International Trade and Carriage of Goods

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Islamic letters of credit - square peg in a round hole

Islamic letters of credit - square peg in a round hole

Professor Jason Chuah

11.1 Introduction

There has been much discussion in recent times about the massive expansion of Islamic finance - the UK government’s commitment to establish London as one of the largest sukuk markets in the world points toward this trend. Hitherto much of the legal literature on Islamic finance has focussed on the money markets, consumer credit and Islamic banking. Less covered is the field of Islamic trade finance and payment. However, from the global trade perspective, especially where international trade is considered to be pivotal to international development, the subject of Islamic trade finance and payment cannot be ignored. Central to trade finance and payment is the letter of credit. Letters of credit, as we know, are governed largely by the International Chamber of Commerce’s UCP 600. There is no similar instrument for Islamic letters of credit. Although the ICC represents chambers of commerce from many countries, the UCP 600 is essentially based on the idea of an autonomous payment instrument as recognised and given effect to in the twentieth century by Western legal systems.2 That is of course not to say that the idea of an autonomous payment instrument is unknown in Islamic legal history - a form of an ‘abstract’ bill of exchange was used in the middle ages in the Islamic world.3 Indeed, some scholars were of the view that the medieval Islamic bill of exchange had influenced and shaped the Western idea of bills of exchange.4 The present chapter asks how equipped the UCP 600 and contemporary shipping practice are to accommodate emerging Islamic payment instruments. The wider theoretical question concerns the management of the interaction

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between ‘Western’ international trade legal norms and nascent practice of Islamic finance. It is also to be seriously questioned whether in a globalised world of trade and shipping, the UCP 600, a transnational soft instrument expressed to be committed to trade promotion, could and should be reshaped to facilitate Islamic trade finance and payment. This paper will not address the issue from a Shari’a point of view - the paradigm being one relating to the treatment of the Islamic letter of credit in a Western or conventional trade finance legal environment.

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