ISLAMIC LETTER OF CREDIT (LC-I UPC 600) 2025
MURABAHA HALAL LETTER OF CREDIT
An Islamic Letter of Credit (LC-I UPC 600) in 2025 is defined by a financial tool that adheres to Islamic Sharia law, which prohibits the charging or payment of interest (Riba), it is structured to ensure compliance with Islamic principles while facilitating international trade transactions.
The Islamic letter of credit (LC-I UPC 600) serves as a secure method of payment as it offers assurance to the seller that they will receive payment for their goods or services as long as the terms of the LC are met, this is particularly important in international trade, where buyers and sellers may be unfamiliar with each other and operating under different legal systems.
The Murabaha letter of credit or halal of letter credit acts as a bridge facilitating trade between Islamic and non-Islamic entities while maintaining adherence to Islamic law, it provides a Sharia-compliant method to engage in trade, ensuring that their financial transactions adhere to their religious beliefs.
The Islamic letter of credit (LC-I UPC 600) in 2025 has the objectives that align closely with the broader goals of Islamic finance: to foster economic development and social progress within the framework of Islamic ethics, it not only serves the economic interests of the Islamic community but also contributes to the global financial landscape with ethical and sustainable financial solutions.
What types of Islamic letter of credit are existing?
Islamic Letters of Credit are financial instruments designed to comply with Islamic Sharia law. They are used in international trade transactions and come in various types, each with its unique characteristics and usage. Here are some common types:
1. Murabaha Letter of Credit
This type involves the bank purchasing the goods and then selling them to the buyer at a marked-up price. The payment is made on a deferred basis, allowing the buyer to sell the goods before payment is due.
2. Musharakah Letter of Credit
In a Musharakah LC, the bank and the customer share the cost of purchasing the goods. Profits and risks are distributed according to their respective investment shares.
3. Wakala Letter of Credit
Here, the bank acts as an agent (Wakil) for the customer. The bank pays the supplier on behalf of the customer, who then repays the bank without any interest, but possibly including a fee for the service.
4. Istisna Letter of Credit
This type is used for financing the manufacture or construction of goods. Payments are made in stages, based on project milestones, ensuring compliance with Sharia principles.
Does UPC 600 apply to an Islamic letter of credit, what are challenges?
Yes, UPC 600 (Uniform Customs and Practice for Documentary Credits) can apply to an Islamic letter of credit, but it needs to be adapted to comply with Shariah principles.
How does an Islamic letter of credit work ?
Understanding the Islamic Letter of Credit
The Islamic Letter of Credit is a financial instrument used in international trade to ensure that transactions comply with Islamic Sharia law. It serves as a guarantee to the seller that they will receive payment for their goods or services under specific terms and conditions.
Key Steps in an Islamic Letter of Credit
- Initiation: The buyer and seller agree on a trade deal and decide to use an Islamic Letter of Credit for the transaction. The buyer approaches an Islamic bank to issue the LC.
- Issuance: The Islamic bank issues the LC in favor of the seller, ensuring the terms are compliant with Sharia principles such as risk-sharing and avoidance of interest.
- Shipment of Goods: The seller ships the goods to the buyer and presents the required documents (like a bill of lading, invoice, etc.) to their bank.
- Document Verification: The seller’s bank verifies the documents against the LC’s terms. If compliant, the bank requests payment from the buyer’s Islamic bank.
- Payment: Upon verification, the buyer’s Islamic bank makes the payment to the seller’s bank, which in turn pays the seller, completing the transaction.
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