Ethica Institute of Islamic Finance™

How does documentary credit work from the client’s perspective?

Documentary credit may be issued based on the client’s balance in his account with the bank provided the amount is sufficient to cover the entire value of cash credit. The bank can deduct the amount from the client’s account without charging any interest for the interim period, i.e. between the date the negotiating bank pays the exporter and the date of importing on the client’s account.

The fee should be reasonable and in keeping with customary practice. If the client’s account does not have sufficient balance to cover the entire value of the goods to be imported, the bank may pay a part of the value and become a partner according to the rules of a Musharakah.

Both partners must receive their share of profits in accordance with the percentage of capital invested by them. If the client has no balance, the bank may issue him documentary credit on the basis of the client’s specifications. The client agrees to buy the goods from the bank upon their arrival at the port or upon arrival of their title documents based on the conditions of a Shariah-compliant Murabaha sale.

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