CONVENTIONAL VS ISLAMIC TRADE FINANCE

CONVENTIONAL LETTER OF CREDIT

WAKALAH
ISLAMIC LETTER OF CREDIT

Agency
Transit interest
Upon negotiation foreign based
interest
Standard remittance days interest
Penalty is charged for late payment


Agency
No transit interest
Compensation is claimed for late
payment

TRUST RECEIPT
MURABAHAH
ISLAMIC LETTER OF CREDIT

Based on simple interest basis
Payment of principal plus interest
upon maturity (tail end)
Interest may be varied after issuance
of the trust receipt. The customer may
end up paying more when the interest
rate increases-uncertain profit
Budget may not be accurate


Based on murabahah principle
Mark-up deferred payment sales
Buying and selling
Payment tail-end
Profit fixed
Budget is simpler

BANKER ACCEPTANCE ISLAMIC ACCEPTED BILL

Based on discounting
The customer pays the interest plus
accepts commission upfront either by
the bank debiting customers current
account or utilising overdraft facility
Budget may not be accurate


Purchase & Import
Based on murabahah and bay al dayn
principles for purchase and import
Mark-up deferred payment sales and
sales of debt
Full financing to the exact amount
Payment at tail-end
Islamic accepted bill draft drawn on
the customer, Islamic bank is the
drawer and customer is acceptance

Sales & Import
Based on bay al dayn principle or
sale of debt
Payment at tail-end
The Islamic bank is the acceptor and
the customer, the drawer


EXPORT CREDIT FINANCING
ISLAMIC
EXPORT CREDIT FINANCING

Purchases foreign bill at a discount
Overhead finances
Roll over on CP
Involves interest


ECR-i Pre Shipment
Based on murabahah and bay al dayn
principles
Finances the customer on a cost plus
mark-up basis
Discounts the bill with Exim Bank on
Bai al dayn basis or sales of debt
Does not finance overhead
No roll-over for CP

ECR-i Post Shipment
Bay al dayn concept or sale of debt
Discounting basis


CONVENTIONAL
LETTER OF GUARANTEE
ISLAMIC BANK GUARANTEE

Charges commission

Based on kafalah (suretyship) or a
hybrid concept of al wakalah bi al
istithmar (investment agency) and
kafalah (suretyship)
Charges commission on pro-rata basis
or changes an agency fee for
managing the funds