Muhamad Nasir Haron; Aniza Rahaya Zulkifli; Marjan Muhammad; Mezbah Uddin Ahmed (International Shari'ah Research Academy for Islamic Finance (ISRA), 2020)
Islamic banks provide similar trade finance facilities to those of conventional banks. They intermediate between buyers (i.e., importers) and sellers (i.e., exporters), act as a custodian of documents, and provide means to reduce payment risks via different payment terms (e.g., open account, documentary collection and letter of credit (LC)). They also provide financing - as need be - to help with working capital tied to the trade transactions. This research focuses only on financing by Islamic banks to importers that involve LCs. Different underlying Shari'ah contracts are used for import financing facilities under LC, the most common being the murabahah contract. At the time of sale, the existence of the subject matter and its ownership by the seller are the key requirements for the validity of a murabahah contract. In the absence of either of these requirements, the contract is considered null and void.
