ISLAMIC BANKING “IMPORT FINANCING”

Conventional Way of Import Financing: Banks charge two types of fee for the service of Letter Of Credit which the bank provided to the importer. They are: - Service charges for opening an LC - Interest charged on the LCs which are not opened on full margin.

Collecting service charges for this purpose is allowed, but as interest cannot be charged in any case, experts have proposed two methods for financing LCs. These methods are: Musharakah Morabaha

MUSHARAKAH The appropriate substitute for LC is Musharakah. Bank and importer can make an agreement of Mudarbah or Musharakah while opening LC. If LC is being opened at zero margin then an agreement of Mudarbah can be made, in which bank will become rabb-ul-mal and importer will be regarded as mudarib. Bank will own the goods that are being imported and profit will be distributed according to the agreement.

If LC is being opened at some margin then Musharakah agreement can be made. Bank will pay the remaining amount and the goods that are being imported will be owned by both of them according to their share of investment. Bank and Importer, with their mutual consent can also include a condition in the agreement, whereby, Musharakah or Mudarbah will end after a certain tile period even if the goods are not sold. In this case, importer will purchase the bank’s share at the market price.

MORABAHA: At present Islamic banks are using Morabaha to finance LC. These banks themselves import the required goods and then sell these goods to the importer on Morabaha agreement. Morabaha financing requires bank and importer to sign two agreements separately. One for the purchase of goods and other for appointing the importer as the agent of the bank (that is Agency Agreement). Once these two agreements are signed importer can negotiate and finalize all the terms and conditions with the exporter on behalf of the bank.