Download - International Banking Under Islamic Banking

International Banking International Banking under Islamic Banking under Islamic Banking

FrameworkFramework

Dr. Shah Md. Ahsan HabibDr. Shah Md. Ahsan Habib

Professor & Director Professor & Director [Training] , BIBM[Training] , BIBM

International BankingInternational Banking

Cross Country Cross Country TransactionTransaction

Cross Currency Cross Currency Transaction Transaction

Activities Performed by the Banking SectorActivities Performed by the Banking Sector

• Facilitation of Trade PaymentFacilitation of Trade Payment• Financing International TradeFinancing International Trade• Foreign Exchange Services Foreign Exchange Services

Rules/System for International Banking- Rules/System for International Banking- Investment System for Import/Export [BB]Investment System for Import/Export [BB]

The importers avail of investment facilities The importers avail of investment facilities under the Shariah approved Bai-Murabaha and under the Shariah approved Bai-Murabaha and Bai-Muajjal modes; and Hire Purchase. ….Bai-Muajjal modes; and Hire Purchase. ….

Moreover, Mudaraba, Musharaka (shirkat); Bai Moreover, Mudaraba, Musharaka (shirkat); Bai Salam and Bai-al-sarf are in use.Salam and Bai-al-sarf are in use.


• To accomplish export process/ order as per the terms of To accomplish export process/ order as per the terms of L/C and the contract, an exporter needs financial and other L/C and the contract, an exporter needs financial and other banking facilities on urgent basis. Financial assistance/ banking facilities on urgent basis. Financial assistance/ facilities complying Shariah principles are provided at both facilities complying Shariah principles are provided at both Preshipment and Post-shipment Stages by the Islamic Preshipment and Post-shipment Stages by the Islamic Banks under Bai Muajjal, Bai Murabaha, Bai Salam, and Banks under Bai Muajjal, Bai Murabaha, Bai Salam, and Musharaka. Musharaka.


………………………………....Besides, the Islamic banks Besides, the Islamic banks will fully abide by the national and will fully abide by the national and international norms and guidelines international norms and guidelines relating to export/import business.relating to export/import business.

Rules/System for International BankingRules/System for International Banking

Domestic Domestic Set of Set of

RegulationsRegulationsInternational International

Set of Set of RegulationsRegulations

Rules/System for International BankingRules/System for International Banking

Domestic Domestic Set of Set of

RegulationsRegulations

FERA 1947FERA 1947Export PolicyExport PolicyImport PolicyImport Policy

Regulatory Framework Regulatory Framework

International International Set of Set of

RegulationsRegulations

UCPDCUCPDCURRURRISBPISBPURCURC

Facilitation of Trade PaymentFacilitation of Trade Payment

• Cash in AdvanceCash in Advance• Open AccountOpen Account• Documentary CollectionDocumentary Collection• Documentary Credit Documentary Credit

Cash in AdvanceCash in Advance

• Interest of Exporter ProtectedInterest of Exporter Protected• Interest of Importer Not ProtectedInterest of Importer Not Protected• Insignificant Involvement of Bank Insignificant Involvement of Bank • No universal Regulation No universal Regulation

Open AccountOpen Account

• Interest of Importer ProtectedInterest of Importer Protected• Interest of Exporter Not ProtectedInterest of Exporter Not Protected• Insignificant Involvement of Bank Insignificant Involvement of Bank • No universal Regulation No universal Regulation

Documentary CollectionDocumentary Collection• Interest of Importer ProtectedInterest of Importer Protected• Interest of Exporter better Protected Interest of Exporter better Protected

than Open Accountthan Open Account• Involvement of Bank is higherInvolvement of Bank is higher• Regulated by URC 522Regulated by URC 522

Documentary CollectionDocumentary Collection

Importer

Exporter

Collecting Bank

Remitting Bank

PresentingBank

Purchase- SaleContract

Documentary Credit [LC]Documentary Credit [LC]• Islamic LC allows to procure goods locally as well Islamic LC allows to procure goods locally as well

as imports from overseas providing your supplier as imports from overseas providing your supplier an undertaking to pay them upon shipment of an undertaking to pay them upon shipment of goods and presentation of documents complying goods and presentation of documents complying with the terms of LC.with the terms of LC.

Islamic LC is provided under the Islamic Shariah Islamic LC is provided under the Islamic Shariah principle of Wakalah (agency arrangement). …a principle of Wakalah (agency arrangement). …a Bai Murabaha agreement is commonly executed Bai Murabaha agreement is commonly executed at the time of opening LC…….at the time of opening LC…….

Before establishing LC, the bank shall receive an Before establishing LC, the bank shall receive an application from the client in prescribed form which shall application from the client in prescribed form which shall include : price, …Expected sale price of imported goods; include : price, …Expected sale price of imported goods; expected sale price of the imported goods; Estimated net expected sale price of the imported goods; Estimated net profit; Capital and profit /loss sharing ratios; profit; Capital and profit /loss sharing ratios; The Bank The Bank shall, thereafter, receive the equity portion of the client shall, thereafter, receive the equity portion of the client and after completion of documentation shall make and after completion of documentation shall make payment against the import liability and all expenses payment against the import liability and all expenses related to it as per the Musharaka agreement [BB]….related to it as per the Musharaka agreement [BB]….

Documentary Credit [LC]Documentary Credit [LC]

Importer

Exporter

AdvisingBank

Issuing Bank

NominatedBank


Documentary Credit [LCDocumentary Credit [LC]]

• Interest of Importer ProtectedInterest of Importer Protected• Interest of Exporter Protected Interest of Exporter Protected • Significant Involvement of Bank Significant Involvement of Bank • Regulated by UCP 600Regulated by UCP 600

UCP 600-AN OVERVIEWUCP 600-AN OVERVIEW

• The Uniform Customs and Practice for The Uniform Customs and Practice for Documentary Credits, 2007 Revision, Documentary Credits, 2007 Revision, ICC Publication No. 600 ("UCP") are ICC Publication No. 600 ("UCP") are rules that apply to any documentary rules that apply to any documentary credit ("credit") when the text of the credit ("credit") when the text of the credit expressly indicates that it is credit expressly indicates that it is subject to these rules. subject to these rules.

• They are binding on all parties thereto They are binding on all parties thereto unless expressly modified or excluded unless expressly modified or excluded by the credit.by the credit.

Application of UCP 600

• Complying presentation Complying presentation means a means a presentation that is in accordance with the presentation that is in accordance with the terms and conditions of the credit, the terms and conditions of the credit, the applicable provisions of these rules and applicable provisions of these rules and international standard banking practice.international standard banking practice.

• CreditCredit means any arrangement, however means any arrangement, however named or described, that is irrevocable and named or described, that is irrevocable and thereby constitutes a definite undertaking of thereby constitutes a definite undertaking of the issuing bank to honour a complying the issuing bank to honour a complying presentation. presentation.

Important DefinitionsImportant Definitions

• HonourHonour means to pay at sight; to incur a means to pay at sight; to incur a deferred payment undertaking and pay at deferred payment undertaking and pay at maturity; or to accept a bill of exchange maturity; or to accept a bill of exchange ("draft") drawn by the beneficiary and pay ("draft") drawn by the beneficiary and pay at maturity.at maturity.

• Negotiation Negotiation means the purchase by the means the purchase by the nominated bank of drafts (drawn on a bank nominated bank of drafts (drawn on a bank other than the nominated bank) and/or other than the nominated bank) and/or documents under a complying documents under a complying presentation, by advancing or agreeing to presentation, by advancing or agreeing to advance funds to the beneficiary on or advance funds to the beneficiary on or before the banking day on which before the banking day on which reimbursement is due to the nominated reimbursement is due to the nominated bank.bank.

Important Definitions

Importer

Exporter

AdvisingBank

Issuing Bank

NominatedBank

Contract of Reimbursement


Credits v. Contracts

Standard for Examination of Documents • Banks must examine a presentation on the Banks must examine a presentation on the

basis of the documents alonebasis of the documents alone

• Bank shall each have a maximum of five Bank shall each have a maximum of five banking days following the day of banking days following the day of presentationpresentation

• Presentation not later than 21 calendar Presentation not later than 21 calendar days after the date of shipment, but in any days after the date of shipment, but in any event not later than the expiry date of the event not later than the expiry date of the creditcredit

• In documents other than the commercial In documents other than the commercial invoice are examined in general terms not invoice are examined in general terms not conflicting with their description in the conflicting with their description in the creditcredit

Standard for Examination of Documents

• If a credit requires presentation of a If a credit requires presentation of a document without stipulating by whom the document without stipulating by whom the document is to be issued or its data document is to be issued or its data content, banks will accept the document if content, banks will accept the document if not conflicting…not conflicting…

• A document presented but not required by A document presented but not required by the credit will be disregarded the credit will be disregarded

• If a credit contains a condition without If a credit contains a condition without stipulating the document banks will deem stipulating the document banks will deem such condition as not stated and will such condition as not stated and will disregard it.disregard it.

• A document may be dated prior to the A document may be dated prior to the issuance date of the creditissuance date of the credit

Discrepant Documents, Waiver and Notice

• When a presentation does not comply, it When a presentation does not comply, it may refuse to honour or negotiate.may refuse to honour or negotiate.

• When an issuing bank determines that a When an issuing bank determines that a presentation does not comply, it may in presentation does not comply, it may in its sole judgement approach the its sole judgement approach the applicant ..applicant ..

• When decides to refuse, it must give a When decides to refuse, it must give a single notice to .........the presentersingle notice to .........the presenter

• Contents of Discrepancy Contents of Discrepancy Notice……………..Notice……………..

Documents under UCP 600

• Commercial InvoiceCommercial Invoice• Transport DocumentTransport Document• Insurance DocumentsInsurance Documents• Other DocumentsOther Documents

Disclaimer on Transmission and Translation

Force Majeure

Disclaimer for Acts of an Instructed Party

Disclaimer on Effectiveness of Documents

Transferable Credit

Assignment of Proceeds

ISBP 745ISBP 745

• Application and Issuance of the CreditApplication and Issuance of the Credit• General Principles General Principles • Drafts and Calculation of MaturityDrafts and Calculation of Maturity• Commercial InvoiceCommercial Invoice• Transport Documents Transport Documents

THE UNIFORM RULES FOR BANK-TO-THE UNIFORM RULES FOR BANK-TO-BANK REIMBURSEMENTS UNDER BANK REIMBURSEMENTS UNDER

DOCUMENTARY CREDITS (URR 725)DOCUMENTARY CREDITS (URR 725)

ICC UNIFORM RULES FOR BANK-TO-BANK ICC UNIFORM RULES FOR BANK-TO-BANK REIMBURSEMENTS (URR 725)REIMBURSEMENTS (URR 725)

•Direct Reimbursement •Bank to Bank Reimbursement •URR 725 and UCP 600•Effective Date: October 01, 2008

LC Procedure and ReimbursementLC Procedure and Reimbursement

Importer

Exporter

AdvisingBank

Issuing Bank

NominatedBank

ReimbursingBank

ICC Uniform Rules for ICC Uniform Rules for Collections [URC]Collections [URC]

Publication No. 522Publication No. 522

….Article 2: Definition of Article 2: Definition of CollectionCollection

““Financial documents” means bills of Financial documents” means bills of exchange, promissory notes, cheques, or exchange, promissory notes, cheques, or other similar instruments used for other similar instruments used for obtaining the payment of money.obtaining the payment of money.

““Commercial documents” means Invoices, Commercial documents” means Invoices, transport documents, documents of title or transport documents, documents of title or other similar documents, or any other other similar documents, or any other documents whatsoever, not being financial documents whatsoever, not being financial documents.documents.

Collection ProcedureCollection Procedure

Importer

Exporter

Collecting Bank

Remitting Bank

PresentingBank

Import FinancingImport Financing

• Importers are financed in the Importers are financed in the form of Bai-Murabaha Post form of Bai-Murabaha Post Import Basis; or Trust Import Basis; or Trust Receipt on Bai-Muazzal….Receipt on Bai-Muazzal….

Export Financing- Back to BackExport Financing- Back to Back

Bank extends Back to Back letter of credit (L/C) Bank extends Back to Back letter of credit (L/C) facility for producing exportable goods at pre-facility for producing exportable goods at pre-shipment stage under the mode of Bai-Muajjal. shipment stage under the mode of Bai-Muajjal. Initially, no financial facility from the Bank is Initially, no financial facility from the Bank is required when the back to back L/C is opened. But required when the back to back L/C is opened. But if the exporter fails to pay the L/C value at maturity if the exporter fails to pay the L/C value at maturity or on due date, the bank provides financial facilities or on due date, the bank provides financial facilities to the client under Bai- Muajjal mode..(BB).to the client under Bai- Muajjal mode..(BB).

Export Financing- Post-Shipment Export Financing- Post-Shipment InvestmentInvestment

Bank provides post-shipment investment facilities Bank provides post-shipment investment facilities through Negotiation (FBN) and purchase of export through Negotiation (FBN) and purchase of export bills. It normally negotiates or purchases the export bills. It normally negotiates or purchases the export documents if the documents/bills prepared by the documents if the documents/bills prepared by the exporter are found in order/correct……….exporter are found in order/correct……….[BB]. ..banks commonly use Bai-al-Sarf for [BB]. ..banks commonly use Bai-al-Sarf for negotiation of documents. negotiation of documents.

Foreign Exchange Foreign Exchange

• Foreign Exchange MarketForeign Exchange Market• Foreign Exchange Market ProductsForeign Exchange Market Products• Exchange Rate Exchange Rate • Exchange Rate Management System Exchange Rate Management System

Foreign Exchange Foreign Exchange

• Foreign exchange remittances, spot sale Foreign exchange remittances, spot sale and purchase of foreign currency is and purchase of foreign currency is allowed; foreign currency forward cover is allowed; foreign currency forward cover is generally allowed with certain conditions.. generally allowed with certain conditions..

• Only Actual delivery Only Actual delivery • This must be used only for hedging This must be used only for hedging

purposespurposes

Foreign Exchange Products

SpotFuture

Forward

Swap

Option

Exchange Rate SystemsExchange Rate Systems

FixedFixed HybridHybrid FloatingFloating

PeggingPegging Managed Managed Floating Floating

Commodity TradingCommodity Trading

• Banks are allowed to offer commodity swap Banks are allowed to offer commodity swap as part of foreign exchange transactions….in as part of foreign exchange transactions….in most cases Islamic scholars do not have most cases Islamic scholars do not have objections on ‘Commodity Swap/Forward’…..objections on ‘Commodity Swap/Forward’…..

• Information should be made availableInformation should be made available• Greater benefits of producers and farmers Greater benefits of producers and farmers

should be ensured…….should be ensured…….

Thank YouThank You

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