2. Islamic Letters of Credit - An Overview

A Letter of Credit as an instrument of international trade is one of the most secure methods for a seller to be paid. Besides credit risk considerations, LCs is the customary business practice for long distance trade and a particularly important commission earning service for any bank.

The Islamic Letters of Credit (Islamic LC) module constitutes a part of Oracle FLEXCUBE’s comprehensive trade financing system. Together with the Islamic Bills and Collections module, it automates the entire gamut of trade financing.

The Islamic LC module supports the processing of all types of documentary and clean Islamic LCs. It can handle all activities during the lifecycle of an Islamic LC. This includes the generation of messages and advices for all the applicable events, and the update of account balances. The system also handles the collection of various commissions and charges defined for an Islamic LC.

The chapter contains the following sections:

• Section 2.1, "Features"
• Section 2.2, "Operations supported on an Islamic LC"
• Section 2.3, "SWIFT Messages for an Import Islamic LC"
• Section 2.4, "SWIFT Messages for an Export Islamic LC"
• Section 2.5, "SWIFT Messages for a Standby Islamic LC"
• Section 2.6, "SWIFT Messages for a Clean Islamic LC"
• Section 2.7, "SWIFT Messages for a Guarantee"
• Section 2.8, "SWIFT Messages for a Shipping Guarantee"
• Section 2.9, "Processing Commissions and Charges"
• Section 2.10, "Variations Supported for an Islamic LC"
• Section 2.11, "Red Clause Letter of Credit"
• Section 2.12, "Revocable and Irrevocable Islamic LCs"
• Section 2.13, "Transferable and Non Transferable Islamic LCs"
• Section 2.14, "Revolving and Non Revolving Islamic LCs"
• Section 2.15, "Sight and Usance Islamic LC"
• Section 2.16, "Open Ended Islamic LCs"
• Section 2.17, "Cash Collateral against an Islamic LC"
• Section 2.18, "Availment against an Islamic LC"
• Section 2.19, "Reports"

2.1 Features

In an effort to sharpen the competitiveness of your trade-financing department and to empower your bank to handle a high volume of credit transactions Oracle FLEXCUBE is designed with the following features:

• The Islamic Letters of Credit module supports the processing of all types of clean and documentary Islamic LCs. These include:
  • Import Islamic LCs
  • Export Islamic LCs
  • Guarantees
  • Shipping Guarantees
  • Clean Islamic LCs
  • Standby Guarantees

• The Islamic LC module is designed to handle all the events in the life cycle of an Islamic LC. The booking, subsequent amendments and an availment can be processed automatically. The messages and advices applicable for each event are also automatically generated. The messages are communicated done through SWIFT, TELEX, mail, or any other compatible medium.
• The product definition function enables you to create products for specific services you offer. This offers your customer flexibility as well as quick and efficient processing of contracts.
• The product definition covers all the key features of an Islamic LC. For example, details of documents that should accompany it, the free format messages that form part of the correspondence, the advices to be generated for various events, the accounting entries to be passed for an event, the commission and tax handling specifications.
• The details of documents, free format messages, and commodities are defined only once and can be retrieved whenever needed. This reduces the effort involved in the capture of Islamic LC details, thus rendering it faster and error free. The flexibility built into the system ensures that you can modify these details to suit the requirement of each Islamic LC.
• The copy feature further simplifies, the input processing, for contracts.
• The Central Liability sub-system automatically controls the booking of an Islamic LC against the credit lines assigned to the customer before the bookings are made.
• Oracle FLEXCUBE supports the concept of ‘specialized services branch’ concept. If you have trade financing expertise at only one branch, say the Head Office (HO) and Islamic LCs for customers of any branch is processed only through the HO, Oracle FLEXCUBE offers absolute ease of operations. The Islamic LC can be processed for a customer of any branch, in the same way as you would, for a customer of your own branch.
• The module supports automated follow-up for commission and charge payments, confirmation and acknowledgements.
• Graphic User Interface (GUI) facilitates ease of input. Pick-lists have been provided wherever possible. This makes the module both efficient and easy to use.
• The media supported include Mail, Telex and SWIFT
• The National Language Support (NLS) features are available.
• LCs are governed by the Uniform Customs and Practice (UCP) which is published by the International Chambers of Commerce (ICC) Paris, France. You can indicate that the Islamic LCs issued at your bank fall in line with the UCP, which is regarded as a rule book by virtually all banks in the world.

2.2 Operations supported on an Islamic LC

The following are the operations supported on an Islamic LC:

• Open an import Islamic LC or guarantee
• Open and confirm an import Islamic LC
• Pre-advice an export Islamic LC
• Advice an export Islamic LC
• Advice and confirm an export Islamic LC
• Confirm an export Islamic LC

Thus, your bank can perform one of the following roles:

• The issuing (opening) bank for an import Islamic LC or guarantee
• The advising bank or for an export Islamic LC
• The confirming bank for an export Islamic LC

In addition to amendment of the terms of an Islamic LC such as the expiry date, the amount, the latest shipment date, etc., you can amend the operation on an Islamic LC as follows:

• Open to open and confirm of an import Islamic LC
• Pre-advice to advice of an export Islamic LC
• Pre-advice to advice and confirm an export Islamic LC
• Advice to advice and confirm an export Islamic LC

Appropriate messages, advices, and covering letters are generated for these operations. These are listed in an annexure in this manual. The SWIFT messages generated for the different types of Islamic LC are listed in this chapter.

2.3 SWIFT Messages for an Import Islamic LC

The messages that are generated for an Import Islamic LC depends on the operation you perform on the Islamic LC.

The following are the SWIFT messages supported for an Import Islamic LC:

Event	SWIFT
Issue of a documentary credit	MT 700 and MT 701
Pre-Advice of a documentary credit instrument	MT 705
Amendment to a documentary credit	MT 707
Authorisation to reimburse	MT 740
Amendment to an authorisation to reimburse	MT 747

2.4 SWIFT Messages for an Export Islamic LC

For an export Islamic LC, the Acknowledgement (MT 730) is the SWIFT message generated.

2.5 SWIFT Messages for a Standby Islamic LC

The following are the SWIFT messages supported for a Standby Islamic LC:

Event	SWIFT
Issue of a documentary credit	MT 700 and MT 701
Pre-Advice of a documentary credit instrument	MT 705
Amendment to a documentary credit	MT 707
Authorisation to reimburse	MT 740
Amendment to an authorisation to reimburse	MT 747

2.6 SWIFT Messages for a Clean Islamic LC

The following are the SWIFT messages generated for a clean Islamic LC:

Event	SWIFT
Issue of a clean credit	MT 700 and MT 701
Pre-Advice of a clean credit instrument	MT 705
Amendment to a clean credit	MT 707
Authorization to reimburse	MT 740
Amendment to an authorisation to reimburse	MT 747

2.7 SWIFT Messages for a Guarantee

The following are the SWIFT messages generated for a guarantee:

Event	SWIFT
Guarantee instrument	MT760
Guarantee amendment	MT767
Acknowledgement for a guarantee issued	MT 768

2.8 SWIFT Messages for a Shipping Guarantee

The following are the SWIFT messages generated for a shipping guarantee:

Event	SWIFT
Guarantee instrument	MT760
Guarantee amendment	MT767

2.9 Processing Commissions and Charges

In the Islamic LC module, the method of collecting commissions and levying charges is flexible.

Commissions can be collected for the initiation and amendment events of an Islamic LC. The definition of commission rules facilitate the uniform and efficient application of commission across all Islamic LCs processed under a product.

Commissions can be collected in advance or in arrears, periodically or non-periodically. You can choose to accrue commissions at a regular frequency (daily, monthly, quarterly, half-yearly or annually). Similarly, the frequency of liquidation of periodic commission can be varied.

In Oracle FLEXCUBE various charges such as handling charges, SWIFT charges, etc. can be processed.

The commissions and charges can be collected from any party, and if necessary, debited from a receivable account and liquidated subsequently.

2.10 Variations Supported for an Islamic LC

An Islamic LC being a very flexible payment mechanism can be made available to the customers of your bank in a number of popular variations.

2.11 Red Clause Letter of Credit

You can process a Red Clause Islamic LC wherein you can provide for anticipatory drawings. In such a case, the confirming bank or any other bank is authorised to make advance payments to the beneficiary, before the presentation of the documents.

2.12 Revocable and Irrevocable Islamic LCs

You can process both revocable and irrevocable Islamic LCs. However, irrevocable Islamic LCs are commonly used as they cannot be cancelled without the consent of the buyer, the seller and the banks that are parties to the transaction.

A revocable Islamic LC can be cancelled without any notice or consent from the parties involved in the Islamic LC.

2.13 Transferable and Non Transferable Islamic LCs

While capturing the details of an Islamic LC, you can indicate whether it is transferable. This information is part of the instrument generated for an Islamic LC.

2.14 Revolving and Non Revolving Islamic LCs

You can open an Islamic LC and choose to make it available again in its original amount after the goods have been shipped, documents presented and credit is settled. Such an Islamic LC is a revolving Islamic LC. Under a revolving Islamic LC the amount is reinstated or renewed without any specific amendments to the Islamic LC. A revolving Islamic LC may be revocable or non-revocable, and can revolve in relation to the following:

• Value
• Time

This facility can be utilized when a supplier wishes to make repetitive shipments over a period such as a year.

The Islamic LC can have an automatic reinstatement clause, which provides for continuing the renewal of availability. You also have the option to manually reinstate an Islamic LC. The credit may require approval of the opening party before it becomes available again.

2.15 Sight and Usance Islamic LC

Oracle FLEXCUBE allows the processing of a sight or usance payment against an Islamic LC.

• In case of a sight Islamic LC, the negotiating bank pays the seller immediately and is later reimbursed by the issuing bank
• In the case of a usance Islamic LC, the drawee bank accepts the obligation to pay the seller at maturity. An Islamic LC with a time draft drawn on the opening party, calling for payment at a future date is called a time or Usance Islamic LC.

2.16 Open Ended Islamic LCs

You can also process an Islamic LC without an expiry date known as an open ended Islamic LC.

2.17 Cash Collateral against an Islamic LC

An Islamic LC can be processed against cash collateral. Oracle FLEXCUBE provides you with the facility to calculate the cash collateral either as a percentage of the Islamic LC amount or as a fixed amount. Cash collateral advice will be generated for its collection.

When the Islamic LC amount is amended, you also have the option of adjusting the collateral amount accordingly.

2.18 Availment against an Islamic LC

You can process the availments against an Islamic LC either through the Islamic LC module or through the bills module of Oracle FLEXCUBE. Availment charges can be levied and cash collateral adjusted, during an availment.

2.19 Reports

Information on the Islamic LCs processed and the static maintenance done for the module is available in the form of reports. These reports can be printed, spooled on to a disk file or displayed on the screen. The following are some of the reports available:

• Accrual control report
• Closed out Islamic LCs report
• Commission activity report
• Commission due report
• Confirmed Islamic LCs report
• Daily activity report
• Expired Islamic LCs report
• Islamic LCs due to be closed report
• Islamic LCs due to expire report
• Open ended Islamic LCs
• Un-replied tracers report
• Process exception report
• Overrides
• Product report
• Clause report
• Branch report