In the name of God, the compassionate the merciful
It is important to note that financing international trade is not only the preserve of conventional financial institutions. Islamic financial institutions also carry out large-scale import and export financing agreements.
However, Islamic financial institutions must be shariah compliant. Islamic finance emphasizes principles that comply with the Sharia (the Quran and Sunnah), which strictly prohibits the involvement of riba (interest/usury), Maysir (all games of chance), Gharar (uncertainty), and the prohibition of investment in illicit products.
Islamic import finance as the name implies, also adheres strictly to the precepts of the Shariah. Some Common Islamic modes of import financing include Murabahah (cost-plus financing), Ijarah (Islamic lease), and Musharakah Mutanakisah (Diminishing Musharaka).
These modes ensure adherence to Islamic principles while facilitating import transactions. However, we will concentrate on Murabaha import financing since it is the most widely used by Islamic financial institutions.
Murabaha is a form of Islamic financing that involves a cost-plus-profit arrangement. In the context of import financing, Murabaha is commonly used to facilitate international trade transactions while adhering to Islamic finance principles. Here’s how Murabaha works in the form of import financing:
Request for Financing: The buyer (importer) identifies goods that they want to import and approaches a financial institution for financing.
Agreement on Terms: The financial institution and the importer agree on the terms of the Murabaha transaction, including the cost of the goods and the profit margin that the financial institution will charge.
Purchase of Goods: The financial institution purchases the goods on behalf of the importer. This is usually done through the use of a letter of credit to ensure that the payment is secure.
Markup/Addition of Profit: The financial institution adds a markup to the cost of the goods. This markup represents the profit for the institution.
Deferred Payment: Instead of the importer repaying the financing amount immediately, the financial institution allows for deferred payment. The importer usually pays the total amount, including the cost and profit, at a later agreed-upon date.
Ownership Transfer: The ownership of the goods is transferred from the financial institution to the importer at the time of purchase.
Repayment: The importer repays the financing amount in instalments as per the agreed-upon schedule.
This structure allows the transaction to comply with Islamic finance principles, as it avoids the payment or receipt of interest (riba), which is prohibited in Islamic finance. Instead, Murabaha involves a transparent cost-plus-profit arrangement, where the profit is clearly defined and agreed upon by both parties.
It is worth noting that Importers and financial institutions involved in Islamic finance typically choose the structure that best suits their needs and complies with Islamic principles. And Allah knows best! “Praise be to Allah in Whose favour good deeds are accomplished” (ibn Majah 3803).
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana.
Email: yahaya0246873726@gmail.com
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