This document discusses Islamic letters of credit (ILCs) and how they are applied using different Shariah contracts. It provides an overview of key Islamic trade finance products like Murabahah, Musharakah, and Wakalah that can be used as the basis for ILCs. It then examines the modus operandi and processes for Murabahah, Musharakah and Wakalah ILCs. The advantages of each model are also highlighted. The document aims to explain how ILCs can be structured in compliance with Islamic principles like the prohibition of Riba.

1. ADVANCED FIQH MUAMALAT
ISB 548
ISLAMIC BANKING INSTRUMENTS IN APLLYING OF LETTER OF
CREDIT (LC)
Prepared By:
Huzaimah Bt. Jaimin 2011256756
Eka Pusmawati Bt. Abd. Wasir 2011812488
Sofiah Bt. Arip 2011401738
Smelta Ak Judi 2011829212

2. Islamic Trade Finance Product
IMPORT
Letter Of Credit-i (Lc-i)
Trust Receipt-i (Tr-i)
Accepted Bills –I (Ab-i)
PURCHASES
Working Capital Financing-i (Wcf-i)
EXPORT/SALES
Bills Purchased (Bp-i)
Export Credit Refinancing – I (Ecr-i)
OTHER FACILITIES
Bank Guarantee (Bg-i)
Shipping Guarantee (Sg-i)

3. ISLAMIC TRADE FINANCE
Letter of Credit - i
Islamic letter of credit (ILC) is a written undertaking
given by the Islamic bank to the seller (beneficiary) at
the request and on the instruction of the buyer (the
applicant) to pay at sight or at a determinable future
date, a stated sum of money within prescribed time
limit and against stipulated documents which must
comply with term and condition. An Islamic ban may
offer ILC under the some Shari’ah contract namely
Murabahah (cost-plus profit), Musharakah
(partnership) and Wakalah (agency).
Uniform Customs and Practice for Documentary Credit International Chamber of
Commerce Publication 600 (2007 Revision )

6. RIBA IN THE SUNNAH
narrated from Abu Said Al Khudri, the Prophet S.A.W. said:
“gold for gold, silver for silver, wheat for wheat, barley for
barley, dates for dates, and salt for salt, like for like, and
hand-to-hand. whoever pays more or takes more has
indulged in Riba. the taker and giver are alike (in guilt).

7. Murabahah (Cost-plus Profit)
A document of trust signed by the importer, the strength
on which the bank allows the importer to obtain release
of the merchandise but making a lump sum payment at
a later date
Murabahah Islamic Letter of Credit
Under the principle of Murabahah (cost plus profit) where
the customers is unable to pay the purchase price, the bank
issues the ILC and pays the purchase price to the exporter.
The bank immediately sells to the customer at a mark up
for a deferred payment. The model of murabahah letter of
credit as follow :

9. Modus Operandi of MURABAHAH in Islamic
Letter of Credit
1) The customer inform the Islamic Bank of his ILC requirement and requests
the Islamic bank to purchase or import the goods indicating that he would be
willing to purchase the goods from Islamic Bank upon negotiation of the ILC
on the principle of Murabahah concept.
2) The Islamic Bank appoints the customer as its agent to purchase the
required goods on his behalf.
3) The Islamic Bank establishes the ILC and pays the proceed to the
negotiating bank utilizing its own funds.
4) The Islamic Bank sells the goods to the customer at a sale price comprising
its cost and profit margin under the principle of murabahah for settlement on
deferred term
5) The customer takes possession of the goods and disposes of them in the
manner agreed.

11. Customer Informs The Bank Of His LC Requirement And
Request Bank To Purchase The Goods.
The Bank Retains The Legal Title To The Goods BUT
Relinquishes Physical Possession To The Buyer Or Importer.
Buyer/Importer Acts As Trustee Or Agent Of The Bank
Buyer/Importer Dispose The Goods And Repays The Bank
SP = FV [1 + {r x t)]
---------
36500
Note:
Sp = Selling Price
Fv = Invoice Value
R = Mark-up Rate Or Annual Rate Of Return
T = Tenor

12. MUSHARAKAH
 Islamic bank issues the ILC and both the bank
and customer contribute to the purchase price
under ILC, and later share.
The procedures of the sale of the asset based on
the pre-agreed profit sharing ratio. Losses are
born proportionate to the capital contribution.

14. Modus Operandi MUSHARAKAH ILC
1. The customer informs the Islamic bank of his ILC requirement
and negotiates the terms of musharakah financing for his
requirement.
2. The customer places with the Islamic bank a deposit ofr his
share of the cost of goods to be purchased or imported as per
the musharakah agreement which the Islamic bank accepts
under the principle of wada’ah yad dhamanah.
3. The Islamic bank establishes the ILC and pays the proceeds
to the negotiating bank, utilizing the customer’s deposit as
well as its won shares of financing.
4. The Islamic bank releases the documents to the customer.
5. The customer takes possession of the good and disposes of
them in the manner agreed.
6. The Islamic bank and the customer share the profit from the
venture as provided for in the agreement

15. Advantaged
Customer shares the profit from the
venture as provided in this agreement
The absolute return on the investment
depends on the profitability of the
venture.

16. WAKALAH
Islamic letter of credit, the customer must
pay in advance the full value of the item
in question prior to the issuance of the ILC.
Furthermore, the Islamic bank will receive
a commission or service fee upon the
service rendered to the customer.

18. Modus Operandi On WAKALAH ILC
1. The customer informs the Islamic bank of his ILC
requirements and requests the Islamic bank to provide the
facility
2. The Islamic bank may require the customer to place a
deposit to the full amount of the price of the good to be
purchased or imported, which the Islamic bank accepts
under the principle of Wadiah Yad Dhamanah
3. The Islamic bank established the ILC and pays the proceeds
to the negotiating bank, utilizing the customer’s deposit,
and subsequently release the documents to the customer
4. The negotiating bank claims reimbursement from the
Islamic bank as per the reimbursement instruction.
5. The Islamic bank charges the customer fees and commission
for its services under the principle of al-ujr based on the
Wakalah principle.

19. Advantaged
 To ensure buyer receives merchandise on time and payment
made upon receipt of complied document.
 From islamic point of view, zakat fund of the islamic banks
will help the muflis. So, there will be no auction of assets of
the muflis unless he surrenders himself.
 Therefore, this explicitly shows the beauty of islamic
banking system in protecting its ummah.

20. THANK YOU
ANY QUESTION??