Documentary Credit - Scope Of Standard

Transcription

1. Shari ’ah Standard No. (14): Documentary Credit Statement of the Standard 1. Scope of the Standard This standard covers documentary credit extended by an Institution, either on the basis of client orders or for the use of the institution itself, including all types and forms of documentary credit, the various stages of their execution and the relationships created between the parties to the transaction. 2. Definition, Types and Characteristics of Documentary Credit 2/1 Definition of documentary credit A documentary credit is a written undertaking by a bank (known as the issuer) given to the seller (the beneficiary) as per the buyer’s (applicant’s or orderer’s) instruction or is issued by the bank for its own use, undertaking to pay up to a specified amount (in cash or through acceptance or discounting of a bill of exchange), within a certain period of time, on condition that the seller presents documents for the goods conforming to the instructions. In brief, a documentary credit is an undertaking by a bank to pay subject to conformity of the documents to the contractual instructions. 2/2 Procedural stages of documentary credit 2/2/1 The stage of concluding a credit contract: This stage precedes credit, and the contract concluded is usually a sale contract in which the seller stipulates that the price be paid through documentary credit, however, the contract may be a lease contract, agency with commission or any other contract. 2/2/2 The stage of requesting the opening of credit: At this stage the buyer requests the bank to open the credit so that the seller can be notified. 396
2. Shari ’ah Standard No. (14): Documentary Credit 2/2/3 The stage of issuing credit and notifying the seller: At this stage, the bank issues and sends the letter of documentary credit to the buyer, either directly or through an intermediary bank. 2/2/4 The stage of executing the credit: At this stage, the beneficiary presents the documents stipulated in the letter of credit to the bank. The bank examines them in accordance with the credit conditions. If the documents conform to instructions, the bank accepts them, executes the credit and delivers the documents to the buyer, in case it is not the institution itself, after the receipt of partial or full payment of the value or receives a deed of commitment to pay on the date of maturity so that the buyer is able to receive the goods represented by the documents. If the documents do not conform to instructions, the bank reserves the right to accept, reject or seek amendment of the documents. 2/2/5 Coverage by correspondents: If more than one bank participate in the execution of credit, the accounts are settled in accordance with the terms of coverage agreed upon between the banks. 2/3 Types of documentary credit 2/3/1 Basic classification Documentary credit is classified, according to the strength of the undertaking into two types; namely (I) revocable credit, which can be amended or cancelled without consulting the beneficiary, and (II) irrevocable credit, which cannot be amended or cancelled without the consent of the parties. 2/3/3 Other classifications There are other classifications of documentary credit. These include the following: ■ Transferable documentary credit: This credit entitles the beneficiary to request the executing bank to make the credit available, partially or totally, to another beneficiary or beneficiaries. ■ Back-to-back credit, which means the credit issued is guaranteed by another credit. 397
3. Shari ’ah Standard No. (14): Documentary Credit ■ Revolving or renewable credit, which means the beneficiary can repeatedly submit new documents for new operations within the limits of the credit amount and during its permissibility permissibility. ■ Red clause or advance payment credit whereby the bank is allowed to pay a certain percentage of the credit before submission of the documents, against an undertaking by the beneficiary to repay that amount if the goods are not shipped or the beneficiary fails to use the credit during the period of its permissibility permissibility.. Such payment may be made against a letter of guarantee from the beneficiary. ■ Import and export credit (depending on the issuing bank). ■ Local and foreign credit. ■ Confirmed and non-confirmed credits. ■ Partial shipment and a non-partial shipment credit. ■ On sight or immediate payment credit, deferred payment credit, acceptance credit and negotiable credit. ■ Syndicated credit (partnership credit), which describes the state of participation by more than one bank due to the huge amount of credit granted with each bank providing a letter of guarantee, to the extent of its participation, to the leading bank. ■ Standby credit (guarantee credit). This credit resembles letters of guarantee with a clause that payment is conditional upon beneficiary’s (in this case the contractor’s) failure to perform. 2/4 Characteristics of documentary credit 2/4/1 Dealing in documentary credit takes place on the basis of the documents alone and is executed without reference to the goods. Documentary credit, in essence, makes it binding for the bank to execute the credit whenever the beneficiary presents, within the duration of the validity of the contract, the documents required by the credit and conforming to the instructions. 2/4/2 Opening of credit by the buyer (orderer), though it may be acted upon with certainty, is not considered a final payment of the price of the goods. The buyer remains liable for the payment until the bank pays the value of the documents, however, the 398
4. Shari ’ah Standard No. (14): Documentary Credit seller (beneficiary) does not have a right to request payment from the buyer as long as the credit subsists and is valid. If the credit expires before the submission of the documents, the seller has the right to claim payment directly from the buyer, because expiry of the credit in itself does not amount to revocation of the sale contract. 2/4/3 The bank is obliged to pay the value of the credit to the beneficiary when the latter presents the documents that conform to instructions, except upon proof of fraud or forgery of the documents, or in the case of a court decision declaring the sale contract null and void. 2/4/4 Interpretation of the duties and obligations of the parties to documentary credit are subject to International Commercial Terms (INCOTERMS 2000) and the Uniform Customs and Practices for Documentary Credit (UCP 500) when reference is made to INCOTERMS in the sale contract and to UCP in documentary credit. 3. Shari’ah Ruling on Documentary Credit 3/1 Permissibility of documentary credit 3/1/1 Dealing in documentary credit includes agency for providing procedural services, the most important of which is the examination of documents, and the provision of institutional guarantee to the importer. As both agency and guarantee contracts are permissible, documentary credit becomes permissible subject to the conditions stipulated in this standard. 3/1/2 Opening of all types of documentary credit, its issuance and confirmation, on the basis of the client’s order or for the institution itself, are permitted to an Institution. It is also permissible to an institution to participate, or play an intermediary role, in such dealings and to notify, amend or execute in any way such credit, either for its own use or on behalf of another institution or bank, according to the available forms of executing documentary credit, subject to item (3/1/3) below. 399
5. Shari ’ah Standard No. (14): Documentary Credit 3/1/3 It is not permissible for the institution to undertake transactions in documentary credit, in accordance with what is stated in item (3/1/2), either for itself or on behalf of another as a client or institution or by way of collaboration, when such credit pertains to goods that are prohibited by the Shari’ah, or is based on a contract that is void or irregular (according to the Shari’ah) due to vitiating conditions or includes interest, either charged or paid, whether explicitly as in the case of loan upon payment by the beneficiary of amounts not fully or partially covered in similar credit, or impliedly, as in the case of discounts or trading (payment) on bills of exchange with deferred and delayed payments. It is stipulated for the permissibility of the subject of documentary credit that the contract upon which reliance is placed be a contract that is valid in the Shari’ah insofar as its elements, conditions and type of transaction, whether currency exchange, ordinary sale or another, are concerned, and also with respect to its specific additional conditions. 3/1/4 The bank is obliged to execute the credit when it conforms to instructions, except upon proof of fraud or forgery of the documents, in which case it is under no obligation to execute it. Provided that if the contract concluded prior to opening of documentary credit is nullified by a court decision, the execution of the credit is subject to a new agreement. 3/2 The contract preceding the opening of credit 3/2/1 It is permissible for the seller to stipulate in the sale contract that payment be made through documentary credit. Such a condition is valid and its performance is binding upon the buyer. 3/2/2 It is permissible to secure international transactions using documentary credit provided that the secured transactions do not violate the rules of the Shari’ah. 400
6. Shari ’ah Standard No. (14): Documentary Credit 3/2/3 When the contract stipulates that its interpretation is subject to INCOTERMS (issue 2000) or the United Nation’s Convention in respect of the International sale of goods or any other reference, then such potential interpretation is circumscribed with a condition that it must not violate the rules of the Shari’ah. [see item 3/2/2] 3/3 Commissions and expenses in documentary credit 3/3/1 It is permissible for the institution to charge actual expenses incurred in issuing documentary credit. It is also permissible for the institution to charge a fee for providing the required services, whether such a fee is in the form of a lump sum or a certain percentage of the credit amount, provided that the duration of the credit is not considered in determining the commission. This rule applies to services rendered for both import and export credit, except where the amendment involves a rescheduling of the duration of the credit facility. It is, therefore, permissible for the institution to charge only the actual expenses incurred, in which case it will be a definite sum and not a percentage. The Institution must abide by the following conditions: a) The aspect of guarantee per se must not be taken into account when estimating fees for documentary credit. Accordingly, it is not permissible for an institution to charge an amount in addition to the actual expenses incurred if it endorses a credit facility issued by another bank, because endorsing a credit facility is an addition over guarantee. The rule for endorsement applies to participation in the issuance and endorsement of credit as well as issuance of standby credit (guarantee credit), as long as services or obligations are not required. b) The issuance of a credit facility should not involve Riba bearing profits or become a means for such profits. 401
7. Shari ’ah Standard No. (14): Documentary Credit c) It is not permissible to use a combination of contracts in documentary credit as an excuse for involvement in the prohibited transactions, such as taking a commission for providing a guarantee or extending a loan. 3/3/2 The rule of item 3/3/1 above equally applies to receiving or payment of commissions and expenses and in a situation where the institution acts as an intermediary in these respects, irrespective of whether the transaction is between the institution and its client (the orderer or beneficiary) or between the institution and other institutions and banks. 3/3/3 The ruling of commission for providing letters of guarantee that was stated in the Shari’ah Standard No. (5) on Guarantees must be applied when determining commissions for the letters of guarantee that accompany documentary credits, such as letters of guarantee provided in the case of advance payment of a portion of the amount or the shipping guarantee that is issued for releasing the goods before the arrival of documents. 3/4 Guarantees in documentary credits 3/4/1 It is permissible for the institution to secure the obligations arising out of documentary credit, or to provide documentary credit as security for payment in favour of institutions and banks dealing with it. The institution may act as an intermediary for facilitating documentary credit using other permissible and acceptable forms of guarantee. It is, therefore permissible to use a number of means as a cover for documentary credit including cash, freezing of permissible accounts and negotiable instruments valid according to the Shari’ah, certificates of shares in real estate and withholding the documents of the credit that stand for the goods. The cover of a documentary credit may be also one of the following: a transferable letter of credit; a back-to-back letter of credit; a letter of guarantee issued by the bank of the beneficiary 402
8. Shari ’ah Standard No. (14): Documentary Credit against the advance payment in case of advanced payment credits; a letter of guarantee issued by a bank participating in the issuance or confirmation of the credit; relinquishment receivables and commercial papers, such as bill of exchange and promissory notes. This item must be read together with item 3/4/2 below. 3/4/2 It is not permissible for the institution to accept the following types of guarantees: interest-based bonds, shares of companies that deal in prohibited activities, and interest-based receivables. It is also not permissible for the institution to provide any of these guarantees as security for its obligation to other institutions or banks or to act as an intermediary to facilitate such guarantees. 3/4/3 It is permissible for the institution and the applicant for documentary credit to agree on investing the cash cover of the credit in accordance with Mudarabah partnership. 3/5 Murabahah transactions in documentary credit When a client intends to purchase imported goods from the institution through Murabahah financing of the documentary credit, the following must be observed: 3/5/1 Opening of documentary credit should not precede the conclusion of the sale contract between the orderer and the beneficiary (the seller) irrespective of the orderer having taken possession of the goods that are the subject-matter of the contract. 3/5/2 Institution should be the party who purchases from the supplier, and then sells to the client through Murabahah as per the rulings stated in Shari’ah Standard No. (8) on Murabahah, while taking into account item 2/2/2 in respect to cancellation of contract and item 3/1/3 in respect to agency in Murabahah. 403
9. Shari ’ah Standard No. (14): Documentary Credit 3/6 Musharakah contract with the client to finance documentary credit for imported goods 3/6/1 In case the institution signs a partnership contract with the client to purchase goods prior to the opening of credit and before the client concludes a sale contract with the supplier, it is permissible to open the credit in the name of either partner. It is permissible for the institution, after receipt of the goods, to sell its share to a third party or to its partner through a spot or deferred payment Murabahah on the condition that the sale to the partner is not based on an earlier exchange of binding promises or stipulated in the Musharakah contract. 3/6/2 It is permissible for the institution to sign a partnership contract with the client in respect of goods purchased by the client on the condition that the institution does not sell its share to the client on a deferred payment basis. 3/7 General rules 3/7/1 If the credit transaction includes a provision that it is subject to the prevalent principles and practices that unify documentary credit, it is necessary to qualify such a statement with the stipulation that it will not violate Shari’ah rules and principles. It is preferable that the institution presents alternatives that could be agreed upon between the institution and the correspondent banks. It is a requirement to explicitly state that a provision stipulating interest will not be acted upon, and also for trading activities that contravene the provisions of the Shari’ah. For valid substitutes. [see Shari’ah Standard No. (17) on Commercial Papers, items 5/2 and 5/3] 3/7/2 It is not permissible for the institution to discount accepted bills of exchange, i.e. to purchase these bills before maturity at less than their nominal value. 404
10. Shari ’ah Standard No. (14): Documentary Credit 3/7/3 It is not permissible for the institution to trade in deferred payment documents or accepted bills of exchange, i.e. to purchase these instruments at less than their nominal value. It is also not permissible for the institution to act as an intermediary, whether by payment or notification, between the beneficiary and the issuing or confirming bank to facilitate such dealings. 3/7/4 It is not permissible for the institution to negotiate, for less than their nominal value, documents payable on sight or payable bills of exchange. 3/7/5 It is not permissible for the institution, as far as possible, to present bills of exchange that it undertakes to pay to clients whose debts to the institution are represented by these bills, so as to get them discounted by other banks that may accept them. 3/7/6 The institution should arrange its relationships with other institutions and correspondent banks on the basis of nonpayment of interest and avoidance of prohibited transactions with respect to covering operations between the correspondent banks when such relationships involve settlement of interbank obligations resulting from documentary credit and other banking operations. 4. Date of Issuance of the Standard This Standard was issued on 7 Rabi’ I, 1424 A.H., corresponding to 8 May 2003 A.D. 405