International Banking under Islamic Banking Framework

Dr. Shah Md. Ahsan Habib Professor & Director [Training] , BIBM

International Banking

Cross Country Transaction Cross Currency Transaction

Activities Performed by the Banking Sector

Facilitation of Trade Payment Financing International Trade Foreign Exchange Services

Rules/System for International BankingInvestment System for Import/Export [BB]

The importers avail of investment facilities under the Shariah approved Bai-Murabaha and Bai-Muajjal modes; and Hire Purchase. .
Moreover, Mudaraba, Musharaka (shirkat); Bai Salam and Bai-al-sarf are in use.

Rules/System for International BankingInvestment System for Import/Export [BB]

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

Rules/System for International BankingInvestment System for Import/Export [BB] ..Besides, the Islamic banks

will fully abide by the national and international norms and guidelines relating to export/import business.

Rules/System for International Banking

Domestic Set of Regulations

International Set of Regulations

Rules/System for International Banking

Domestic Set of Regulations

FERA 1947 Export Policy Import Policy

Regulatory Framework
UCPDC URR ISBP URC

International Set of Regulations

Facilitation of Trade Payment

Cash in Advance Open Account Documentary Collection Documentary Credit

Cash in Advance
Interest of Exporter Protected Interest of Importer Not Protected Insignificant Involvement of Bank No universal Regulation

Open Account
Interest of Importer Protected Interest of Exporter Not Protected Insignificant Involvement of Bank No universal Regulation

Documentary Collection
Interest of Importer Protected Interest of Exporter better Protected than Open Account Involvement of Bank is higher Regulated by URC 522

Documentary Collection Importer

Purchase- Sale Contract

Presenting Bank

Collecting Bank

Exporter

Remitting Bank

Documentary Credit [LC]

Islamic LC allows to procure goods locally as well as imports from overseas providing your supplier an undertaking to pay them upon shipment of goods and presentation of documents complying with the terms of LC. Islamic LC is provided under the Islamic Shariah principle of Wakalah (agency arrangement). a Bai Murabaha agreement is commonly executed at the time of opening LC.

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

Documentary Credit [LC]

Importer
Purchase- Sale Contract

Issuing Bank

Exporter

Advising Bank Nominated Bank

Documentary Credit [LC]

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

UCP 600-AN OVERVIEW

Application of UCP 600

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

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

Important Definitions Important Definitions

Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice. Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.

Important Definitions

Honour means to pay at sight; to incur a deferred payment undertaking and pay at maturity; or to accept a bill of exchange ("draft") drawn by the beneficiary and pay at maturity. Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.

Credits v. Contracts

Importer
Purchase- Sale Contract

Contract of Reimbursement

Issuing Bank

Exporter

Advising Bank Nominated Bank

Standard for Examination of Documents

Banks must examine a presentation on the basis of the documents alone Bank shall each have a maximum of five banking days following the day of presentation Presentation not later than 21 calendar days after the date of shipment, but in any event not later than the expiry date of the credit In documents other than the commercial invoice are examined in general terms not conflicting with their description in the credit

Standard for Examination of Documents

If a credit requires presentation of a document without stipulating by whom the document is to be issued or its data content, banks will accept the document if not conflicting A document presented but not required by the credit will be disregarded If a credit contains a condition without stipulating the document banks will deem such condition as not stated and will disregard it. A document may be dated prior to the issuance date of the credit

Discrepant Documents, Waiver and Notice

When a presentation does not comply, it may refuse to honour or negotiate. When an issuing bank determines that a presentation does not comply, it may in its sole judgement approach the applicant .. When decides to refuse, it must give a single notice to .........the presenter

Contents of Notice..

Discrepancy

Documents under UCP 600

Commercial Invoice Transport Document Insurance Documents Other Documents

Disclaimer on Effectiveness of Documents Disclaimer on Transmission and Translation Force Majeure Disclaimer for Acts of an Instructed Party

Transferable Credit

Assignment of Proceeds

ISBP 745
Application and Issuance of the Credit General Principles Drafts and Calculation of Maturity Commercial Invoice Transport Documents

THE UNIFORM RULES FOR BANK-TOBANK REIMBURSEMENTS UNDER DOCUMENTARY CREDITS (URR 725)

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

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

LC Procedure and Reimbursement

Importer

Issuing Bank

Exporter

Advising Bank Nominated Bank

Reimbursing Bank

ICC Uniform Rules for Collections [URC]

Publication No. 522

.Article

2: Definition of Collection

Financial documents means bills of exchange, promissory notes, cheques, or other similar instruments used for obtaining the payment of money. Commercial documents means Invoices, transport documents, documents of title or other similar documents, or any other documents whatsoever, not being financial documents.

Collection Procedure

Importer

Presenting Bank

Collecting Bank

Exporter

Remitting Bank

Import Financing

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

Export Financing- Back to Back

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

Export Financing- Post-Shipment Investment

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

Foreign Exchange
Foreign Exchange Market Foreign Exchange Market Products Exchange Rate Exchange Rate Management System

Foreign Exchange
Foreign exchange remittances, spot sale and purchase of foreign currency is allowed; foreign currency forward cover is generally allowed with certain conditions.. Only Actual delivery This must be used only for hedging purposes

Foreign Exchange Products

Spot Future

Swap Forward

Option

Exchange Rate Systems

Fixed

Hybrid

Floating

Pegging

Managed Floating

Commodity Trading
Banks are allowed to offer commodity swap as part of foreign exchange transactions.in most cases Islamic scholars do not have objections on Commodity Swap/Forward.. Information should be made available Greater benefits of producers and farmers should be ensured.

Thank You