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An overview of Shari'ah issues regarding the application of the Islamic letter of credit practice in Malaysia

Othman, Ahmad Azam and Che Hashim, Rosmawani and Abdul Aziz, Akhtarzaitie (2010) An overview of Shari'ah issues regarding the application of the Islamic letter of credit practice in Malaysia. ISRA International Journal of Islamic Finance, 2 (2). pp. 37-66. ISSN 0128-1976

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Abstract

The Letter of Credit (LC) serves as an instrument of payment in international trade. Its aim is to facilitate trade between seller and buyer in different countries. To date, the Islamic banking environment promotes the use of the Islamic LC as a method of financing in international trade, particularly to Muslims and to the general public as a whole. Thus far, this facility is offered not only by Islamic banks, but also by all commercial banks. It is basically governed by the same rules of the UCP 600 that regulate the conventional LC. Realising the peculiarity in the application of this conventional rule to the Islamic LC, this paper focuses on the aim of harmonising the practice of the Islamic LC with the requirements of Shari'ah principles where elements such as interest (riba) and uncertainty (gharar) are prohibited. It begins by giving the background of the Islamic LC in Malaysia. Next, it discusses the definition and types of Islamic LCs, murabahah (cost-plus sale), wakalah (agency) and musharakah (partnership), as the issuance of the Islamic LC is based on these three concepts. In addition, it highlights comparisons between these three concepts. Furthermore, the focal point of discussion is on Shari'ah issues in the practice of the Islamic LC, such as governing rule, subject-matter, interest, INCOTERMS and insurance, contract ('aqd), discrepancy fee, and exclusion of risk of goods in the Islamic LC. Discussion of these issues leads us to identify whether they are in compliance with Shari'ah principles. In relation to this, various proposals are suggested to harmonise the rules applicable to the Islamic LC and Shari'ah principles.

Item Type: Article (Journal)
Additional Information: 1643/3011
Uncontrolled Keywords: conventional LC, Islamic LC, UCP 600, Shari'ah principle
Subjects: K Law > KBP Islamic Law > KBP1 Islamic law.Shariah.Fiqh > KBP173.25 Islamic law and other disciplines or subjects
Kulliyyahs/Centres/Divisions/Institutes (Can select more than one option. Press CONTROL button): Ahmad Ibrahim Kulliyyah of Laws
Ahmad Ibrahim Kulliyyah of Laws > Department of Islamic Law
Kulliyyah of Islamic Revealed Knowledge and Human Sciences
Kulliyyah of Islamic Revealed Knowledge and Human Sciences > Department of Fiqh and Usul al-Fiqh
Depositing User: Dr Ahmad Azam Othman
Date Deposited: 14 Sep 2011 09:57
Last Modified: 11 Sep 2014 09:49
URI: http://irep.iium.edu.my/id/eprint/3011

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