 of the UCP 550 provides that a credit should indicate clearly whether it revocable or irrevocable, and if there is no such indication, then the credit shall be deemed to be irrevocable.
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FORMS OF DOCUMENTARY CREDIT/LETTER OF CREDIT

REVOCABLE
Can be cancelled by the issuing bank (importers bank) without prior notice. Give flexibility to amend or cancel to applicant. Any payment, acceptance or negotiation prior to receipt of amendment or cancellation by the beneficiary has to be made good by the issuing bank.

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FORMS OF DOCUMENTARY CREDIT/LETTER OF CREDIT

IRREVOCABLE It can be just irrevocable LC or confirmed irrevocable LC. COMFIRMED IRREVOCABLE At the request of issuing bank on the instruction of the applicant with the consent of the beneficiary and confirming bank. Double assurance of payment. Silent confirmation refers to independent confirmation by the confirming bank at the request of the beneficiary.
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FORMS OF PAYMENT UNDER DOCUMENTARY CREDIT /LC

Sight Documentary Credit/LC the beneficiary present sight bill of exchange (draft) and the stipulated documents, and complies with terms and conditions of the credit to the issuing bank or confirming bank for payment. Deferred Payment Documentary Credit means payment will be made on a future due date. Generally no BE is required. Beneficiary presents the documents to the issuing bank or confirming bank, and upon being satisfied by the bank that the terms and conditions are complied with, the bank will issuing an undertaking to effect payment on the due date to the beneficiary.
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FORMS OF PAYMENT UNDER DOCUMENTARY CREDIT

Term (acceptance) Documentary Credit also known as acceptance credit. It calls for a tenor BE such as 30 days, 60 days, 80days, 90 days etc.) drawn by the beneficiary on the issuing bank, or the advising/confirming bank as stipulated in the credit. BE may be drawn for certain period and beneficiary will be able to secure payment on the maturity date. He may discount it prior to the maturity date if he needs financing.
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RECAP
Documentary Credit = Letter of Credit (LC) Advantages and Disadvantages of LC to Seller/Exporter and Buyer/Importer Revocable LC Irrevocable LC Confirmed Irrevocable LC

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RECAP
You must know :
What is LC? Advantages and Disadvantages of LC to:
Seller/Exporter Buyer/Importer

Diagram of the operation of LC

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RECAP
Definition of LC A Letter of Credit is an instrument issued by a bank on behalf of the importer promising to pay the exporter upon presentation of the relevant prescribed documents

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Letter of Credit = a document Who apply for LC? Issuing Bank? Advising Bank/Negotiating Bank? Beneficiary?

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OTHER TYPES OF DOCUMENTARY CREDIT/LC

Special Types of Documentary Credit/LC: RED CLAUSE LC STANDBY LC REVOLVING LC BACK-TO-BACK LC TRANSFERABLE LC GREEN CLAUSE LC

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RED CLAUSE LC
LC is issued with special clause written in red, authorizing advising bank to make an advance to beneficiary according to stated terms and conditions. An example : This is a red clause credit authorizing the advising bank to advance up to 80% of this credit amount to the beneficiary to utilize it for goods to be supplied/shipped. Issuing bank is required to have a credit line with advising bank prior to its issuance. It is issued against applicant indemnity to indemnify the advance made. The bank provides the advance is not required to ascertain the end use of such advance. The suggested concept for this under shariah is Al-Mudharabah principle and known as Al Mudharabah LC.
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STANDBY LC (SLC)
A form of guarantee payment. SLC secures payment to the beneficiary if there is nonperformance of the contract terms by another party. SLC backs up the beneficiary (seller/exporter) when there is any default by the buyer/importer. Assurance of payment to beneficiary for performance under contract against documents called for under the credit. For example, performance guarantee, repayment of loan, services rendered or for goods shipped. Standby LC is governed by UCP No. 400 while conventional guarantee is governed by the common law of the country where guarantee is issued. Concept under shariah may in used is Al-Kafalah, known as Al Kafalah LC.
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REVOLVING LC
LC amount is renewed or reinstate automatically under stated condition. LC may revolve in relation to time or credit value. Example : This credit is a cumulative credit for RM10,000 available every month for 6 months period. In January, credit was drawn for RM10,000 i.e. the credit was fully negotiated/paid for RM10,000. In February the available amount is RM10 000. However in March it is negotiated for RM5,000. In April, the available balance is RM15 000. It can be cumulative or non-cumulative in nature. A revolving credit may be revocable or irrevocable.
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BACK-TO-BACK LC (BBLC)
It involves two LC, the first LC is known as the Master LC or Prime LC and the second is known as Back-to-Back LC or Secondary LC. Those two LC are separate LC. Normally when a seller is a middleman. The applicant of back-to-back LC is the middleman. The middleman is the original beneficiary. Therefore, back-to-back LC depends very much on the standing of the middleman in order to secure the back-to-back LC.

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 ABC Sdn. Bhd., a middleman, sells keropok to Muthu Ltd in India. And Muthu Ltd. in India will apply LC to pay ABC Sdn. Bhd. in Malaysia, who is the original beneficiary of the LC. ABC Sdn. Bhd. gets supply from people in Terengganu. Then ABC Sdn. Bhd. apply a back-to-back credit to secure supply from Trengganu.
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BACK-TO-BACK LC
Applicant 1st LC (importer) Issuing Bank Advising/ Confirming Bank 1st Beneficiary
(middleman)

Goods To final buyer 2nd Beneficiary (the actual seller)

nts ume Doc

Applicant (Second L Credit)

Advising/ Confirming Bank

Issuing Bank

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TRANSFERABLE LC (TLC)
This type of credit is covered under Article 48 of the UCP No. 500, which states A transferable LC is a LC under which the beneficiary (first beneficiary - exporter) may request the authorized bank to pay in whole or in part to one or more other parties (i.e. second beneficiaries). Transferable LC can therefore be of assistance to seller with limited resources because payment is guaranteed.
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TRANSFERABLE LC
The letter of credit can be transferred only once unless otherwise stated in the credit. Middleman will request buyer to issue a transferable credit. 1st beneficiary will request the credit to be transferred to the 2nd beneficiary in part or fully with a lower amount. 1st beneficiary will substitute/replace for documents presented by the 2nd beneficiary.

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TRANSFERABLE LC
The transfer may be effected only if the letter of credit is designated as a transferable LC. Credit may be transferred within the ambit/scope of the original credit terms and conditions except it may be reduced or slashed the following:- the amount of the credit - any unit price stated therein - the expiry date - the last date for presentation of documents - the period for shipment - the percentage of insurance coverage May be issued under Al-Hiwalah principle.
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TRANSFERABLE LC
Shipped goods

Contract Applicant (Importer/Buyer) Signed

Seller/Exporter 1st Beneficiary

Contract Signed

Actual Supplier 2nd Beneficiary

Advise 1st Beneficiary

Instruct changes

Advise 2nd Beneficiary

Issuing Bank

Issue Transferable Advising Bank LC

Revised Terms Passed on

2nd Beneficiary Bank

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GREEN LC
This LC authorizes bank to make advance payment to the beneficiary against security of a standby credit. It is a pre-financing made against the presentation of invoice and delivery order in the name of a bank. Not a popular form of credit. Suggested concept to be applied for this credit is Al-Murabahah, known as Al Murabahah LC.
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Issuing And Advising Documentary Credit

By Brief Tele-transmission - must be authenticated - it may be operative or non By Airmail - it is an operative credit By Full Tele-transmission - must comply to ICC required operative credit

standard

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Issuing And Advising Documentary Credit cont

By SWIFT - must comply to the standard format (MT 700 & MT 701) - instantaneous / immediately - cheap - safe - credit issues by SWIFT is in effect from date of issued, provided such credit is subject to UCP 500.

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PRESENTATION OF DOCUMENTS AND RESOLVING DISCREPANCIES Presentation of Documents - Beneficiary has a duty to ensure all documents drawn are in complete conformity with credit. This is evidenced in the case of Equitable Trust Co. of New York vs. Dawson Partners Ltd. -To ensure documents are consistent.
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PRESENTATION OF DOCUMENTS AND RESOLVING DISCREPANCIES cont

Discrepancies It is the duties of banks to examine all documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit. In Midland Bank Ltd vs. Seymour where in absent of clear requirement on documents will contribute to as it was sufficient when read in all documents together. Discrepancies must be rectified prior to presentation. Risk of documents with discrepancies: non-payment delay payment rejection of documents force discount additional expenses incurring big loss

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PRESENTATION OF DOCUMENTS AND RESOLVING DISCREPANCIES cont

Request the beneficiary to rectify the error(s). Pay or negotiate against indemnity. Seek approval from applicant/importer. Present under collection Look for alternative buyer. Arrange for return shipment. Seek amendment on credit.

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AMENDMENT OF CREDIT Duties of Applicant to give instruction for amendment must be written form duty to check copy of credit send to ensure conformity with sale contract to ensure amendment must be acceptable to issuing bank, otherwise may be refused by the bank 56

AMENDMENT OF CREDIT
Duties of Beneficiary to determine the acceptability of the amendment to advice non-acceptable of amendment immediately not to partially accept amendment as it not effective e.g. amendment in quantity and price from 100 units @ RM100 to 150 units @ RM90. Only accept the increase of quantity but reject the decrease in price.
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PROCEDURE FOR ESTABLISHING A LC

An importer / applicant when requesting a bank to issue LC in favor of the beneficiary / exporter, he will complete a form and must incorporate the full terms and conditions as in the sale contract under which the credit will be issued and eventually paid. It must include the following: Whether advice of the credit is to be sent by cable or mail. Whether the credit is to be irrevocable or revocable; and whether confirmation by the advising bank is required (normally the issuing bank will nominate the advising bank). The name and address of the beneficiary.

1. 2.

3.

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PROCEDURE FOR ESTABLISHING A LC

4. 5. 6. The amount of the credit and its expiry date. Whether sight or term drafts are to be drawn and on whom. A description of the goods concerned, including if relevant, the quantity and cost price. This description should not be excessive in detail. The bank and its correspondence cannot be expected to exercise supervision over the minutiae of the sale contract. The more details that are given, the greater the possibility of errors with their consequent inconvenience.
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PROCEDURE FOR ESTABLISHING A LC cont 7. The place of shipment, destination and latest shipment date.

8. The terms of shipment, for example whether f.o.b or c.i.f. etc. 9. Detail of documents required in evidence of the transaction against which payment will be made.
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PROCEDURE FOR EXAMINING LC

1. 2. 3. 4. 5. 6. Are the terms of payment in the credit in conformity with sellers contract with the buyer. Is sellers name and address shown correctly. Is the amount of the credit sufficient to cover all costs permitted by the terms of the credit? Do the latest shipping date and latest date for presentation of documents allow sufficient time to process the order, ship it, and present the documents to the bank for negotiation or payment. Are the documents obtainable in the form required? Does the description of goods or commodities conform with the sellers agreement with the buyer?

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PROCEDURE FOR EXAMINING LC

cont
7. Is the provision for insurance in accordance with the terms of sale? 8. Are the points of shipment and destination as agreed? 9. If the credit is in Australian currency and provides for drafts to be drawn on the overseas bank, or the buyer, is the seller likely to be liable for interest charges which he has not provided for in making the sale of goods? 10. Generally,are there any provisions in the credit which are unacceptable to the seller? E.g. if the credit has an expiry date in an overseas center, there may be problems in ensuring that the documents will reach that center prior to expiry of the credit.

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TRUST RECEIPT (TR)

DEFINITION: Is a document executed by a customer who is the pledgor of the goods or the documents of title thereto when the goods are released to him by the bank, in order that he may sell the goods and pay the proceeds to the bank Commonly refers as TR, the traditional mode of financing imports. TR is a document signed by the buyer/importer. It is a financial contract between the buyer and his bank. Based on TR, importers bank releases the shipping documents to the importer. The importer is acting as trustee for the bank, the importer is holding or taking possession of the goods on behalf of the bank. Trust receipt will state: - acknowledge receipt of the documents of title holds the goods as trustee for the bank - undertakes to pay the proceeds of sales to the bank - undertakes to insure the goods - the period within which the customer will repay the bank - calculation : interest = p X t X rate quoted

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BANKER ACCEPTANCE (BA)

DEFINITION: A banker s acceptance, or more commonly referred to as BA is an usance (time) bill of exchange drawn by the customer to his order, and accepted by his banker, and payable on a specified future date. A form of bill financing that a bank can arrange for its trading customers. The idea is for the bank to finance or make advance payment to the exporter on behalf of the importer. On a specified future date, without days of grace (such date being not earlier than 21 days from the date of acceptance. It may be drawn for 10 or 30 days up to 200 days or other period as may be approved by BNM. Amount not less than RM 30 000. It is enforced with a statement that it was drawn to finance the purchase or sales of goods from / to; - a resident (s) or - a non-resident(s)

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BANKER ACCEPTANCE (BA)

cont

7.

8.

It is drawn on a standard format (as prescribed by BNM); pink for purchase and certain sales green for certain sales only The maturity date of a BA should not fall on a Sunday or a public holiday. BA may be presented for payment on the next working day in KL. Discount the BA; MP = FV x 365 365 + (r + t) MP = market price or proceeds after discount FV = face value or maturity value of a BA R = rate of discount T = number of days remaining to maturity
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FINANCING FACILITIES FOR LC FROM THE ISLAMIC PERSPECTIVES

Financing of purchase / import AL - MURABAHAH AL - MUSHARAKAH AL - MUDHARABAH ISLAMIC ACCEPTED BILL - IMPORT Financing of sales / export AL- WAKALAH AL - DAYN
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LC - MURABAHAH
Cost plus deferred lump sum sale AlMurabahah contract allows the commodity exchange to be delivered immediately and the price is paid in lump sum at a later date. Essentials (tenets) Seller Buyer Commodity Price Offer and Acceptance (Ijab / qabul)
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THE PRINCIPLES
THE SELLER MUST REVEAL THE COST OF THE MERCHANDIZE. THE SELLING PRICE MUST BE AGREED BY BOTH PARTIES. THE CONTRACT CAN BE REVOKED IF THERE IS ANY DISPUTE ON THE SELLING PRICE DULY QUOTED BY THE SELLER.

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FEATURES OF LC - MURABAHAH
The customer informs the bank of his LC requirements and request the bank to purchase / import the goods. The customer indicates that he would be buying the goods from the bank on the negotiation of the credit under the concept of Al Murabahah. Bank appoints the applicant as its agent to purchase the goods. Bank establishes the credit and pays the proceeds to the negotiating bank utilizing its own fund. The bank then sells the goods to the customer at price comprising its COST and PROFIT MARGIN for settlement on a deferred term.

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BENEFITS OF LC - MURABAHAH
Facilitate a convenience cash flow management of a business. To help in harmonizing credit sale and collection of debt and thus provide a reasonable aging of credit terms for business. As a prudent and reliable basis in the preparation for the projection of business. As a flexible financial instrument for the financing of working capital for a business. It can be securitized in the secondary market and thus convenience for liquidity management of the bank.
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M.W.C.F. Purchase
1. Purchase order Supplier of goods Customer acting as an agent for the bank

3. Settles the purchase Price on cash basis

2. Supply goods to k an customer b he ity t les tur tt Se ma 5. on 4. Bank sells goods on deferred payment basis BIMB

Price quotation formula 100 + (100 x r x t ) 36500

where: r = rate of profit t = number of days to maturity

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LC - MUSYARAKAH
DEFINITION : An arrangement of payment of a credit under an agreement of trustee joint venture profit sharing between the bank and the customer. ESSENTIALS: 1. SHARE HOLDING 2. CAPITAL 3. PROJECT 4. OFFER AND ACCEPTANCE
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Features of LC - Musyarakah
Partners or shareholders are to negotiate on the terms of the AlMusyarakah financing. The customer places his capital sharing as deposit with the bank for his share of the cost of goods to be purchased / imported as per Al-Musyarakah Agreement. Bank as a party to the contract of Al-Musyarakah accepts the deposit under the principle of Al-Wadiah Yad Dhamanah. The bank establishes the LC and pays the proceeds to negotiating bank utilizing the customers deposit and its own shares of financing. The customer obtains the documents and take possession of the goods which will then be disposed. The bank and customer will then share the profit from the venture according to the terms in the agreement.
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LC - MUDHARABAH
DEFINITION : It is a contract of trustee profit sharing between the capital provider and the entrepreneur. Another similar to this concept is Al-Qiradh, where under such contract the capital provider provides full capital (100%) for any project and to be managed by the entrepreneur without the interference of the capital provider. : 1. To overcome the wastage of expertise on the part of the entrepreneur. 2. To increase productivity. 3. To overcome a position of idle funds on the part of surplus unit. 4. To benefit the society as a whole.

Implication

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Features of LC - Mudharabah
For the financing of permissible goods or projects. Capital must be in a specified monetary form determined at the point of offer and acceptance. The profit sharing ratio must be predetermined. No interference by the capital provider. In the event of loss, the capital provider/owner has to bear all the loss (purely business losses, not due to negligence). Al-Mudharabah contract can be revoked prior to the commencing and the utilization of fund for the project.
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Characteristics of LC - Mudharabah
Capital is held under trust. Principle of guarantee is applied, if the lost incurred arises due to negligence of fraud. Both the capital owner and the entrepreneur are partners. Authority on the management of project is fully lies on the hand of the entrepreneur. In the case of Mudharabah Mutlaqah. Acts of entrepreneur is restricted to a particular project within a limited period.

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mudharabah vs. musyarakah

Capital contribute by capital owner Management capital owner not allowed to interfere Profit & loss shared as agreed while losses absorb by the capital owner Nature of capital money or in kind Capital all parties contribute to the capital fund Management all partners can interfere Profit & loss both are to be shared as agreed Nature of capital money or in kind

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LC WAKALAH (AGENCY)
IS AN ARRANGEMENT OF PAYMENT FOR A CREDIT UNDER AGENCY DEED ESSENTIALS: - Agent - Agent representative - Object of transaction - Offer and acceptance
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FEATURES OF LC WAKALAH
THE APPLICANT WILL PLACE CASH FOR FULL AMOUNT TO CATER FOR PAYMENT OF THE IMPORTATION UNDER THE DOCUMENTARY CREDIT. THE CASH IS HELD AS MARGINAL DEPOSIT AGAINST THE LC BY THE ISSUING BANK UNDER THE CONCEPT OF AL-WADIAH YAD DHAMANAH THIS DEPOSIT IS THEN WILL BE LIQUIDATED FOR THE PAYMENT OF CLAIM UNDER THE DOCUMENTARY CREDIT
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BENEFITS OF LC-WAKALAH TO THE BANK

ENJOY THE BENEFIT OF UTILIZATION OF DEPOSIT EARNED COMMISSION CONCEPT OT AL-UJR UNDER THE

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