1. Islamic Trade Financing: Tools for Trade Competitiveness Presentation by: Asnulhadi Yeop Aziz Wholesale Banking for: Seminar on Islamic Banking & Capital Market: Products & Instruments 1

2. Presentation Outline Islamic Trade Financing: An overview
Types of Products & Instruments & Shariah Principles/contracts
Letter or Guarantee
Letter of Credit
Working Capital Financing
Islamic Accepted Bills (AB-i)
Islamic Export Credit Refinancing (IECR)
Prospects & Challenges 2

3. Trade Financing : An Overview
Merchandise
Manufacturer (Exporter)
Which comes first?
Buyer (Importer)
Payment
Modes of Payment:
Advanced Payment
Documentary Collection
Open Account
Letter of Credit

4. Trade Financing : An Overview
CASH
RAW MATERIAL
RECEIVABLE
FINISHED GOODS
Cash Operating Cycle of both Exporter & Importer

5. Trade Finance Tools Bank Guarantee Letter of Credit Overdraft
Trust Receipt
Bankers Acceptance 5

6. Manufacturer (Exporter)
Bank Guarantee
Merchandise
Manufacturer (Exporter)
Bank
Guarantee
Buyer (Importer)
Payment

7. Differences Between Pro-rated vs Per annum Commission
Bank Guarantee
Types of Guarantee
1.Tender Guarantee/Bond 4. Customs Guarantee
2. Performance Guarantee 5. Utility Payment Guarantee
3. Advanced Payment Guarantee 6. Others
Islamic Bank Guarantee
Based on the principle/contract of Kafalah or Dhamanah (guarantee)
Operationally, there is no difference between conventional and Islamic guarantee where bank charges commission/fee (ujr) for the guarantee.
Certain Islamic banks adopt pro-rated commission (i.e. based on actual number of months)
Differences Between Pro-rated vs Per annum Commission
Amount : RM200,000-00
Commission : e.g. 1% p.a.
Tenor : 6 months
Pro-rated Basis Per Annum Basis
Commission : RM2, RM1,000-00 7

8. Letter of Credit
Written undertaking by a commercial bank to seller (beneficiary) to effect payment on behalf of the buyer if terms & conditions of the LC (i.e. terms of credit) have been complied with.
Advantages
Provides importer with credit backing & eliminates buyer risk to exporter
Importer may get better pricing & payment terms
Importer is assured documents presented are as per requirement and duly examined by experts in the field as per UCP500.
Exporter may get sale proceeds faster (via negotiation of LC) 8

9. Letter of Credit- The Mechanics
EXPORTER
IMPORTER
4.Client provide document & receive payment
1.Apply LC & place 100% deposit
7.Client receive document
3.Advise LC
2. Issue LC
ADVISING/ NEGOTIA-TING BANK
ISSUING BANK
5.Forward document
6. Payment reimbursement

10. Letter of Credit Islamic Letter of Credit
Based on the principle/contract of Wakalah
If deposit is placed upfront by client, it will be placed under wadiah.
Customer will pay commission/fee (ujr) for the service
Operationally, no difference from conventional LC.
Main advantage: No interest payment on Settlement Period.
Settlement of LC
via upfront wadiah deposit placement
via Murabahah Working Capital Financing
via Equity Financing namely Mudharabah or Musyarakah financing. 10

11. DIFFERENCES IN COSTS BETWEEN CONVENTIONAL & ISLAMIC LC
Letter of Credit
DIFFERENCES IN COSTS BETWEEN CONVENTIONAL & ISLAMIC LC
Assumption
LC issued on 1 Apr 2006 and expires on 30 May 2006
Beneficiary : In the USA
LC Amount : USD100,000-00
Foreign Exchange : 3.60
Amount in MYR : RM360,000-00
Commission : 0.1% p.m.
Tenor : 2 Months
Foreign Interest : 6%
SWIFT Charge : RM25.00
CONVENTIONAL LC RM
ISLAMIC LC
Commission
(RM360,000 X 0.1% X 2)
720-00
Interest from date of negotiation to date of 8 days + 10 remittance days
(RM360,000 X 6% X 18/365
1,065-21 -
SWIFT Charges
25-00
TOTAL CHARGES
1,810-21
745-00 11

12. Working Capital Financing
The money that is required to circulate within a business in order to finance its business/operating cycle. (It can also be used to settle LC)
Nature
Short period – according to business/operating cycle
Self-liquidating
Financing relates to specific asset (eg stock, receivable)
Forms
Overdraft
Trust Receipt
- Document of trust signed by importer, the strength on with bank allows the
importer to obtain release of the merchandise but making payment at a later date.
Bankers Acceptance (Import/Export)
- Usance Bill of Exchange drawn by client on the bank for acceptance/discount.
The proceeds will be utilised to finance the merchandise imported. 12

13. Financing of Purchase/Import - Murabahah
1. Bank appoints Client as Purchasing Agent
5. Sale of Goods
BANK
CLIENT
6. Payment of Sale Price on Maturity
4. Payment of Purchase Price
2. Purchase Order
Supply of goods
SUPPLIER
Sale Price = Cost + (Cost X Profit rate X Tenor) 13

14. Islamic Accepted Bills (AB-i) (Purchase/Import)
1. Bank appoints Client as Purchasing Agent
5. Sale of Goods
BANK
CLIENT
6. Payment of Sale Price on Maturity
4. Payment of Purchase Price
2. Purchase Order
Supply of goods
Securitisation of the Debt : AB-i. Sale of AB-i to another party is under Bai’ Dayn
SUPPLIER 14

15. Financing of Sales/Exports - Bai’ Dayn
5. On maturity, Client collect debt and pay to Bank
3. Sale of Debt
BANK
CLIENT
4. Payment via cash
Supplier will pay on end credit term
Client sells goods
SUPPLIER 15

16. Islamic Accepted Bills (AB-i) (Sale/Export)
5. On maturity, Client collect debt and pay to Bank
3. Sale of Debt
BANK
CLIENT
4. Payment via cash
Supplier will pay on end credit term
Client sells goods
Securitisation of the Debt : AB-i. Sale of AB-i to another party is under Bai’ Dayn
SUPPLIER 16

17. AB-i (Purchase or Sale)
Transactions Allowed to be Securitised under AB-i
Tangible and non-haram goods (eg. raw materials, semi-finished goods or finished goods)
Selected services – 1.Purchase of computer software licence,
2.Companies involved in trade-related logistic services such as warehousing, forwarding & shipping, or
3.Purchase of electricity such as Independent Power Producer
(Exemption given on case to case basis)
(Source: BNM AB-i Guideline) 17

18. Working Capital Financing
Trust Receipt & Bankers Acceptance (BA)
Financing for Purchases/Imports & Islamic Accepted Bills (AB-i)
Tenor
30 – 180 days
Payment of Interest/Profit
Upfront
Requires Overdraft Facility
On maturity (in arrears)
Coincides with operating cycle
Not requires Overdraft Facility
Lower effective rate
Financing Amount
100% under Trust Receipt
Round Down to nearest thousand for BA
100% of invoice amount
Acceptance Commission
Available under BA Facility
None even under AB-i Facility

19. Cost Comparison Between BA and AB-i BANKERS ACCEPTANCE - CONVENTIONAL
Invoices
RM384,429.00
Discount Rate / Accepted Commission
3.0%, 0.5%
Tenor
120 Days
Discounted Amount
RM384, x 3.0% x 120/ = RM3,787.40
Acceptance Commission Amount
RM384, x 0.5% x 120/ = RM631.23
OD Rate
BLR + 1.5%
Upon Issuance
BA Draft Amount = RM384,000.00
Current Account/ OD Debited
RM RM3, RM =RM4,847.63
Up front Charges
RM4,847.63
OD Interest
RM4, x 7.5% x 120/365 = RM119.53
Upon Maturity
RM384, (BA Amount + OD Interest)
Overall Charges
RM388, (Upon Issuance + Upon Maturity)

20. Cost Comparison Between BA and AB-i ACCEPTED BILLS - ISLAMIC
Invoices
RM384,429.00
Profit Rate
3.5%
Tenor
120 Days
Profit Amount
RM384, x 3.5% x 120/ = RM4,423.57
Upon Issuance
BANK PURCHASE PRICE = RM384,429.00
BANK SELLING PRICE = RM388,852.57
Upon Maturity
RM388, (Bank Selling Price)
Overall Charges
RM388, (Upon Issuance + Upon Maturity)

21. Islamic Export Credit Refinancing Scheme (IECR)
Special government scheme to promote export of Malaysian
manufactured products, agriculture products & primary commodities via
participating commercial banks.
IECR Pre-shipment and Post-Shipment
AB-i uses the prevailing profit rate in the market while IECR allows
banks to resell the debt to EXIM Bank at a special rate. EXIM Bank will
notify the refinancing rate from time to time.
Uses the principle/contract of Bai’ Dayn. 21

22. Islamic Trade Financing : Prospect GROWTH OF TRADE BILLS IN MALAYSIA
Trends in Islamic Trade Financing in Malaysia
In Malaysia, Islamic Trading Finance has gradually gained acceptance due to the distinct advantages.
GROWTH OF TRADE BILLS IN MALAYSIA
(in RM’Mil)
Source : BNM 22

23. Islamic Trade Financing : Challenges
1. Differential in views of Islamic scholars on Bai’ Dayn
Scholars in the Middle East have different views on bai’ dayn.
2. Interest on Remittance Days of LC
Establishing LC where no interest is payable on remittance days.
3. Differential in Rates between BA and AB-I
Currently, AB-I rate is lower than BA rate due to the liquidity in Islamic Banking. The
position may be different in the future. 23

24. THANK YOU