It deals with the short-term financing of import and export transactions. Since Riba (usury) is prohibited, various Shariah-compliant structures are applied to finance trade operations.
Types of Arrangements
This is a partnership structure and the bank enters into an agreement with the client for the sale and purchase of goods as per the latter’s specifications. Any profit or loss from the transaction is shared between them according to a pre-determined ratio.
At the client’s request, the bank imports commodities and sells them to the client using the Murabaha structure where a mark-up is added to the selling price. The terms of repayment are based on a pre-determined agreement between the client and the bank. Murabaha is the most widely used product in Islamic trade finance.
Wakala is the delegation of an agent (Wakil) on behalf of a principal in a known and permissible dealing. In this case, the Islamic bank delegates the customer as the agent to invest its money for an agency fee. Losses are borne by the bank, unless the agent is found to be negligent.