Abstract
In an interest-based economy, trade transactions are financed through credit for the purpose of acquiring and selling goods in the domestic or international markets. In an Islamic economy, trade operations may be financed through credit or on a participatory basis. The purpose of this paper is to review two Islamic financial contracts; Murabahah and Bai Al-Dayn. This paper also aims to review Islamic Trade Finance (ITF) and issues concerning ITF facilities, given they are operating under conventional International Chamber of Commerce (ICC) rules. To achieve the research goals, data has been gathered from journal articles, books, industry reports, and product disclosure statements issued in Malaysia. This paper highlights the underlying issues for Murabahah and Bai Al-Dayn, and provides recommendations to overcome the challenges associated with processes shaped by the underlying Islamic trade finance contract.
Highlights
The history of Islamic trade finance dates back to the ninth century, when Muslim merchants travelled overland and created a "commercial diaspora" (Cole, 2008) with Islamic values and standards served as a common legal system for trade
Murabahah and Bai Al-Dayn are commonly used in trade finance; this paper mainly focuses on these two types of Islamic trade finance: Murabahah and Bai Al-Dayn
Based on the literature review, we found that there are a few operational Shariah issues in the use of Bay Al-Murabahah and Bai Al-Dayn in trade financing
Summary
The history of Islamic trade finance dates back to the ninth century, when Muslim merchants travelled overland and created a "commercial diaspora" (Cole, 2008) with Islamic values and standards served as a common legal system for trade. Businesses need a line of credit to pay for inventories and long-term finance to acquire capital goods. Trading activities -- especially international trade -- need an intermediary or financial instrument to manage cash flow. There are various types of facilities which different Islamic banks use with various Shariah compliant facilities for international trade financing (Oseni, 2013). As for export transactions, the facilities involved are Export Credit Refinancing (ECR) Pre-Shipment, Cash-lines Facilities and Term Financing. To attain and implement the prohibition of riba (interest or usury) under Shariah principles, it is necessary to understand the adverse relationship between usury and trade, as well as the complementary interrelationship between trade, money and the real economy in Islamic banking and finance (Choudhury et al, 2018). This paper studies the underlying Shariah principles and their impact on the understanding of the trade versus riba and bank-savings rule. This study uses library-based research in which data was collected from academic publications, industry reports, classical texts and product disclosure statements published by Islamic commercial banks in Malaysia
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