Analysis of ICC Trade Standard for LC Issuance (UCP-600) with relevant AAOIFI Shariah Standards

Abstract

Lack of Shariah compliant International Standards for Trade in particular and other banking transactions in general may cause considerate drip to growth of Islamic Financial Institutions. In this paper an attempt has been made to dwell the subject by analyzing the ICC standard of “UCP-600” in preview of AAIOFI Shariah Standards. Generally, in Islamic Financial Institutions Documentary Credits are executed under two modes known to be as Murabaha and Wakala. The analysis reveals that in principal AAIOFI Shariah Standard allows the use of UCP-600 in Documentary Credits. However, certain clauses necessitate evaluation in accordance with the guidelines outlined in Shariah Standards, particularly when Documentary Credits are conducted under the Islamic mode of Murabaha. Additionally, Shariah Standards consider the validity and permissibility of other contracts executed during the opening, execution, and retirement of Documentary Credits. Provisions such as charging interest, trading impermissible commodities, and providing remunerative guarantees are strictly prohibited for Documentary Credits issued by Islamic Financial Institutions.The analytical section of the paper examines all such clauses with specific reference to relevant Shariah Standards. In the end few recommendations have also been deliberated to elucidate the contravening clauses of UCP-600 with AAIOFI Shariah Standards.