Islamic Trade Finance Research Articles

Islamic Trade Financing and Poverty Mitigation: An Econometric Estimation Informing Islamic Development Bank Member Countries Considering Their Entrepreneurial Ecosystems

This paper is an analysis of the empirical effect of entrepreneurial ecosystems on the relationship between Islamic Trade financing (TF) and poverty trends in the context of Islamic Development Bank (IsDB) member countries. The study is an empirical analysis seeking to find out whether there is a statistical effect of the entrepreneurial ecosystems, measured as Global Entrepreneurship Index (GEI) scores, on the relationship between the Islamic Trade Financing dollar amounts by the IsDB (TF) and the GNI Per Capita, PPP, of all Islamic Development Bank (IsDB) member countries for the years 2009 to 2019. The research is designed as a desk-top longitudinal, correlation, employing the linear dynamic panel data GMM model as an estimator of the empirical relationships between the key variables of the study. The study results show that there is a significant positive relationship between the TF dollar amounts from the IsDB and the GNI Per capita, PPP, and that the ascending entrepreneurial ecosystem positively affects this relationship in the IsDB member countries. Therefore, countries that receive higher Islamic Trade Financing dollar amounts from the IsDB (IF), generally have more GNI Per capita, PPP (less poverty) than their counterparts, but ascending entrepreneurial ecosystem levels raises this positive relationship. It is, therefore, recommendable for IsDB member countries and all other interested countries to formulate policies that facilitate Islamic Trade financing to mitigate poverty and improve their entrepreneurial ecosystems for economic progress. This paper develops policy conversations that guide political discourse on policy topics of poverty mitigation and their relation to financing trade following Islamic products and services, while improving the entrepreneurial environment, thus generating information on policy choices of an Islamic financing nature.

Adoption of Islamic trade financing facilities among SMEs in North-West Nigeria: A preliminary investigation

The existence, growth and development of Small and Medium-sized Enterprises (SMEs) depend on trade and commercial activities. Trading activities, especially cross-border trade, have been acknowledged as an important instrument for sustainable economic growth, development, poverty alleviation, inclusiveness and global stability. However, for the smooth flow of trade and commercial activities, SMEs need a specialized form of financing (i.e., trade finance). North-West Nigeria being a Muslim-majority region, Islamic trade finance should be a better alternative than conventional trade finance. Thus, this preliminary study aims to examine the significant factors influencing the adoption of Islamic trade financing products among SMEs owner-managers in North-West Nigeria. Besides, the study investigates the moderating effects of age, gender and education on the adoption of Islamic trade financing products among SMEs owner-managers. To achieve this aim, a quantitative survey of 36 randomly selected SMEs was undertaken of which 35 were valid for analysis. A hierarchal multiple regression approach was employed to analyse the data. The results of hypotheses testing revealed that religious obligation and awareness have a direct and significant influence on the adoption of Islamic trade financing products. On the contrary, relative advantage, compatibility, complexity, perceived risk, social influence, and government support were found to be insignificant. Also, age, gender, and education were found to be insignificant moderators in this study. The results of this preliminary study indicate the need for massive awareness and the importance of promoting the “Islamicity” of Islamic trade financing facilities by Islamic banks in North-West Nigeria.

Examining Contracts used in Islamic Trade Financing: Issues in Bai Al-Dayn and Murabahah

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.

Risk Management in Islamic Trade Finance

Risk Management in Islamic Trade Finance

Exploring novel Islamic finance methods in support of OIC exports

Purpose This paper aims to propose a new Islamic trade finance framework for Islamic financial institution (FIs) to support exports in Organisation of Islamic Co-operation (OIC) countries. Design Methodology Approach: This paper introduces and proposes the recently developed Islamic finance methods of the supplier financing Wakala agreement, restricted Mudaraba and award-winning Export Credit Agency (ECA) export finance structures from the aspects of Shari’ah compliance, efficiency, simplicity for traders and risk management. This paper uses the approach of critical realism. The three-stratum approach is appropriate for Islamic product development, where the real, the actual and the empirical can be observed. Findings: The author argues that the ECA export financing structures, or restricted Mudaraba if preferred, with an embedded supplier financing Wakala agreement can pave the way for Islamic FIs to support exporting companies. It is also concluded that development and support of the Takaful industry are vital for the success of Islamic export financing schemes because of its role in risk management. Originality Value: Although very active in import financing with standard Murabaha contracts, Islamic FIs are still not able to meet the need for financing the expanding exports of OIC countries. Because of the difficulty in developing products that are both efficient and Shari’ah-compliant, export financing is the most controversial issue for the Islamic trade finance industry. Existing or proposed export finance products are heavily criticised by concerned Muslims, as they include bill discounting, akin to factoring in conventional finance. This paper introduces methods aimed at overcoming the inadequacy of existing structures.

Aplikasi Kontrak Al-Kafalah dalam Produk-Produk Pembiayaan Perdagangan Antarabangsa Islam

Islamic Trade Finance (ITF) instruments were introduced into the Islamic banking system in Malaysia since the early 1990s when there was a need for Islamic instruments in commerce especially in international trade.Most of the financial products are based on conventional instruments such as Bank Guarantee (BG), Letter of Credit (LC), Accepted Bill (AB), Shipping Guarantee (SG), Export Credit Refinancing (ECR) and others.In order to be accepted in Islamic Finance, some amendments will have to be made so that it will be ‘sharia compliant’ by applyingmuamalat contracts to those products. Muamalat contracts that are widely used in Islamic Trade Finance products are murabahah, bay’ al-dayn, kafalah and wakalah.This article analyses the views of previous and contemporary Islamic scholars and those with authority in Islamic financial jurisprudence in the use of kafalah contracts. This article also analyses the issues that arise in the application of kafalah in Islamic Trade Finance products namely Shipping Guarantee-i (SG-i) and Bank Guarantee-i (BG-i).

Towards restructuring the legal framework for payment system in international Islamic trade finance

Purpose – The purpose of this paper is to examine the current legal framework for payment system in international Islamic trade finance vis‐a‐vis the new regime introduced by the Uniform Customs and Practice for Documentary Credits (UCP) 600 as well as the Sharī'ah Standard on Documentary Credits issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Sharī'ah Resolutions of selected Sharī'ah Boards of Islamic financial institutions.Design/methodology/approach – A partial comparison of both the UCP 600 and the Sharī'ah framework for documentary credit is given through the content analysis of relevant sources.Findings – The AAOIFI Sharī'ah Standard on Documentary Credits, as well as other applicable Sharī'ah resolutions of Islamic financial institutions, does provide a good framework for a Sharī'ah‐compliant documentary credit system, which is unique to trade in Islamic finance products, but there is scope for further improvement, taking into consideration the two...

Global Financial Crises and Its Effect on Islamic Finance

The Islamic finance industry today offers a broad variety of products and services as well as corporate finance, project finance, equity funds, personal and wealth management, venture capital investment, real estate investment and private equity, mainly providing Islamic trade financing solutions. Structured in accordance with Shariah principles are all these products and services, as interpreted in their respective jurisdictions. The Shariah compliant capital markets products have gathered acceptance in the global market and are now shaping up into an attractive investment in market place. The demand for Shariah compliant securities has been high and is growing the supply side is also witnessing increasing activity. The development of Shariah compliant securities “Sukuk” is one of the capital market products that have been developed to avoid the Islamic prohibition of Riba (interest). Sukuk (plural of Sak) mean certificates and papers with the features of liquidity, tradability and cash equivalence, while a conventional bond is a promise to repay a loan, Sukuk present partial ownership. They’re several types of Sukuk, Ijarah Sukuk, Mudarabah Sukuk, Istisna Sukuk, and Musharakah Sukuk.