chapter 5 - documentary credit

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CHAPTER 5

METHODS OF SETTLEMENT – DOCUMENTARY CREDIT

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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 importer’s

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

2. Documentary Against Acceptance (DAA)– Appropriate for Importer

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Documentary Collection vs Documentary Credit

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DOCUMENTARY CREDIT / LETTER OF CREDIT

• Definition

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

A promise to pay

ExporterImporter

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.

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Documentary Credit/Letter of Credit

• Who apply for LC?

• Who issue LC?

• Who undertake to make payment?

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Importer

Issuing bank

Issuing bank

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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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http://en.wikipedia.org/wiki/Clearing

http://en.wikipedia.org/wiki/Settlement

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4. Currency and amount of the Credit – should be correctly and clearly in words and figures, e.g. USD One hundred (USD100).

5. Form of documentary Credit – it is revocable or irrevocable and does it require to be confirmed or otherwise?

6. 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.

7. Method of Drawing the BE – either to be drawn at sight or at tenor or not to draw any BE.

8. 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.

9. Mode of Transportation – how goods to be transported by road, railway, air or by sea.

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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.

11. 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.

12. 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.

13. 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 date must be before the expiry date of the credit.

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14. 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.

15. 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

16. Whether Partial Shipment allowed – means buyer needs to have his goods in one shipment or more shipments.

17. 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

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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

buyer’s 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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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 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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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

ADVISING/NEGOTIATING

BANK

ISSUINGBANK

BUYER/APPLICANT

1. Sales contract

3. Issuance and advising

2. Application of L/C4. Credit advise to Beneficiary

user

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Negotiation of Documents and Reimbursement

SELLER/BENEFICIARY

ADVISING/NEGOTIATING

BANK

ISSUINGBANK

BUYER/APPLICANT

5. Goods shipped directly

8. Documents sent toIssuing bank

9. Issuing bank reimbursesto negotiating bank

6. P

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7. B

ank

pay

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10. D

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11. A

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CASE EXAMPLES AND APPLICATIONS

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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 semi-precious 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 TAKEN

ACTION OR ACTIVITY ACTION PERFORMED BY

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

2 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 month’s journey)

CSB (importer)

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STEP TAKEN

ACTION OR ACTIVITY ACTION PERFORMED

BY

3 MIB checked CSB’s account. Still has RM400,000 available trade line. Processed CSB’s LC application. Couriered the original copy of the LC to BNB in Brazil. At CSB’s request, confirmed a forward exchange rate for US$80,000 for CSB’s account. Give duplicate copy to CSB.

MIB (importer’s bank)

4 Went to insurance company to arrange for insurance policy (marine cargo policy) for the shipment of goods.

CSB (importer)

5 BNB received LC. Notified BCL. BCL intended to negotiate the LC, and make all arrangements to ship the goods.

BNB (exporter’s bank)

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STEP TAKEN


BY

6 BCL made arrangements to ship the goods. 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 BCL’s account.

BCL

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

BNB

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STEP TAKEN


BY

8 MIB received the shipping documents from BNB. Notified CSB and arranged to debit CSB’s 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 CSB’s application for a Trust Receipt of 90 days to accommodate CSB’s temporary financing period because the US$80,000 has to be remitted to BNB to honour the LC arrangement. After CSB’s TR of 90 days had been approved/processed, MIB remitted US$80,000 to BNB in Brazil.

MIB

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

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STEP TAKEN


BY

10 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.

CSB

11 The 90-day TR matured on March 16, 2004. CSB paid for it on Feb 20 2004 well before the maturity date. By doing so it saved a little on interest payable.

CSB

12 MIB liquidated the TR account of CSB so that CSB has again to date an available line of RM304,000 to use for other future imports/purchase.

MIB

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FORMS OF DOCUMENTARY CREDIT/LETTER OF CREDIT

There are two forms of documentary credit, namely:Revocable creditIrrevocable creditArticle 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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REVOCABLE• Can be cancelled by the issuing bank (importer’s

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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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.

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 non-

performance 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.

• 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

2nd

Beneficiary(the actual seller)

Advising/Confirming

Bank

IssuingBank

1stBeneficiary

(middleman)

Applicant

(Second L Credit)

GoodsTo

final buyer

Documents

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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

Applicant(Importer/Buyer)

Issuing Bank Advising Bank 2nd BeneficiaryBank

Actual Supplier2nd Beneficiary

Seller/Exporter1st Beneficiary

Advise1st Beneficiary

Instructchanges

Issue Transferable

LC

Advise2nd Beneficiary

RevisedTerms

Passed on

ContractSigned

Shipped goods

ContractSigned

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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- operative credit

• By Airmail- it is an operative credit

• By Full Tele-transmission- must comply to ICC required 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

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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:

1. Whether advice of the credit is to be sent by cable or mail.

2. 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).

3. The name and address of the beneficiary.

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PROCEDURE FOR ESTABLISHING A LC

4. The amount of the credit and its expiry date.5. Whether sight or term drafts are to be drawn

and on whom.6. 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 LCcont…

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. Are the terms of payment in the credit in conformity with seller’s contract with the buyer.

2. Is seller’s name and address shown correctly.3. Is the amount of the credit sufficient to cover all costs

permitted by the terms of the credit?4. 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.

5. Are the documents obtainable in the form required?6. Does the description of goods or commodities conform with

the seller’s agreement with the buyer?

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PROCEDURE FOR EXAMINING LCcont…

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, importer’s 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. 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.

8. Discount the BA;MP = FV x 365 365 + (r + t)MP = market price or proceeds after discountFV = face value or maturity value of a BAR = rate of discountT = 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 – Al-Murabahah 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

Supplierof goods

Price quotation formula100 + (100 x r x t ) where:

36500 r = rate of profit t = number of days

to maturity

Customer actingas an agent

for the bank

BIMB

1. Purchase order

2. Supply goods tocustomer

3. Settles the purchase Price on cash basis

5. Settle

s the b

ank

on maturit

y

4. Bank sells goodson deferred

payment basis

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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 HOLDING2. CAPITAL3. PROJECT4. OFFER AND

ACCEPTANCE

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Features of LC - Musyarakah

• Partners or shareholders are to negotiate on the terms of the Al-Musyarakah 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 customer’s 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 - MUDHARABAHDEFINITION : 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.

Implication : 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.

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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 UNDER THE CONCEPT OT AL-UJR