Istijrar: An Alternative Solution to Murabaḥah-based Import Financing Facilities under Letter of Credit-i in Malaysia

Author: Marjan Muhammad, Mezbah Uddin Ahmed, Muhamad Nasir Haron & Aniza Rahayu Zul
Pages: -

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 Sharīʿah contracts are used for import financing facilities under LC, the most common being the murābaḥah 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 murābaḥah contract. In the absence of either of these requirements, the contract is considered null and void.
Based on the researchers’ engagement with a few industry practitioners on the current market practices, two potential issues are raised regarding murābaḥah-based import financing under LC in Malaysia:
Islamic banks enter into murābaḥah-based financing when the underlying goods have changed their form after reaching the importer’s premises (e.g., the importer has already processed the raw materials into a different type of good, such as turning cocoa beans into chocolates or cocoa powder). Hence, using the original form of goods as the underlying asset when concluding the murābaḥah contract may violate the Sharīʿah requirement of existence of the asset.
Islamic banks enter into murābaḥah-based financing using the same underlying goods after the exporter has already dispatched the goods to the importer’s destination and the latter has already taken delivery of the goods and subsequently sold them to a third party (e.g., a petrol station owner who imports petrol from an exporter immediately sells the petrol to end users prior to entering into murābaḥah financing with the bank). This would raise the Sharīʿah issue of not having ownership of the asset at the time the murābaḥah contract is concluded.
To avoid the above potential Sharīʿah issues, this paper proposes istijrār as an alternative contract for murābaḥah -based facilities involving import financing under LC. The structure is based on the product of MUFG Bank (Malaysia) Berhad that was approved by the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) in its 194th meeting on 25 June 2019.
Istijrār is a type of sale contract that involves taking merchandise or goods from the vendor in instalments on a regular basis and paying the price in advance or on a deferred basis. Muslim jurists have different opinions on the permissibility of this contract depending on its forms. This paper adopts the view that istijrār with deferred payment is allowed provided that the price is either specied in every transaction or not specified in every transaction, but there is an initial agreement that the price will be determined based on the market price on the day goods are taken. Istijrār is allowed due to people’s need. Examples given in the classical books are limited to staple foods such as rice, wheat, bread and meat, which are sold on a retail basis. However, this research proposes that the istijrār structure in Islamic trade finance be extended to other types of necessary goods or merchandise such as vehicles, commodities, etc. The trade can either be retail or wholesale.
The proposed istijrār structure for import financing under LC can be applied in the following two modes of delivery arrangements/transport documents:
Bill of lading where the issuing bank has control over the goods; and
Other than bill of lading, where the issuing bank does not have control over goods which are sent directly to the importer (i.e., customer).
Payment terms for both modes are done either:
At sight: payment is made upon sighting the documents; or
Usance: payment is deferred based on the credit term specified by the exporter in the LC.
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