Trade Finance Sight & Usance LCs

Sight & Usance
Letter of Credit
Product Development &

Shariah Compliance
1
Presentation Outline
Import Financing
Guidelines for LCs
Process Flow of Sight LCs
Process Flow of Usance LCs
Special Cases – DO & SG
Contract Price Calculation
2
Import Financing
3
Import Financing
Conventional Banks earn in two ways

while opening Letter Of Credit. They are:
 Service charges for opening an LC
 Interest charged on the LCs not paid

on due date
4
Import Financing
Service Charges
Collecting various service charges (such as
documentation charges, correspondence, account
maintenance, credit assessment charges etc)for
the purpose of opening LC is permissible according
to Shariah.
5
Import Financing
SSB has allowed that the bank may charge

service charges for the following services.
Documentation
Credit Assessment
Correspondence
Account Maintenance Services
Monitoring Services
6
Import Financing
However, these service charges should be

developed keeping in view the reasonable cost
estimates.
For example if the importer extends the LC, less
service charges should be collected as less
services would be required for extension in the
period of the LC.
7
Import Financing
Profit in LCs
 The bank may need to charge certain profit in

case the LC is not settled by the importer on
time, or if the Nostro account of the bank is
debited before the importer has made
payment to the bank.
 In this case appropriate Islamic mode need to
be used to charge the profit.
 Modality for both cases is discussed next.
8
Import Financing
A more conservative approach is to open

LC on the basis of any Islamic mode of
finance.
Three modes can be used for this
purpose:
 Murabaha
 Ijarah
 Musharaka
9
Guidelines for LCs
10
SIGHT LC - Basics
Basics
• All Sight LCs are opened under MMFA/Agency
arrangement, whereby the customer acting as
an agent of MBL procures the goods. The
ownership of the goods rests with MBL till the
time it is sold to the customer.
• In this case a valid Declaration is a must for

Murabaha to take place and it needs to be
signed at the time of delivery of documents to
the customer.
11
SIGHT LC - Basics
Basics
• In case Ijarah is being done for the goods,
Declaration will not be signed since the
ownership of asset remains with MBL
throughout the Lease period.
• Exception: Any Exception (Sight LC without

MFFA/Agency) in this regard should be
specifically approved by the Management.
12
SIGHT LC
Process Flow:
Step 1:
• Meezan Bank and the customer will sign a
Master Murabaha Finance Agreement for LCs
and an agency agreement for the same.
• As per the agency arrangement the customer

would purchase goods from foreign suppliers on
Meezan Bank’s behalf by opening LCs with
Meezan Bank.
13
SIGHT LC
Process Flow:
Step 2:
• The customer will negotiate a deal with some

foreign supplier (exporter) for the purchase of
goods.
14
SIGHT LC
Process Flow:
Step 3:
• Importer will request Meezan Bank to open L/C

by submitting all relevant documents.
• Insurance to be arranged by the importer and

relevant policy to be forwarded along with the
L/C application form.
15
SIGHT LC
Process Flow:
Step 4:
Meezan Bank will obtain LC opening and other

charges from the customer and issue an LC in
the favor of the beneficiary(exporter)
16
SIGHT LC
Process Flow:
Step 5:
• On receipt of L/C exporter will ship the goods

and deliver the related shipping documents to
the negotiating bank for the payment of bill
amount.
• If the documents are found in order the

negotiating bank will claim reimbursement
from MBL’s Nostro account and send
documents to MBL
17
SIGHT LC
Process Flow:
Step 6:
• On receipt of documents Meezan Bank will

contact the customer and inform him of the
availability of the documents.
• The customer will negotiate the FX rate for the

required foreign currency amount.
• Meezan Bank will discuss the payment terms

with the customer and settle the bill
18
SIGHT LC
Settlement:
• Incase Client does not need any financing, client’s
a/c will be debited to settle LC and Declaration will
be signed at the time of document delivery.
• If the client wishes to finance LC against available
Murabaha Limit, sub-Murabaha should be issued.
Issuance of Sub-Murabaha means signing of
declaration by the customer and the acceptance of
its offer to purchase by MBL. Profit will be charged
from the day MBL’ Nostro was debited to the
Murabaha settlement date
• MBL will release the shipping documents to the
customer and record a Murabaha receivable.
19
SIGHT LC
Settlement:
If MBL’s funds are involved (other than Murabaha
Financing), two situations could arise:
a) Nostro Debited before Client settles:
• MBL will discuss the payment date with customer
and issue a Sub-Murabaha.
• Issuance of Sub-Murabaha means signing of
declaration by the customer and the acceptance of
its offer to purchase by MBL. Profit will be charged
from the day MBL’ nostro was debited to the
Murabaha settlement date.
20
SIGHT LC
Settlement:
b) Payment Against Documents(PAD):
• Sub-Murabaha will be booked on the day the

customer can arrange funds and shipping
documents will be released, after getting
Declaration signed, on the same day.
• The price will include profit from the day Meezan

Bank’s Nostro account was debited till the Sub-
Murabaha settlement date.
21
USANCE LC without MMFA
Basics
• Usance LCs are opened without MMFA/Agency

arrangement.
• The customer is not required to sign

declaration at the time of taking possession of
the documents. Since MBL never assumed
ownership risk of the asset, no declaration is
required to be executed.
22
USANCE LC without MMFA
Basics
• MBL will act as an agent of the Client and

recover only charges related to the services
provided.
• It is also to be noted that Murabaha/Ijarah

cannot take place once LC is opened without
MMFA/Agency arrangement.
23
USANCE LC with MMFA
Basics
• If Usance LC is opened with MMFA/Agency

arrangement, a valid declaration is a must for
ownership to be transferred from MBL to the
customer and Murabaha to take place.
• The Declaration must be signed at the time of

handing over of documents to the customer.
• In this case client must book forward cover at

the time of opening LC. It must be explicitly
specified in the Transaction approval sheet
whether customer is willing to take forward
24
cover or not.
USANCE LC with MMFA
• If Client refuses to book forward cover at the

time of opening LC, it should not be opened
under MMFA/Agency.
• In case of Ijarah is being done for the goods,

Declaration will not be signed since the
ownership of asset remains with MBL
throughout the Lease period.
• A Profit amount can be added if the Murabaha

tenor is higher than the payment date.
25
Special Cases
Shipping Guarantees or Delivery

Order(DO):
• If the goods have arrived prior to the shipping

documents the customer may request Meezan
Bank to issue a shipping guarantee or delivery
order.
• In such cases Meezan Bank will take 110%

margin from the customer and execute a Sub-
Murabaha based on the FX rate prevailing on
that date. The selling price will be fixed at that
stage.
26
Special Cases
Shipping Guarantees or Delivery Order(DO):
• In this case, Declaration must be signed at the

time of issuance of DO / SG and should not be
postponed till the document arrives.
27
Special Cases
Shipping Guarantees or Delivery Order(DO):
• If however, upon arrival of the documents the

cost of the goods comes out to be higher or lower
than the cost price of the Sub-Murabaha, Meezan
Bank will settle the difference with the customer
by paying or receiving the differential amount
subject to a Cap & Floor of X%.
• This adjustment in price after the execution of

Murabaha is possible because Murabaha is a cost
plus profit transaction and if after the execution
of the Murabaha the seller discovers that the cost
was higher or lower he can settle the difference
with the buyer 28
Contract Price
Cost Price should include Insurance, LC

opening and miscellaneous charges. If the
client has already paid above charges from his
own sources then profit will be calculated
keeping in view the financing amount. An
illustration of the above process is as follows:
29
Contract Price
LC Amount= Rs. 1,000,000
LC Opening Charges= Rs. 2,500
Insurance= Rs. 2,000
Miscellaneous charges= Rs. 1,000
Total Cost= Rs. 1,005,500
 Assuming that the client has paid all charges

upfront, and needs financing for a period of 30
days against the LC at 10% p.a. The profit for the
period will be Rs. 8,220.
 The total Murabaha contract price would be Rs.
1,013,720.
 If the client wishes to pay on spot then the goods
will be sold to him at Rs. 1,005,500.
30
Key Points
LC Opening
 At the time of opening LC, it must be specified
on the LC opening form / Transaction approval
sheet whether LC is being opened under
MMFA/Agency arrangement or without it.
LC Application Form
 The current LC Application form has been
revised to incorporate few important changes.
31
Murabaha Tenor
Payment during Murabaha Tenor
 It should be ensured that the actual

payment by the agent to the supplier
should be made within the Murabaha Tenor.
 Especially when Murabaha financing is

disbursed against Usance LCs, it should be
ensured that the payment falls during the
Murabaha Tenor.
32

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Sight & Usance

Product Development &

Conventional Banks earn in two ways

 Service charges for opening an LC

 Interest charged on the LCs not paid

SSB has allowed that the bank may charge

However, these service charges should be

 The bank may need to charge certain profit in

A more conservative approach is to open

• In this case a valid Declaration is a must for

• Exception: Any Exception (Sight LC without

• As per the agency arrangement the customer

• The customer will negotiate a deal with some

• Importer will request Meezan Bank to open L/C

• Insurance to be arranged by the importer and

Meezan Bank will obtain LC opening and other

• On receipt of L/C exporter will ship the goods

• If the documents are found in order the

• On receipt of documents Meezan Bank will

• The customer will negotiate the FX rate for the

• Meezan Bank will discuss the payment terms

b) Payment Against Documents(PAD):

• Sub-Murabaha will be booked on the day the

• The price will include profit from the day Meezan

• Usance LCs are opened without MMFA/Agency

• The customer is not required to sign

• MBL will act as an agent of the Client and

• It is also to be noted that Murabaha/Ijarah

• If Usance LC is opened with MMFA/Agency

• The Declaration must be signed at the time of

• In this case client must book forward cover at

• If Client refuses to book forward cover at the

• In case of Ijarah is being done for the goods,

• A Profit amount can be added if the Murabaha

Shipping Guarantees or Delivery

• If the goods have arrived prior to the shipping

• In such cases Meezan Bank will take 110%

Shipping Guarantees or Delivery Order(DO):

• In this case, Declaration must be signed at the

Shipping Guarantees or Delivery Order(DO):

• If however, upon arrival of the documents the

• This adjustment in price after the execution of

Cost Price should include Insurance, LC

 Assuming that the client has paid all charges

Payment during Murabaha Tenor

 It should be ensured that the actual

 Especially when Murabaha financing is

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