Import financing is the most important part of trade finance. Financial institutions play an important role in providing import finance. That is why for importing goods, importer takes services from financial institutions. The conventional financial institute provides its services in the form of Letter of credit (LC). Financial institute charge against opening LC and interest on LC that is not paid on the due date. These charges are not allowed in Shariah.
Islamic financing for import work different from the conventional method. The financial institution can charge service charges against credit assessment, documentation, monitoring services and account maintenance services. But intend of the financial institution could not be to recover any profit. These charges should be actual and mentioned in financial institute schedule charges.
Islamic Financial Institutions provide the following financing products in import financing.
Ijarah is a lease contract. Financial institutes and importer use this contract to import goods for the importer. Under this contract financial institutes import and lease it to the customer against fixed charges. Ijarah contract under import financing is discussed in details in the following steps:
Step 1: The importer asks the financial institution for import financing. The financial institute accepts the application and makes the customer an agent for importing goods on its behalf. Financial institution and customer enter into Ijarah contract.
Step 2: All charges including LC opening, insurance etc. may be taken from the customer as the security deposit.
Step 3: Exporter ship the goods to the financial institution and hand over the bill of lading.
Step 4: Financial institute handover bill of lading to the importer.
Step 5: Importer takes goods and enters into Ijarah contact with the financial institution. A pre-agreed rent will be paid by the customer to the financial institute.
Step 6: At the end of this Ijarah, the financial institution may sell the assets to the importer at a pre-agreed price.
Musharaka is a partnership contract. In the Musharaka agreement, two or more partners combine their capital in a business and share the profit according to the pre-agreed ratio. Musharaka is also used in import financing where financial institute and importer combine their resources and import goods from the international market and sells in the local market to generate profit. In the following section step by step procedure of Musharaka import financing is discussed in detail.
Step 1: Importer asks the financial institute for a Musharaka agreement for import finance. The financial institute accepts it’s application. They both sign the Musharaka contract.
Step 2: The purpose of this Musharaka contract is to import goods from the International market and sell them in the local market.
Step 3: Importer is a working partner. So, it’s share cannot be less than his share.
Step 4: Financial Institution ask the importer to provide his share upfront.
Step 5: Financial Institute opens LC account in favour of the exporter.
Step 6: Exporter ship the goods and provide the bill of lading to Financial Intuition.
Step 7: Financial Institution makes payment to the exporter and provides documents to the importer.
Step 8: Importer of goods sell these goods to the local market. Profit will be distributed among the Financial Institute and importer according to the pre-determined ratio.
Murabaha is a sale contract that is used to sell goods at cost plus profit. Islamic financial institutes provide Murabaha mode of financing where they import equipment, goods, raw material etc. and sell them to the customer at cost plus profit. Customer pay in negotiated instalments. Step by step procedure is explained in the following.
Step 1: Import ask for import financing to financial institute. Financial Institute accepts the request and signs the Murabaha contract with the customer. The financial institute also appoints the importer as an agent to import goods on its behalf.
Step 2: Charges related to LC opening, commission, insurance etc. are taken in advance.
Step 3: Financial institution ask the importer for the Murabaha funds. If the importer provides immediate funds, financial institutions charge less profit on Murabaha goods.
Step 4: The sale price of the good is calculated keeping given cost including insurance LC commission etc. plus profit.
Step 5: Exporter ship the document to the financial institution and provide the bill of lading.
Step 6: Financial institute provides the bill of lading to the importer. At this stage, the Murabaha agreement is executed.
Step 7: Importer of good provide Murabaha price to financial Institute on the due date.