The Sharia Rulings about Letter of Credit in Imports and Exports

As you know Islam is permanent law of life it widely contains and provides rules, regulations and guidance for all departments of life. So Islam also provides pure guidance in a complete way to one of the most complicated and enhanced aspect of life that is Finance. On behalf of specific rules and regulations opens the door of easiness, equality and facilitations for business and financial deals with ability of safety of financial transactions over the world. One of important principle in business is Kafala. In financial matters, kafala means that if one party needs to own a debt and the other party need a trust for giving debt. Therefore, the first party provides guarantee means responsibility of paying back on due time and in case of any issues of return the guarantor will be responsible. For example in some situations merchants deals the deal in two different countries presenting the bank as a guarantor instead of individuals. The bank follows formal process named LC to become legal guarantor between parties. Following article contains different discussions like introduction of LC, its methods, types and Shariah issues related.

Conventional and Islamic Letter of Credit: Comparison and Implementation

This study attempts to provide the insight about payment method in international trade, especially by using Letter of Credit both conventional way and Islamic way. This study is exploratory and using qualitative method of research. This study reviews and analyses the previous literatures and other secondary data to conduct the study. The secondary data for this research were gathered through library research. This study also doing the document analysis. Based on the data collected, Letter of Credit is the most secured and commonly used as the method of payment for International Trade. But a lot of contents on the Conventional Letter of Credit is not Shariah-compliant. Islamic Financial Institutions around the world trying to comes up with Islamic Letter of Credit, but to implementing Islamic Letter of Credit creates some new issues and challenges. This study attempts to provide the insight about payment method in international trade, especially by using Letter of Credit both conventional way and Islamic way.

The Fraud Rules in the Letter of Credit under Jordanian Legal System

Letter of credit (L/C) has a massive role in expanding international trade operations. It is considered the most secure and stable banking service to finance foreign trade operations such as import and export. As an international contract, potential legal issues arise due to fraud practices. In this case, L/C users have to be aware of different approaches followed by domestic courts while dealing with fraud at the international level. This paper aims to identify the fraud means under the fraud rule governing L/C and its impact on Jordan's practice. By applying a qualitative and doctrinal legal approach, this paper analyses the lack of organization of the uniform customs and practice for the letter of credit (UCP No. 600). It also examines, via interviews with Jordanian judges, the perceptions of the Jordanian courts' policy regarding the fraud rule exception in L/C. The finding reveals that to protect the interests of all parties in a letter of credit transaction, Jordanian courts should extend the scope of fraud to cover sale contracts fraud in cases where bona fide holder is involved and when a confirming bank is absent, or when the credit amount has not been paid yet by the issuing bank. In respect of the bank practices, such special provisions implemented to commercial code must be issued due to the lack of legal provisions of the L/C in Jordan legislation.

Legal nature of documentary forms of international settlements and their use in Ukraine

Problem setting. Modern global economy is characterized by significant integration. In this regard, it becomes widespread cooperation between business entities located in different countries. Foreign economic activity of such entities is profitable, but at the same time complex activity with increased risk. Therefore, in the conclusion of the foreign trade agreement, in the process of harmonizing obligations, it is important to establish the most profitable interests of both exporter and importer. One of the main elements in carrying out foreign economic contracts is mutual settlements between the parties, that is, residents of different countries, which are called international calculations. Integrated research of advantages and disadvantages of using certain documentary forms of international settlements becomes increasingly relevant and needs considerable attention. This in turn will enable Ukraine’s business sector to effectively conduct foreign economic activity, to establish trust relations with foreign partners from different countries. Target research. The aim of the article is illumination the essence of documentary forms of international calculations used in modern foreign economic activity, establishing the advantages and disadvantages of their use, the formation of criteria for their effectiveness for subjects that carry out foreign economic activity, as well as consideration of issues of use of such forms of Ukrainian business entities. Analysis of the last researches and publications. The question of organization and forms of international calculations in the scientific works was examined by such foreign and home scientists V. V. Kozyk, N. M. Tiurina, N. S. Karvatska, O. V. Vasiurenko, V. V. Diachek, O. D. Kolosovska, V. S. Onishchenko , N. V. Kudlaieva and others. Article’s main body. World practice determines that international settlements are carried out in relevant forms that are conventionally divided into documentary and undocumented. Documentary forms of calculations are the letter of credit and collection. Up to 80% of payments in world trade is carried out using a letter of credit. In view of this, the authors in this article have identified the legal nature of documentary forms of calculations used in foreign economic relations, considered the advantages and disadvantages of such documentary forms of calculations as a letter of credit and collection, implemented a comparative analysis of forms calculations among themselves, and also analyzed the legislation and issues of use of these forms of Ukrainian entities of foreign economic management. Conclusions and prospect of development. The choice of parties to the foreign economic agreement of the optimal documentary settlement is an important condition for strengthening the financial and economic independence of the enterprise. In view of this, the importer so exporter should provide and take into account all the benefits and disadvantages of the use of a particular form of documentary calculations during foreign economic activity. Concerning the letter of credit, the most important problem of its application in Ukraine is the lack of confidence in Ukrainian banks by foreign partners because the latter establish such conditions for servicing letters of credit, which are often unacceptable for Ukrainian banks. Therefore, in order to effectively exist and develop Ukrainian banks in the world market, we believe that the state needs to improve the system of international settlements in line with current trends and improve the image of both Ukrainian companies and banks. This can be achieved through the use of tools to improve legislation in the settlement and credit sphere and the formation of an information base on solvency and reliability of Ukrainian and foreign companies, banks and their partners.

Part III Innovation and Trade-Finance Challengers, 16 Countertrade as Finance

Whilst the letter of credit has been the dominant force in the trade-finance area, its utility has increasingly been challenged by technology, regulation, and competition from other financial products. Additionally, there are some circumstances where economic, political, or financial instability makes the letter of credit inapt. This is because the letter of credit requires a certain level of financial stability and an appropriate institutional framework to function properly. In such circumstances, the parties may resort to trade finance mechanisms that can withstand such instability. The prime example is countertrade, whereby goods or services are used to ‘pay’ for goods or services. Whilst this form of transacting is not without its legal difficulties, countertrade may provide a useful trade-finance device in times of crisis, such as the global coronavirus pandemic.

Part I Legal and Practical Challenges to Traditional Trade Finance, 7 Letters of Credit and Stop Payment Orders Made in the Issuer’s Country

This chapter offers a critical examination of the significant, but largely unexplored, question whether, and to what extent, a foreign order restraining the issuing bank from making payment under a letter of credit can afford the issuing bank a good defence to a claim in a court outside that bank’s home jurisdiction. At common law, in England as well as in other jurisdictions, such as Hong Kong, Singapore and the US, such orders have only limited effect in the forum. This chapter argues that the approach of the English courts to article 4 of the Rome Convention of 19 June 1980 on the law applicable to contractual obligations meant that such orders could defeat a claim against the issuing bank in England only in very narrow circumstances. It goes on to examine the extent to which the changes introduced in article 4 of the Rome I Regulation of 17 June 2008 on the law applicable to contractual obligations have altered the position under English law, so that stop payment orders made in the issuer’s home jurisdiction may now have a much wider reach in England. The chapter contends that notwithstanding the amendments to article 4, in the specific context of letters of credit, the approach of the English courts under the Rome I Regulation is likely to be broadly similar to that under the Rome Convention. The Rome I Regulation has not (even unintentionally) opened the door to stop payment orders made in the issuer’s home jurisdiction.

Part I Legal and Practical Challenges to Traditional Trade Finance, 3 Soft Clauses in Letters of Credit

Soft clauses in letters of credit make the issuing bank’s obligation conditional upon some event or certification that is in the control either of the applicant, or some agent, entity, or organisation in the applicant’s country. Such clauses make an apparently irrevocable letter of credit into what is, in essence, a conditional undertaking dependent on the applicant’s approval. Soft clauses are not always a vehicle for fraud—there may be genuine reasons for their inclusion—but they certainly make it easy for an applicant to ensure that the issuing bank does not pay the beneficiary. This chapter will consider the problems caused by the use of soft clauses, some possible solutions, and it will suggest alternatives, some of which look to the past (bills of exchange/time drafts), some to the present (open account and standby letters of credit), and some to the future (the advent of blockchain technology).

Part III Innovation and Trade-Finance Challengers, 14 Something Old, Something New: Open Account, Prepayment, and Supply Chain Finance

Letters of credit have increasingly come under strain as a payment mechanism in international trade as a result of increased technology, competition, and regulation. At the same time, the letter of credit’s efficiency has reduced over time as a result of its processing costs and speed. The space created by the decline of the letter of credit has been filled by trade parties turning to open account and prepayment terms, whilst using Supply Chain Financing (‘SCF’) techniques to provide the requisite liquidity. The advantages of such payment terms are principally their speed, convenience and cost, all of which the letter of credit increasingly lacks. Accordingly, it is unlikely that this trend towards SCF techniques will abate any time soon. Nevertheless, there are still legal difficulties associated with such payment and liquidity-enhancing techniques, as well as uncertainty associated with the regulatory and accounting treatment of these devices. If open-account trading and SCF techniques are going to eclipse the letter of credit as a payment mechanism, these challenges will have to be addressed.

Part I Legal and Practical Challenges to Traditional Trade Finance, 4 Perspectives on the Role of the Nominated Bank in a Letter of Credit

This chapter considers the role of the nominated bank in a letter of credit against the backdrop of the Singapore Court of Appeal decision of Grains and Industrial Products Trading Pte Ltd v Bank of India which addresses the situation where a nominated bank declines to act on its nomination. This situation is not covered by the UCP 600 and questions arise as to what, if any, obligations the nominated bank owes towards the issuing bank or the beneficiary. The chapter also examines the extent to which principles of agency law can operate effectively in the relationship between the issuing bank and the nominated bank.

Part I Legal and Practical Challenges to Traditional Trade Finance, 2 The Letter of Credit as a Contract

This chapter considers the relationships created by the issue of a letter of credit. In particular, it focuses on the relationship between the issuer and/or confirmer of the credit on the one hand, and the seller of the goods on the other. Although the letter of credit is typically referred to as creating a contractual obligation between these parties, and that characterisation is rarely disputed, a closer analysis from a common law perspective reveals that some elements for contract formation appear to be absent. The chapter re-examines this debate in the light of recent developments in the law. It concludes that the relationship is indeed contractual, albeit that some of the contractual prerequisites may be satisfied in an unorthodox way.