CONVENTIONAL VS ISLAMIC TRADE FINANCE
WAKALAH
CONVENTIONAL LETTER OF CREDIT
 Agency
 Transit interest
 Upon negotiation – foreign based
interest
 Standard remittance days interest
 Penalty is charged for late payment
TRUST RECEIPT
 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
BANKER ACCEPTANCE
 Based on discounting
 The customer pays the interest plus
accepts commission upfront either by
the bank debiting customer’s current
account or utilising overdraft facility
 Budget may not be accurate
ISLAMIC LETTER OF CREDIT
 Agency
 No transit interest
 Compensation is claimed for late
payment
MURABAHAH
ISLAMIC LETTER OF CREDIT
 Based on murabahah principle
 Mark-up deferred payment sales
 Buying and selling
 Payment tail-end
 Profit fixed
 Budget is simpler
ISLAMIC ACCEPTED BILL
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
 ISLAMIC
EXPORT CREDIT FINANCING
EXPORT CREDIT FINANCING

 Purchases foreign bill at a discount ECR-i Pre Shipment

 Overhead finances  Based on murabahah and bay al dayn
 Roll over on CP principles
 Involves interest  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
ISLAMIC BANK GUARANTEE
LETTER OF 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