Operational Mechanisms of

Islamic Accepted Bill

©Prof. Dr. Mohd. Ma’sum Billah1

Introduction

Islamic Accepted Bill (IAB) is one of the Islamic financial instruments that are traded in
Islamic Inter-bank Money Market (IIMM).2 IABs are traded based on Murabahah and
Bay’ al Dayn concepts similar to the other financial instruments such as Green-bankers
acceptances, Islamic mortgage bonds and Islamic private debt securities. The IIMM, in
turn, is the place where a set of activities are carried out including purchase and sale of
Islamic financial instruments among market participants, inter-bank investment activities
and a cheque clearing and settlement.

1
Professor of Islamic Financial Regulations, King Abdul Aziz University, Jeddah. Professor of Islamic
Financial Applications, University of Camden, USA. Assoc. Professor of Law (Insurance, Takaful, Islamic
Banking, Finance & E-Commerce), Faculty of Economics and Management Sciences, International Islamic
University Malaysia. He is also an Adviser and Consultant to several Companies and Institutions
(Internationally & Locally ) on Insurance, Banking, Financial and IT regulations, Wealth & Asset
Management, Islamic Bond Market, Gold Dinar and so on under both modern principles and Shari’ah
Discipline. Also the author of http//.www.islamic-insurance.com. E-mail: masum2001@yahoo.com

2
Nor Mohamed Yakob, Money Market in Islamic Banking: The Problems of Thin Trading, Paper
presented in the conference on SPTF and Islamic Banking Products, December 1995

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Islamic Accepted Bills arises from the situation when the customer on behalf of a bank
buys goods that he or she wants while the bank sells them back to the customer at a
deferred payment basis. The bank makes payment in lump sum for the goods purchased
by its customer on its behalf and sells those goods to the customer on the deferred
payment basis. These due payments represent profit for the holders of the Islamic
Accepted Bills that are traded in the secondary market. Islamic Accepted Bills are mostly
used to finance imports and export or local purchases and sales, provided that the traded
goods are halal.

This paper will analyze Islamic Accepted Bills in terms of structure and operations. First
of all, we define Islamic Accepted Bills and show what its operational procedures. Next,
we present some of the guidelines imposed on trade and issuance of Islamic Accepted
Bills. The third part will explain how Islamic Accepted Bills are traded in the secondary
market, who are the users and traders and what basis of pricing used. Finally, we address
the Shari’ah point of view on Islamic Accepted Bills in terms of their acceptability.

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Understanding Islamic Accepted Bills

Islamic Accepted Bill is one of the instruments traded on Islamic Inter-bank Money
Market (IIMM) and based on the concept of Al-Murabahah/Bai’ Al-Dayn.3 Islamic
Accepted Bills is an order to a bank by its customer obliging it to pay a certain amount of
money to the holder of the acceptances bill. The bank makes payment in lump sum for
the goods purchased by its customer on its behalf and sells those goods to the customer
on the deferred payment basis. These due payments represent profit for the holders of the
Islamic Accepted Bills that are traded in the secondary market to another party. It attracts
a very attractive price because it is a negotiable instrument. The customer is, therefore,
financed at a very attractive rate.

Islamic Accepted Bill is similar to Bankers Acceptance. Bankers Acceptance is a bill

with a certain face value issued by a bank to the customer at a discount.4 The discounted
value of the bill is credited to the customer’s account while the customer pays back the
face value at the maturity date. For example a Bankers Acceptance Bill might have a
face value of RM 2 million, while the amount of money credited to the customer’s
account is RM 1.9 million. The difference between the face value and the discounted
value (the amount of money credited to the customer’s account) represent interest
payment. Bankers Acceptances are used for project financing and traded on the
secondary market. The Islamic Accepted Bill is introduced as an alternative to Bankers
Acceptance in view of the need to provide customers an Islamic alternative.

The difference between the Bankers Acceptance and Islamic Accepted Bill is the absence
of interest payments in the case of Islamic Accepted Bill. Interest is not allowed in Islam
and, therefore, the profit in Islamic Accepted Bill is said to be derived from trading which
is permissible. The profit by trading is derived through the contracts of Murabahah.
Murabahah refers to the sale of a good at a price based on cost-plus profit margin agreed
by the both parties. Here the Islamic bank appoints a customer as agent to purchase the
3
Nor Mohamed Yakob, Money Market in Islamic Banking: The Problems of Thin Trading, Paper
presented in the conference on SPTF and Islamic Banking Products, December 1995
4
Saiful Azhar Rosely, Islamic Project Financing in Malaysia, A collection of his articles on “Islamic
Banking and Finance”, 2003

3
goods at cost. The bank guarantees the payment to the supplier. Then, the bank sells the
goods to the customer where credit to be settled in say, 90 days. The selling price
includes cost and profit which is called a mark-up price. The bank then draws a bill on
the customer who accepts the bill at the mark-up price. The holder of the bill, i.e. the
bank can sell the bill to the third party at a price not less than the cost.5 Such sale is based
on the bay’ al dayn contract. Bay’ al dayn refers to the sale of a debt arising from a trade
transaction with a deferred payment.

Islamic Accepted Bills are widely used in financing imports and exports. It is an
alternative to the Bankers Acceptance Bill that is used to finance purchases and sales by
conventional banks. Islamic Accepted Bill, however, is used only in transactions
involving halal goods and services. Examples of using Islamic Accepted Bills in imports
and exports are as follows:

Islamic Accepted Bill-Imports (Al-Murabahah/Bai’ Al-Dayn)

The customer can approach the bank to provide financing for his working capital
requirements to import inventories or raw materials. The bank purchases the required
goods and settles the purchase price from its own funds. Then, the bank sells the goods to
the customer at an agreed price comprising its purchase price and a profit margin and
allows the customer to settle this sale price on a deferred term of 30 days, 60 days or 90
days. Lastly, on the due date the customer pays the Bank the agreed sale price on
maturity date of the financing. The sale of goods by the bank on deferred payment term
constitutes the creation of debt. This debt is securitized in the form of a bill of exchange
drawn by the bank on the customer for the full amount of the bank’s selling price payable
at the maturity. Islamic Accepted Bills are traded in the secondary market based on bay’
al dayn concept. This makes them an attractive financing instrument with low cost.

Islamic Accepted Bill – Exports or Sales ( Bai’ Al-Dayn )

5
Saiful Azhar Rosely, Islamic Project Financing in Malaysia, A collection of his articles on “Islamic
Banking and Finance”, 2003

4
The bank finances exports and sales under the principle of Bai Al-Dayn. Under this bill,
an exporter who wishes to avail himself of this facility, prepares export documents as
required under the sale of contract or letter of credit. He represents these documents to
the Bank to be purchased. As the export documents have to be sent to the buyer overseas,
the exporter is requests by the bank to draw another Bill of Exchange drawn on the bank.
This bill is known as Islamic Accepted Bill-Exports (IAB-Exports). The IAB-Exports can
be traded in secondary market.

Determining the Price of Islamic Accepted Bill

The holder of the Islamic Accepted Bill may resell it to any other person. The price of an
IAB used for financing sales is determined using the following formula6:

P = FV ( 1 – rt / 36500 )
Where,
P = Market Price or sale proceeds
FV = Face or maturity value
r = Annual rate of profit (in percentage)
t = Number of days remaining to maturity

The price of an IAB used for financing purchases is determined using the following
formula:
P = IV ( 1 + rt / 36500 )
Where,
P = Market Price or sale proceeds
IV = Invoice value
r = Annual rate of profit (in percentage)
t = Number of days remaining to maturity
A certain commission may be charged for services related to IAB acceptance. In case of
IAB for sales, the drawer of an IAB may pay to the bank the commission of acceptance
6
Bank Negara Malaysia, Guidelines on Interest-Free Accepted Bills, March 4, 1993

5
service. On the other hand, in case of IAB for purchases, the drawer may charge the
acceptor a commission for the drawing services. Where such a commission is payable,
the rate of commission shall be determined on the basis of the agreed proportion of the
maturity face value of the IAB, expressed in percentage per annum.

Features of the Islamic Accepted Bill

As mentioned earlier, Islamic Accepted Bills are similar to Bankers Acceptance and but
were introduced as an alternative for Islamic institutions that can get the same benefits of
Bankers Acceptance facility used by conventional banks. There are a number of features
that make Islamic Accepted Bill distinct from Bankers Acceptance. Some of these silent
features of Islamic Accepted Bill are as shown below:

1. There are two types of financing under Islamic Accepted Bill facility, namely: Imports
and local purchases; and Exports and local sales.

2. The financing would be done under Murabahah concept whereby a customer purchases
the required goods from the seller on behalf of the bank which pays for the goods and
resells them to the customer at a price inclusive profit margin and based on deferred
payment. The maximum time allowed for a deferred payment is up to 200 days.

3. The deferred payment constitutes a creation of debt. This debt is securitized in the
form of bill of exchange drawn by the bank and accepted by the customer for the full
amount of the bank’s selling price including cost and profit margin payable on the day of
maturity. Islamic Accepted Bill can be sold in the secondary market at an agreed price
using the concept of bay’ al-dayn. Here, it is the bank that draws an Islamic Accepted Bill
while the importer or purchaser becomes the acceptor.

4. Similar to letter of credit arrangement, an exporter who wants to use Islamic Accepted
Bill prepares and sends export documents to the importer’s bank. The exporter draws on
the domestic bank a new bill of exchange and this becomes an Islamic Accepted Bill. The

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bank purchases the Islamic Accepted Bill at a mutually agreed price using the concept of
bay’ al-dayn. The proceeds will be credited to the exporter’s account. In this case, it is
the exporter who draws the Islamic Accepted Bill and the bank is an accepting party.

5. Islamic Accepted Bills can be purchased and sold using forward purchase and forward
sales agreements. Forward Purchase is a separate agreement whereby the purchasing
party agrees to purchase Islamic Accepted Bills at an agreed price on a future specified
date. On the other hand, Forward Sale is an agreement to sell Islamic Accepted Bills at an
agreed price on a future specified date. There shall be two undertaking agreements in
forward purchase and forward sale transactions.

Guidelines and Regulations on Islamic Accepted Bills

After its introduction in 1991, Islamic Accepted Bill facility became very popular in the
areas of trade and finance. With such a significance development in that product, in 1992,
the Bank Negara saw a need to revise the Guidelines on bankers Acceptance and
undertaken a full review to revise the Islamic Accepted Bill guidelines issued first in
1989. These guidelines are briefly presented below:7

1. An IAB can be drawn on and accepted by a bank or purchaser under the following
circumstances only:
a) The IAB is drawn to finance geniuine trade transactions
b) The drawer, in case of IAB sale, makes a declaration that he has not obtained
or will not obtain another source of financing.
c) The goods involved in the trade transaction are tangible and halal goods.
Services will not be eligible unless specifically provided for in Guidelines.
d) Adequate documentary evidence must be presented to the accepting or drawing
bank.

2. An IAB may be drawn to finance a trade transaction between two related companies,
provided that:
7
Bank Negara Malaysia, Guidelines on Interest-Free Accepted Bills, March 4, 1993

7
 a) The related companies are separate legal entities
b) The transaction was undertaken resulting in a genuine transfer of title to the
goods concerned, evidenced by the proper and documents.

3. An IAB shall not be drawn to finance any trade transaction between two business
entities of sole proprietorships where the proprietor is the same person or between two
business entities of partnerships where the majority of partners are the same persons.

4. An IAB shall not be drawn to finance a sales transaction on which the seller has
provided a leasing, hire purchase or factoring facility to the buyer for the settlement of
that transaction.

Application of Islamic Accepted Bills

As we already mentioned earlier, there are two types of financing under Islamic Accepted
Bill (IAB) facility:
1. Imports and local purchases; and
2. Export and local sales

Imports and Local Purchases

The financing of this contract will be under al-Murabahah working capital mechanism.
For this concept, the bank appoints the customer as the purchasing agent for the bank.
The customer then purchases goods required from the seller on behalf of the bank, then
the bank pays the seller and resells the goods to the customer at a price inclusive of a
profit margin. The customer will be allowed for a deferred payment term up to two
hundred days. After maturity of al-Murabahah financing, the customer will pay the bank
the cost, original plus the profit margin8.

Al-Murabahah Working Capital Financing

8
Bank Negara Malaysia, Guidelines on Interest-Free Accepted Bills, March 4, 1993

8
 1) Purchase order
Customer Acting On
Supplier of
2) Supplies goods to the customer Behalf Of Bank as A
Goods
an Agent for Bank

5) Pays the Bank Cost

+ Profit Margin

3) Pays cash 4) Bank Sells

Goods on
Deferred Basis

Bank

Export and Local Sales

The bank finances exports and sales according to the concept of Bay’ al-Dayn. Bay’ al-
Dayn or debt financing is a short term financing facility. It is where the bank purchases
the customer’s right to the debt which is normally securitized as Islamic Accepted Bill.
The customer’s account will be credited with purchase price less bank’s charges. The
price of al-dayn will be agreed upon the customer and the bank. After this, al-dayn may
be sold to a third party.

The sale of goods on a deferred payment term creates debt. This debt in the form of a bill
of exchange drawn by the bank on and accepted by customer for the full amount of the
bank’s selling price payable at maturity. The bank may sell the Islamic Accepted Bill to a
third party, then the concept of Bay’ al-Dayn will be used whereby the bank will sell the
Islamic Accepted Bill at an agreed price9.

The purchase of debt by the bank will at the current financing rate at the market.
However, Bank Negara Malaysia, in its effort to encourage exports from Malaysia, has
9
Bank Negara Malaysia, Guidelines on Interest-Free Accepted Bills, March 4, 1993

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introduced a scheme known as the “Export Credit Refinancing Scheme”, using this
scheme the bank may resell this debt or al-dayn to Bank Negara Malaysia at a special
price. Bank Negara Malaysia, however, limits the availability of this financing scheme to
certain goods only.

Shari’ah Point of View on Islamic Accepted Bills

We have seen in the above section that the application of Islamic Accepted Bill creates
debt or al-dayn and in this section of our assignment we will discuss Shari‘ah point of
view regarding the sale of al-dayn.

The Nature of Bay` Al-Dayn

The issue of bay’ al-dayn arises when the IAB are traded in the secondary market.
We may now discuss Bay` al Dayn to show its nature according to Islamic point of view.
According to al-Majallah10, dayn defines as the thing due i.e the amount of money owed
by a certain debtor. So also a sum of money not existing is considered a debt, as also a
certain sum of money from things which exist or are present, or from a heap of wheat
which is present before it is separated from the mass. Al-Dayn can be either monetary, or
a commodity, like, food or metal. Based on the aforementioned of al-Dayn, and the literal
meaning of Bay’ al-Dayn we can define it as the sale of payable right either to the debtor
himself, or to any third party. This type of sale is usually for immediate payment or for
deferred payment (al Nasi’ah).

Sale of Al-Dayn to a Third Party

According to most of Hanafis, Hanbalis and Shafis jurists11, it is not allowed to sell al
Dayn to non-debtor or a third party at all. Such opinions are based on the forbidden sale
of al Kali Bil al Kali, sale of a Gharar, sale which the seller does not possess.

10
Majallah al-Ahkam al c Adliyyah, Art. No. 158.
11
Al-Zuhili, Bay’ al Dayn in the Shari’ah, pp. 35/6

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A prophetic tradition which clearly states: “Do not sell what you do not possess”

Selling al-Dayn to a third party is allowed with conditions

As an exception Malikis, Hanafis and some Shafi’s jurists allowed selling al-dayn to a
third party. They said that there is no authentic source which prohibits such kind if
selling. Therefore, it should be allowed and permitted since the Dayn is Mustaqir
(confirmed debt). Since the creditor has the right to sell it to the debtor, as well as he has
the right to sell it to a third party provided the following rules must be observed:

a) The Dayn must be Mustaqir (confirmed debt) and the contract must be performed on
the spot, not deferred in order to avoid any relationship with the sale of a debt for a debt
which is prohibited by Islamic law.

b) The debtor must be a financially capable, must accept and recognize the sale, in order
that he will not deny the sale. This condition aims to avoid any dispute between the
parties, and the debtor must be easily accessible so that the creditor knows whether he has
the capacity to pay his debt or not.

c) The sale should not be based on selling gold with silver or opposite, because, any
exchanges between these items necessitates the immediate possession, and if the debt is
money, its price in another debt should be equal in terms of amount of quantity.

Furthermore, the selling of al-dayn must avoid the occurrence of Riba between the two
debts, and must also avoid any kinds of Gharar which may be raised at the level of
inability of the buyer from possessing what he bought, as it is not permitted that the buyer
sells before actual receipt of the purchased item.
It is important to note that Muslim scholars have unanimously prohibited the trading of
debt (bay` al-dayn) at anything other than face value. Where the price paid for a debt is
not the same as the face value of that debt, the transaction would be tantamount to riba

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al-Nasi’ah and is therefore prohibited. Any profit created from the sale and purchase of a
debt is riba.

"And whatever riba you give so that it may increase in the wealth of the people, it does
not increase with Allah." [Ar-Rum 30:39]

Prophet Muhammad (S.A.W) said: “That every loan entailing benefit is usury”12

The IAB would have been acceptable from an Islamic point of view if the application of
the mode of financing would be based on the legal maxim of al-Ghunmu bil ghurmi13
meaning that no person is allowed to invest in a way that generates profit without
exposing himself to the risk of loss. It would expose both parties to the outcome of their
deal, be it a profit or a loss, and thus avoid of usury as matter of Islamic principle.

12
Al-Shirazi, al-Muhadhab, vol. 1, p. 304.
13
Majallah al-Ahkam, Art. 87.

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Conclusion

Islamic Accepted Bills is indeed a low cost financing for businesses in purchases and
sales of inventories, raw materials and finished goods. The low cost is due to the
exchange of Islamic Accepted Bills in the secondary market. After its introduction in
1991, Islamic Accepted Bill facility in Malaysia became very popular in the areas of
trade and finance.

A set of guidelines were issued by the Bank Negara of Malaysia in regulating the
transactions involving Islamic Accepted Bills. Islamic Accepted Bills are based on
Murabahah and Bay’ al Dayn concepts. Consequently, the Shari’ah ruling for Islamic
Accepted Bills is similar to the one applied to Bay al Inah which involves Bay’ al dayn.
That is, majority of ‘ulama in the Middle East do not agree with such transactions, while
some of the ‘ulama, have accepted them based on the valid external evidence of sale.

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