Banking

Trade And Financing In Islamic Banking And Its Global Aspect

BEYOND ANY DOUBT, THE ISLAMIC BLOCK IS ONE OF THE LARGEST POPULATED COMMUNITIES OF THE WORLD AND AROUND 49 ACTIVE ISLAMIC COUNTRIES ARE AVAILABLE ON INTER-TRADE ACTIVITIES UNDER THE ORGANIZATION OF ISLAMIC COUNTRIES (OIC) WITH ISLAMIC DEVELOPMENT BANK (1DB) PLAYING ONE OF THE MAJOR ROLES IN THE ENDEAVOUR.

Development of Islamic trade finance market and its capacity to support the demand

With the blessings of Almighty Allah the Islamic block has abundant useable and consumable resources. Every country importing and exporting the products could explore the possibility to have inter-trade between member countries by taking the advantage of the major currencies of the Islamic block consisting of dirham or dinar. As a common assessment the trade volume of major Islamic countries, the Islamic trade and supply market could be minimum Euro 5 trillion a year. This volume will not only decrease the inflation, but also bring the prices to afford ability level to common people living in the community For example, Pakistan produces one the best quality of rice and cotton and export to various markets, which can exploit Paid stath real value for products due to its geopolitical condition The Islamic commodity market can overcome this situation and Pakistan can fulfil the basic material demand that can be converted into value-added- products in the importing country. The price and cost of procurement could be reduced in such a trade, which ultimately benefits the importing country in reducing the product price for the end user. Syndicate financing of Bahrain based banks to Pakistan Cotton Export Corporation and Rice Export Corporation from 1986 to 1992 for over US $500 million is a successful record on trade related financing. Similarly, commodity export of denim cloth procured by Faisal Finance Institution of Turkey through Faisal Islamic Bank Pakistan, which was manufactured by Siddiq Sons Paid stan and exported to Turkey are few other fine examples. Many such businesses can take place and promote growth if trade barriers are eased, which is hindered primarily due to political uncertainties. A single currency transaction was executed between Iran and Pakistan of over US$500 million under the barter trade system, but employing the value of the commodity in exchange of commodities. Both the countries use the base currency as the volume for the value of the exchange and fund the export bill in their respective currency at their respective location instead of sending the documents for collection. Scope (or syndicabons in Islamic trade finance The Islamic financial system provides an excellent opportunity of syndications trade related financing. Such transactions are common among the Islamic countries and can be structured under Musharakah for Ijarah or Mudarabah for Murabahah transactionThere are many examples of issuance of specific Suick to structure the capital base of trade related transaction. Such contribution is routed through Murabahah by employing margin amount participated by trader and the balance by Sulmk contribution that give the opportunity for small and medium saver of the bank to participate with their savings amount for halal profitability. In trade related markets Islamic finance provides leasing and Ijarah transactions when the goods are procured under Murabahah and offloaded on Ijarah. For example, Sulmk is taken as a contribution of capital, which is used for the procurement of useable asset and then Sulmk are discharged byway of Ijarah financing and assets remain under rental on ownership base. If we look into the present market trend on such transactions, we will find the market is still conside red as virgin and scope to accommodate such transactions is higher than the interest based lending’ The equity participation from the user is the strongest aspect of risk cover that mortgage does not cover if we see the case ofLehman Brothers incident. Trade between OIC countries through Islamic banks to meet the increasing demand for Muslim countries After the 9/11 and the role of United States in regards to the Islamic block, there was tremendous growth in Islamic banking and financial markets’. The market players were not only Islamic, but many conventional banks opted to open Islamic window under their operations’. This provided the link between the market financiers instead of lenders. The financial growth was noticeable, however, unfortunately professionals who lack expertise in these Islamic financial institutions created a kind of mistrust among the customer and business communities, who desire to opt for the Islamic way rather to go for the nba-based conventional financial transactions. Fewer banks hired Shari’a supervisory members and struggled to prove transparency in the transactions and the Islamic ban1dngsystem. They seem to fail in the application and support and to foster trust indicating that the Islamic financial institutions were no different than their conventional counterparts.

THE TRANSACTIONS SEEN and highlighted by 1DB do not appeal to some specialists who know the system in true spirit. On the other hand the respective central banks of banks; which unfortunately Islamic financial institutions lack. Islamic banks operate within their own system and the gap is shared between the two banldng system in normal banking activities and we cannot classify the specific banldng system filling the gap or covering the shortfall of any nature in trade financing activities and transactionsWe must understand that Islamic banking needs to be modest and exclusive in its application to bring changes in the banking industry. Islamic banldng however, is accused of using same methods and modes as practiced by the conventional banks and both the banldng institutions exchange the funds based on supply and demand by using profit instead of interest. Interbanklending and borrowing is based on market’s IBOR fixation, but the method is different as conventional banks use the straight-line method to calculate the cost of lending at a rate, and Islamic bank apply SWAP deals – commonly known as ‘parallel sale’and purchase of currency and commodit)which is considered a kind of riba by some scholars.
Islamic trade finance becomes the preferred choice for emerging markets such as Turkey, Indonesia, MaIaysa, Qatar, Saudi Arabia and the UAE Pakistan has contributed to trade finance and has a lucrative market. It contributed comprehensively to Islamic economics through participation of over 500 leading personalities of various trade affiliations and presented the documentation to the DIO, which was applauded by the member countries. Mudarabah Ordinance for the small medium enterprise, declaring Mudarabah mode of finance as an institution by giving a status of non-banking financial institution is the achievement of Paldstan, which develops an international market for trade and industry.

WE CANNOT IGNORE the Malaysian contribution in this field which was followed by Indonesia and Iran. Turkey ranks among those countries that follow secular system but has adopted Shari’a system of banldng through its participation banking sector’The trade markets do exist inTurkey but with the potential the country has, Islamic finance inTurkeyis awaiting a strong boost. Whereas the Middle East, including Saudi Arabia apply considerable Islamic trade finance concepts, however the application is not specific. Paldstan, Iran, Malaysia, Indonesia, Egypt, Sudan, Iraq and some of the central Asian countries could be the emerging markets, but due to political unrest there might be some hindrance. Middle East countries are huge consumption and supply markets,where financing is available on individual basis, and have ample investment opportunities.UAE is perhaps a considerable market where bulk trade is seen and trade financing is one of the highest in the region in terms of volume. If the trade financing is applied and conducted in the true spirit and on a strongfooting,itwill have a better show of result with riskcalculated based on rational appraisal of the transaction, it’s costing and profit sharing. Once better profit result yields in the transaction the contribution of the financial resources will growhich ultimately develop a strong fund base and better turnover in trading transactionsAs the trade volume grow and Islamic trade finance develops, the industrial growth mayfollow and inflation may reduce with the introduction of new industrial strategies and better supply in terms of better quality and quantity and with affordable cost of production both at supplier and end user levels

 

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