Risk Management in Contract of Islamic Trade Financing

Abstract

Trade was accepted to be a significant tool in the economy activities. It was forming many jobs and demands for trade financing including for import and export resolution. Agreeing to the World Trade Organization, trade financing is vital to the economy by supporting most of the global trade. International trade financing services were introduced in the Islamic banking system in Malaysia in the early 1990s when there was a need for Islamic instruments in the form of trade especially internationally. In this paper, we study about the instrument of trade finance which chooses Letter of Credit-i (LC-i) and Standby Letter of Credit-i (SBLC-i) facility in Islamic banks. Besides that, risk has always occurred in business and it is even predominant when business transactions are done across borders. In the competitive business environment today, for business firms to compete, they essential not only be able to diminish their risks in doing business, but also be able to take advantage of the growth opportunities presented by doing business in other countries. Hence, understanding and identifying what risk is and what the perception of business firm toward risk is very important to any bank especially Islamic bank. This paper analyzes the operation and risk may arise in the LC-i and SBLC-i practice by Islamic banks in Malaysia together with the issues of Shariah arising.