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IMPORT FINANCING SOLUTIONS

Access the working capital you need and improve cash flow by bridging the gap between settlement with suppliers and payment from buyers, putting you in the position to negotiate better prices. Our import finance solutions offer flexible financing options, fixed or variable repayments and a drawdown process on individual transactions to qualified importers. This is combined with our international trade expertise, which enables us to design a structure to suit your specific trading cycle.

Islamic Import Finance Products

Need

Ensure that the buyer will pay the specified amount 

 

Conventional Product and Description  

Letters of credit provide a conditional payment guarantee to sellers that their buyers will pay the specified amount. This ensures payment is made (for sellers) and goods are provided (for buyers). 

 

Shariah-compliant considerations and alternatives 

Typically, Wakalah arrangements are used for Shariah-compliant letters of credit. Under these arrangements, the bank works as an agent for a client, such as a purchaser or supplier of goods. Unlike a conventional agency contract, where interest is paid, in a Wakalah arrangement the client pays the banks fees and commissions. 

 

Risks/Challenges

For the bank, the main risks are legal and documentation risks. For the buyers and sellers, it is a challenge if the other party is unable to perform their part of the contract (e.g. if the seller is unable to make payment, or the buyer is unable to deliver the goods as specified). 

 

Type of finance 

Both import and export finance

Need

Sellers need a way to conveniently improve their cash flows by receiving payment upon arrival of goods to the buyer. 

 

Conventional Product and Description  

Inward bills for collection involve the buyer’s bank receiving inward documents, either domestic or foreign in origin, from the seller’s bank. The buyer’s bank then pays the seller based on this receipt of inward bills, either on a spot or future basis. 

 

Shariah-compliant considerations and alternatives 

Typically, Wakalah (agency) contracts are used for Shariah- compliant inward and outward bills financing (also known as “Inward bills-I” and “Outward bills-I”). 

 

Risks/ Challenges

If the specified terms and conditions are not met, e.g. the seller does not submit the proper documents, the buyer’s bank may refuse to process the payment.  

 

Type of finance 

Import finance 

Need

Sellers need to be able to collect their goods without waiting on shipping documents, so that they do not incur storage costs and experience delays for their goods. 

 

Conventional Product and Description  

The buyer provides a shipping guarantee. This indemnifies a shipping company, enabling the shipping company to release the indemnified goods to the buyer without a bill of lading. This allows the goods to be collected without the shipping documents, enabling the buyer to reduce delays and save on storage costs. 

 

Shariah-compliant considerations and alternatives 

With Shariah-compliant finance, a Kafalah (guarantee) arrangement typically used. 

 

Risks/Challenges

A potential risk with shipping guarantees is that when the actual shipping documents arrive, the invoice price for the goods is higher than the estimated price for the goods. In this case, the buyer will have to bear the additional cost. 

 

Type of finance 

Import finance 

Need

Buyers and sellers need a reliable way of financing their imports and exports through negotiable financial instruments. 

 

Conventional Product and Description  

Accepted bills are negotiable bills of exchange that are used to finance imports and exports. 

 

Shariah-compliant considerations and alternatives 

Islamic accepted bills (also known as “Accepted bills-I”) are used for Shariah-compliant transactions. For imports/purchases, commodity Murabahah contracts are typically used, while for exports/ sales, bai’ dayn (debt trading) principles are usually used. 

 

Risks/Challenges

If the company experience solvency problems, e.g. through non-payment by buyers, this creates a credit risk for the bank. 

 

Type of finance 

Both import and export finance

Need

Sellers need working capital to finance inventory, human capital and other operational expenses. 

 

Conventional Product and Description  

Banks provide working capital credit facilities and charge interest rates on the amount advanced. 

 

Shariah-compliant considerations and alternatives 

This is the most common product in Shariah-compliant trade finance. With Murabahah products, buyers ask banks to import certain goods. The banks do this and then sells the goods to the buyers for a profit. In Murabahah contracts, the bank typically uses its own capital to finance the letter of credit for such financing arrangements. In Murabahah working capital products, firms are provided with working capital on a similar cost-plus-profit basis. 

 

Risks/Challenges

It is a risk to finance working capital in instances where significant cash would be tied up in inventory until a product is finally delivered and payment is made. 

 

Type of finance 

Both import and export finance

Need

Sellers need a convenient and efficient way to convert their accounts receivable into cash to finance their expenses. Sellers may also not have the full financial capability to purchase goods on their own, and may need capital to do so. 

 

Conventional Product and Description  

Banks provide invoice financing/ factoring solutions which advance cash on an interest basis to sellers against the account receivables/ invoices they have from buyers. 

 

Shariah-compliant considerations and alternatives 

Several banks provide Islamic Factoring,a Shariah-compliant form of invoice factoring. Islamic factoring usually employs Murabahah or commodity Murabahah contracts or Wakalah arrangements. 

 

Risks/Challenges

Because Islamic factoring depends on accounts receivable, if the buyer experiences non-payment by account debtors, e.g. the account debtor is financially unable to pay, this will create a credit risk for both the company and the bank providing the Islamic factoring facility. 

 

Type of finance 

Both import and export finance

Need

Parties in a transaction do not know each other well, and it is important for them both to rely on the creditworthiness of a bank. 

 

Conventional Product and Description  

A banker’s acceptance is a promissory note that a bank guarantees and accepts, and is usually used for short-term financing of 6 months or less. It states the amount, date and person who should receive payment, and is typically made based on a deposit at the same bank. 

 

Shariah-compliant considerations and alternatives 

An Islamic banker’s acceptance works on the basis of bai’ dayn (debt trading) and Murabahah (cost-plus- profit) principles. 

 

Risks/Challenges

Banker’s acceptances are attractive instruments as they are relatively low in credit risk. However, it is still important to ensure the Islamic banker’s acceptance is sought from a reputable bank that can honour the arrangement, especially in OIC countries with lesser-developed financial infrastructures. 

 

Type of finance 

Both import and export finance

Need

Ensure that the buyer will pay the specified amount

 

Conventional Product and Description  

Documentary credits provide a conditional payment guarantee to sellers that their buyers will pay the specified amount. A documentary credit is a document that a bank issues on behalf of a buyer, who applies for the documentary credit. This document states that payment will be made by the bank to the seller for the goods and services they offer, as long as the seller meets all the terms and conditions set out in the documentary credit. 

 

Shariah-compliant considerations and alternatives 

The bank provides the service for Shariah-compliant transactions. In return, the bank charges the buyer a fee (ujarah). 

 

Risks/Challenges

There is a risk that the issuing bank does not honour the documentary credit, either because the seller does not meet the terms and conditions set out in the documentary credit, or because the issuing bank reneges. On the second risk, confirmation with one’s own bank is usually sufficient to allay this risk; however, it is sometimes costly to do so. 

 

Type of finance 

Import Finance

Process To Secure Trade Finance

Each funding provider has specific requirements and criteria which must be addressed before funds can be advanced to a business.

Application

The process starts with an application from the business to the provider. When applying for trade finance, the provider will ask for a set of information on the company, the individuals involved (Directors) and details on why the business is seeking finance.

Evaluation

The evaluation process will normally involve some kind of credit scoring process, taking into account any vulnerabilities such as the market the business is entering, probability of default and even the integrity and quality of management.

Negotiation

Eligible SMEs applying for trade finance can negotiate terms with provider. An SME’s aim with a provider is to secure finance on the most favourable terms and price

Approved

Once all the due diligence is done, the funding amount will be aproved with all terms and conditions as greed in the signed documented contract. The funds will be issued to business to carry on their trade business.

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