An Islamic letter of credit is defined by a trade finance instrument which aims to mitigate the payments risks for a seller and the performance risks for a buyer by applying the principles of Islamic Finance.
An Islamic letter of credit shall follow the same rules as the one regulated by UCP 600 as the expansion of the Islamic finance system that produces the Islamic LC does not affect this trade finance at all by creating a new one, however with the difference of excluding exclusion of liability, and discrepancy fees.
The Islamic of letter credit is specific when it comes use the several types of Islamic LC which are using the equivalent options like the conventional system but by applying strictly the Sharia rules with the absence of Riba, these solutions are: Murabahah ILC, Musharaka ILC, Wakalah ILC.
A halal letter of credit in all don’t create a problem when it comes to apply Sharia banking with this product and the typical LC sight letter of credit LC does not create any problems from the Islamic point of view, the issues are more related to the peripheric options like refinancing or deferred payment and to the imported or exported products themselves.