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Principle of strict compliance in letter of credit: a comparative study from legal and Shariah perspective

Othman, Ahmad Azam and Che Hashim, Rosmawani (2012) Principle of strict compliance in letter of credit: a comparative study from legal and Shariah perspective. In: 3rd International Conference on Business and Economic Research (3rd ICBER 2012, 12 - 13 March 2012, Bandung, Indonesia.

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Abstract

Letter of credit (LC) is a payment mechanism which is used to facilitate trade. One of the fundamental principles that govern the LC operation is principle of strict compliance. This principle indicates that in order to be paid; seller’s documents must strictly comply with the LCs’ requirement. This practice seems peculiar to the inherent nature of the contract of sale where the goods are customarily considered to be the only “factor” in making a payment. On the other hand, in LC transaction, banks are confined to handling financial and papers only, as provided by the UCP, “Bank deals with documents only”. Accordingly, payment for the goods is not honored upon compliance of the goods sold but it is paid on compliance of seller’s documents. Likewise, it is established that commercial banks worldwide, including Malaysian banks, adopt the same approach in dealing with documents in Islamic LC. The aim of this paper is to look at this practice which is originally conventional, from Shariah’s perspective. In order to determine the permissibility of stipulating such condition (a condition that payment in LC is honoured only upon compliance of documents) from Shariah’s point of view, it is imperative to study the position of Islamic law relating to freedom of stipulating condition in sale contracts. Among other things, this paper discusses the origin of the principle of strict compliance in LC transactions and the rationale of its application. Furthermore, it highlights Shariah issues in the principle of strict compliance in LC. Last but not least, it focuses on the views of the Muslim jurists in the issue of freedom of stipulating condition in sales contract. It is only by looking into the basic principles highlighted by the Muslim jurists on this issue; the permissibility of strict compliance principle can be ascertained.

Item Type: Conference or Workshop Item (Full Paper)
Additional Information: 1643/38356
Uncontrolled Keywords: Letter of credit, principle of strict compliance, legal perspective, Shariah perspective.
Subjects: K Law > K Law (General)
Kulliyyahs/Centres/Divisions/Institutes (Can select more than one option. Press CONTROL button): Ahmad Ibrahim Kulliyyah of Laws > Department of Islamic Law
Depositing User: Dr Ahmad Azam Othman
Date Deposited: 23 Sep 2014 14:32
Last Modified: 08 Jan 2015 17:35
URI: http://irep.iium.edu.my/id/eprint/38356

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