Most Islamic finance historically has been trade related, with Murabahah used to cover the gap importers inevitably face between their payments to exporters and the receipts from their clients. Although much Islamic banking is now retail, Shariah compliant vehicle and equipment finance is indirectly helping trade as it is covering imported goods.
Financing exports is more problematic because of the risks involved, and intra regional trade in the Muslim world still accounts for less than 5% of total trade. Even this percentage is dramatically reduced when commodity exports such as oil are excluded. The challenge in the years ahead will be to provide Islamic finance for manufactured goods exports from the more populous Muslim countries. Istisnah is a suitable contract but few manufacturers at present appreciate its advantages. Islamic banks need to market Istisnah more effectively and demonstrate to potential clients how it can provide an efficient and competitive solution for their financing needs.
PROFESSOR RODNEY WILSON
Director of postgraduate studies, Durham University
A primary role for Islamic trade finance is its ability to sustain, if not escalate, confidence in the global trading system, especially among smaller firms in key Islamic markets that may be new to international commerce. By facilitating cross-border transactions, Islamic banks are helping to drive the sort of competitiveness that propels the global economy.
Governments can liberalize the global trade regime all they want, but it is ultimately the banks that need to stand behind underlying commercial transactions. Islamic banks commonly embrace these responsibilities by offering a Murabahah structure. The attendant cost and profit disclosure is matter of fact. Such clarity may be just what is needed to assure nervous businessmen at this time. In the post credit crisis era, we are cautious in arguing that traders’ faith in Islamic banks is likely to be resonate more impressively than in their connections with conventional banks. That opinion seems difficult to substantiate. Rather, we see a growing role for Islamic banks to offer affinity services to businesses which might not otherwise consider the possibilities of the international marketplace. And that assuredly is win-win for global momentum.
DOUGLAS CLARK JOHNSON
CEO, Codexa Capital
Murabahah is comparatively the safest mode of financing trade as it can eliminate or minimize the risks of trade financing due to its clear cut and easy to adopt nature. The question is how to handle what I call ‘the 4Ds risks’: 1. Default risk, 2. Declining risk, 3. Delivery risk, and 4. Dealing with the market risk
Default risk
Default risk can be avoided in auto and trade financing through: 1. A collateral has to be pledged by the customer should the transaction be worth more than the value of goods, 2. Third party guarantee, 3. Customer will pay at least 10% as collateral which will be deposited into the Murabahah account. Unpaid installments will be penalized 5%.
Declining risk
1. Customer will purchase their selected goods/service from the bank, 2. In case the customer declines the offer of purchase the penalty will be deducted from the down payment, 3. The customer will sign a promissory note stating that he will buy the goods/car from the bank
Delivery risk
Delivery risk is the risk when the goods/car is not yet delivered to customer. It can be managed by sending a staff representative to accept the item from the supplier which will then be handed over to the buyer on the spot
Dealing with the market risk
This is an important risk and depends on the 5 Cs of credit analysis, which is in turn related to the capacity of the trader and trading company to perform market surveys and in-depth market analysis.
DR ALAM KHAN HAMDARD
Chief of Islamic banking, New Kabul Bank