Transcript Islamic Accepted Bills (AB-i)

Islamic Trade Financing:
Tools for Trade Competitiveness
Presentation by:
Asnulhadi Yeop Aziz
Wholesale Banking
for:
Seminar on Islamic Banking & Capital Market:
Products & Instruments
1
Presentation Outline
 Islamic Trade Financing: An overview
 Types of Products & Instruments & Shariah Principles/contracts
 Letter or Guarantee
 Letter of Credit
 Working Capital Financing
 Islamic Accepted Bills (AB-i)
 Islamic Export Credit Refinancing (IECR)
 Prospects & Challenges
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Trade Financing : An Overview
Merchandise
Manufacturer
(Exporter)
Which
comes first?
Buyer
(Importer)
Payment
Modes of Payment:
•Advanced Payment
•Open Account
•Documentary Collection
•Letter of Credit
Trade Financing : An Overview
CASH
RAW
MATERIAL
RECEIVABLE
FINISHED
GOODS
Cash Operating Cycle of
both Exporter & Importer
Trade Finance Tools





Bank Guarantee
Letter of Credit
Overdraft
Trust Receipt
Bankers Acceptance
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Bank Guarantee
Merchandise
Manufacturer
(Exporter)
Bank
Buyer
(Importer)
Guarantee
Payment
Bank Guarantee
Types of Guarantee
1.Tender Guarantee/Bond
2. Performance Guarantee
3. Advanced Payment Guarantee
4. Customs Guarantee
5. Utility Payment Guarantee
6. Others
Islamic Bank Guarantee
•Based on the principle/contract of Kafalah or Dhamanah (guarantee)
•Operationally, there is no difference between conventional and Islamic guarantee where
bank charges commission/fee (ujr) for the guarantee.
•Certain Islamic banks adopt pro-rated commission (i.e. based on actual number of months)
Differences Between Pro-rated vs Per annum Commission
Amount
:
RM200,000-00
Commission
:
e.g. 1% p.a.
Tenor
:
6 months
Pro-rated Basis
Commission
:
RM2,000-00
Per Annum Basis
RM1,000-00
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Letter of Credit
Written undertaking by a commercial bank to seller (beneficiary) to effect
payment on behalf of the buyer if terms & conditions of the LC (i.e. terms of
credit) have been complied with.
Advantages
•Provides importer with credit backing & eliminates buyer risk to exporter
•Importer may get better pricing & payment terms
•Importer is assured documents presented are as per requirement and duly examined by
experts in the field as per UCP500.
•Exporter may get sale proceeds faster (via negotiation of LC)
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Letter of Credit- The Mechanics
EXPORTER
4.Client provide
document &
receive payment
IMPORTER
ADVISING/
NEGOTIATING BANK
7.Client
receive
document
1.Apply LC
& place
100%
deposit
3.Advise
LC
2. Issue LC
ISSUING
BANK
5.Forward document
6. Payment reimbursement
Letter of Credit
Islamic Letter of Credit
•Based on the principle/contract of Wakalah
•If deposit is placed upfront by client, it will be placed under wadiah.
•Customer will pay commission/fee (ujr) for the service
•Operationally, no difference from conventional LC.
•Main advantage: No interest payment on Settlement Period.
Settlement of LC
•via upfront wadiah deposit placement
•via Murabahah Working Capital Financing
•via Equity Financing namely Mudharabah or Musyarakah financing.
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Letter of Credit
DIFFERENCES IN COSTS BETWEEN CONVENTIONAL & ISLAMIC LC
Assumption
LC issued on 1 Apr 2006 and expires on 30 May 2006
Beneficiary
:
In the USA
LC Amount
:
USD100,000-00
Foreign Exchange
:
3.60
Amount in MYR
:
RM360,000-00
Commission
:
0.1% p.m.
Tenor
:
2 Months
Foreign Interest
:
6%
SWIFT Charge
:
RM25.00
Commission
(RM360,000 X 0.1% X 2)
Interest from date of negotiation to
date of reimbursement @ 8 days +
10 remittance days
(RM360,000 X 6% X 18/365
SWIFT Charges
TOTAL CHARGES
CONVENTIONAL LC
RM
ISLAMIC LC
RM
720-00
720-00
1,065-21
-
25-00
25-00
1,810-21
745-00
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Working Capital Financing
The money that is required to circulate within a business in order to finance
its business/operating cycle. (It can also be used to settle LC)
Nature
•Short period – according to business/operating cycle
•Self-liquidating
•Financing relates to specific asset (eg stock, receivable)
Forms
 Overdraft
 Trust Receipt
- Document of trust signed by importer, the strength on with bank allows the
importer to obtain release of the merchandise but making payment at a later date.
 Bankers Acceptance (Import/Export)
- Usance Bill of Exchange drawn by client on the bank for acceptance/discount.
The proceeds will be utilised to finance the merchandise imported.
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Financing of Purchase/Import Murabahah
1. Bank appoints Client as Purchasing Agent
5. Sale of Goods
BANK
CLIENT
6. Payment of Sale Price on
Maturity
4.
Payment
of
Purchase
Price
2.
Purchase
Order
3.
Supply of
goods
SUPPLIER
Sale Price = Cost + (Cost X Profit rate X Tenor)
36500
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Islamic Accepted Bills (AB-i)
(Purchase/Import)
1. Bank appoints Client as Purchasing Agent
5. Sale of Goods
BANK
CLIENT
6. Payment of Sale Price on
Maturity
4.
Payment
of
Purchase
Price
2.
Purchase
Order
3.
Supply of
goods
SUPPLIER
Securitisation of
the Debt : AB-i.
Sale of AB-i to
another party is
under Bai’ Dayn
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Financing of Sales/Exports Bai’ Dayn
5. On maturity, Client collect debt and pay to
Bank
3. Sale of Debt
BANK
CLIENT
4. Payment via cash
2.
Supplier
will pay on
end credit
term
1.
Client sells
goods
SUPPLIER
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Islamic Accepted Bills (AB-i)
(Sale/Export)
5. On maturity, Client collect debt and pay to
Bank
3. Sale of Debt
BANK
CLIENT
4. Payment via cash
2.
Supplier
will pay on
end credit
term
1.
Client sells
goods
SUPPLIER
Securitisation of
the Debt : AB-i.
Sale of AB-i to
another party is
under Bai’ Dayn
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AB-i (Purchase or Sale)
Transactions Allowed to be Securitised under AB-i
Tangible and non-haram goods (eg. raw materials, semi-finished goods or finished goods)
Selected services –
1.Purchase of computer software licence,
2.Companies involved in trade-related logistic services such
as warehousing, forwarding & shipping, or
3.Purchase of electricity such as Independent Power Producer
(Exemption given on case to case basis)
(Source: BNM AB-i Guideline)
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Working Capital Financing
Trust Receipt &
Bankers Acceptance (BA)
Financing for
Purchases/Imports &
Islamic Accepted Bills (AB-i)
Tenor
30 – 180 days
30 – 180 days
Payment of
Interest/Profit
Upfront
Requires Overdraft Facility
On maturity (in arrears)
Coincides with operating
cycle
Not requires Overdraft Facility
Lower effective rate
Financing Amount
100% under Trust Receipt
Round Down to nearest
thousand for BA
100% of invoice amount
Acceptance
Commission
Available under BA Facility
None even under AB-i Facility
Cost Comparison
Between BA and AB-i
BANKERS ACCEPTANCE - CONVENTIONAL
Invoices
RM384,429.00
Discount Rate / Accepted Commission
3.0%, 0.5%
Tenor
120 Days
Discounted Amount
RM384,000.00 x 3.0% x 120/365
= RM3,787.40
Acceptance Commission Amount
RM384,000.00 x 0.5% x 120/365
= RM631.23
OD Rate
BLR + 1.5%
Upon Issuance
BA Draft Amount = RM384,000.00
Current Account/ OD Debited
RM631.23 + RM3,787.40 + RM429.00 =RM4,847.63
Up front Charges
RM4,847.63
OD Interest
RM4,847.63 x 7.5% x 120/365 = RM119.53
Upon Maturity
RM384,119.53 (BA Amount + OD Interest)
Overall Charges
RM388,967.16 (Upon Issuance + Upon Maturity)
Cost Comparison
Between BA and AB-i
ACCEPTED BILLS - ISLAMIC
Invoices
RM384,429.00
Profit Rate
3.5%
Tenor
120 Days
Profit Amount
RM384,429.00 x 3.5% x 120/365
Upon Issuance
BANK PURCHASE PRICE
BANK SELLING PRICE
Upon Maturity
RM388,852.57 (Bank Selling Price)
Overall Charges
RM388,852.57 (Upon Issuance + Upon Maturity)
= RM4,423.57
=
=
RM384,429.00
RM388,852.57
Islamic Export Credit Refinancing
Scheme (IECR)
 Special government scheme to promote export of Malaysian
manufactured products, agriculture products & primary commodities via
participating commercial banks.
IECR Pre-shipment and Post-Shipment
AB-i uses the prevailing profit rate in the market while IECR allows
banks to resell the debt to EXIM Bank at a special rate. EXIM Bank will
notify the refinancing rate from time to time.
Uses the principle/contract of Bai’ Dayn.
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Islamic Trade Financing :
Prospect
Trends in Islamic Trade Financing in Malaysia
In Malaysia, Islamic Trading Finance has gradually gained acceptance due to the distinct
advantages.
GROWTH OF TRADE BILLS IN MALAYSIA
(in RM’Mil)
35000
30000
25000
Islamic Bill
Financing
20000
15000
Conventional
Trade Bills
10000
5000
0
Jan'02
Jan'03
Jan'04
Jan'05
Jan'06
Source : BNM
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Islamic Trade Financing :
Challenges
1. Differential in views of Islamic scholars on Bai’ Dayn
Scholars in the Middle East have different views on bai’ dayn.
2. Interest on Remittance Days of LC
Establishing LC where no interest is payable on remittance days.
3. Differential in Rates between BA and AB-I
Currently, AB-I rate is lower than BA rate due to the liquidity in Islamic Banking. The
position may be different in the future.
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