Question

(b) Demonstrate modes of operation for Letter of Credit-i based on Murabahah concept.

Answer 1

Letter of credit which is based upon murabahah concept is applicable in the Islamic finance which will encourage the policy of non acceptance of interest because which will be treated as halal in Islam.

Modes of operations of letter of credit would be as follows-

A. Al-Wakalah-in this type of contract the bank will be acting on the behalf of the client and the client will be authorising the bankin issuance of letter of credit and also subsequent operations.

B.Al-murabahah-this type of letter of credit bank will be acting on the request of the client to import the goods.

C. Al-Mushrakaka-it is a contract under which the profits accruing on the letter of contract will be shared by both the banks and the client.

D. Al-Daman-in this concept the bank will be showing the guarantee upon issuance of the letter of credit

E. Al- Mudaraba-in this type of contracts one party will be providing the capital and the other party will be running the business.

Specifically in Al- Murabahah concept, the buyer will have a contract with the the foreign supplier and the bank will be receiving the letter of credit to the foreign supplier on the behalf of the buyer and conducting the business on the behalf of the buyer. Funds will be provided by bank in place of the client.