Documentation for Risk Mitigation in Islamic Trade Financing

Abstract

Risk mitigation is one of the key elements in trade financing. The use of documents represents one of the main techniques by banks in managing risks in trade financing. These documents play an important role in financing, insuring, and guaranteeing the banking operations. Islamic finance, on the other hand, utilizes various asset-based contracts. Islamic financial institutions in Malaysia tend to reconcile, using a combination of these contracts, to replicate the conventional banking techniques. These can be at odds with the conventional trade financing concept that “banks deal with documents and not with goods”. Hence, the undertakings may raise concerns regarding Shari'ah suitability. This chapter examines the challenges faced in the usage of documents covering all risk including Shari'ah risk management in Islamic trade financing.