In order to finance purchase of goods under letters of credit (LC)‎, an Islamic bank adopts a Murabahah structure with the following modus operandi

Fatawa Question

In order to finance purchase of goods under letters of credit (LC), an Islamic bank adopts a Murabahah structure with the following modus operandi : The customer submits the LC request along with a promise to purchase from the bank through Murabahah financing. The bank opens the LC under its own name and asks the supplier to issue a commercial invoice and shipping documents in the bank’s name, being the purchaser from the supplier. Upon arrival of non-discrepant documents under the LC (thereby obtaining the title and possession to the goods), the bank signs a Murabahah agreement with the customer and endorses the commercial invoice and bill of lading in the customer’s name. By so doing, the title and possession gets transferred to the customer. The structure runs smoothly if the LC is issued on sight payment basis since the bank makes payment to the supplier and executes the Murabahah contract after fixing the Murabahah sale price which comprises the bank’s cost in purchasing the goods and the profit agreed with the customer. The situation gets complicated in the case of Usance LC where the supplier gives a Usance (credit) period to the customer, such as 90 days from the bill of lading date or date of negotiation. In such cases, the customer seeks from the bank financing for a further period of time such as another 90 days. In such a situation, the customer wants to get ownership rights on the goods immediately whereas the payment to the supplier is to be made by the bank upon completion of the Usance period. The question to be addressed is : at which stage should the Murabahah agreement be signed if the payment to the supplier is to be made upon completion of the Usance period (such as after 90 days), but the goods must be delivered immediately to the customer upon arrival of the LC documents ?

Fatwa

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Publisher

Islamic Finance News

Publication Date

2015-01-14

Country of Publication

Malaysia

Main Subjects

Economics & Business Administration
Islamic Studies

Data Type

Fatawa

Language

English

Record ID

BIM-783059

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• AMA