(ISB 547)

ISLAMIC ACCEPTED BILL (IAB)

AND EXPORT CREDIT
REFINANCING - i
NAME:

Table Of Content
NO

TITLE

PAGE

1.

Islamic Accepted Bill (IAB)

2.
3.
4.
5.

Introduction
Understanding Islamic Accepted Bills
Determining the Price of Islamic Accepted Bill
Features of the Islamic Accepted Bill
Guidelines and Regulations on Islamic Accepted
Bills
Application of Islamic Accepted Bills
Al-Murabahah Working Capital Financing
Shariah Point of View on Islamic Accepted Bills
Conclusion

6.
7.
8.
9.
10. EXPORT CREDIT REFINANCING - i

2
3-4
5
5-6
7
8
9
10-11
12
13

The meaning of export credit refinancing

Function of Islamic Credit Refinancing
Objectives

11. Two Types of Facilities under the Scheme

12. Modus operandi Islamic Export Credit Refinancing

13-14
15-16

Comparism between IECR and ECR

Bank using Islamic export credit refinancing
Implementation from Bank Islam
Journal about export credit financing
conclusion
References

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18
19-20
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13.
14.
15.
16.
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Islamic Accepted Bill (IAB)

Introduction
Islamic Accepted Bill (IAB) is one of the Islamic financial instruments that are traded inIslamic
Inter-bank Money Market (IIMM). IABs are traded based on Murabahah andBay al Dayn
concepts similar to the other financial instruments such as Green-bankers acceptances, Islamic
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mortgage bonds and Islamic private debt securities. The IIMM, inturn, is the place where a set
of activities are carried out including purchase and sale of Islamic financial instruments among
market participants, inter-bank investment activities and a cheque clearing and settlement.
Islamic Accepted Bills arises from the situation when the customer on behalf of a bank buys
goods that he or she wants while the bank sells them back to the customer at a deferred
payment basis. The bank makes payment in lump sum

for

the goods purchased by its

customer on its behalf and sells those goods to the customer on the deferred payment basis.
These due payments represent profit for the holders of the Islamic Accepted Bills that are traded
in the secondary market. Islamic Accepted Bills are mostly used to finance imports and export or
local purchases and sales, provided that the traded goods are halal. This paper will analyze
Islamic Accepted Bills in terms of structure and operations. Firs to f all, we define Islamic
Accepted Bills and show what its operational procedures. Next, we present some of the
guidelines imposed on trade and issuance of Islamic Accepted Bills. The third part will explain
how Islamic Accepted Bills are traded in the secondary market, who are the users and traders
and what basis of pricing used. Finally, we address the Shariah point of view on Islamic
Accepted Bills in terms of their acceptability.

Understanding Islamic Accepted Bills

Islamic Accepted Bill is one of the instruments traded on Islamic Inter-bank MoneyMarket (IIMM)
and based on the concept of Al-Murabahah/Bai Al-Dayn. IslamicAccepted Bills is an order to a
bank by its customer obliging it to pay a certain amount of money to the holder of the
acceptances bill. The bank makes payment in lump sum for the goods purchased by its
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customer on its behalf and sells those goods to the customer on the deferred payment basis.
These due payments represent profit for the holders of theIslamic Accepted Bills that are traded
in the secondary market to another party. It attractsa very attractive price because it is a
negotiable instrument. The customer is, therefore,financed at a very attractive rate.
Islamic Accepted Bill is similar to Bankers Acceptance. Bankers Acceptance is a billwith a
certain face value issued by a bank to the customer at a discount. The discountedvalue of the
bill is credited to the customers account while the customer pays back theface value at the
maturity date. For example a Bankers Acceptance Bill might have aface value of RM 2 million,
while the amount of money credited to the customersaccount is RM 1.9 million. The difference
between the face value and the discountedvalue (the amount of money credited to the
customers account) represent interest payment. Bankers Acceptances are used for project
financing and traded on thesecondary market. The Islamic Accepted Bill is introduced as an
alternative to BankersAcceptance in view of the need to provide customers an Islamic
alternative
The difference between the Bankers Acceptance and Islamic Accepted Bill is the absenceof
interest payments in the case of Islamic Accepted Bill. Interest is not allowed in Islamand,
therefore, the profit in Islamic Accepted Bill is said to be derived from trading whichis
permissible. The profit by trading is derived through the contracts of Murabahah.Murabahah
refers to the sale of a good at a price based on cost-plus profit margin agreed by the both
parties. Here the Islamic bank appoints a customer as agent to purchase the goods at cost. The
bank guarantees the payment to the supplier. Then, the bank sells thegoods to the customer
where credit to be settled in say, 90 days. The selling priceincludes cost and profit which is
called a mark-up price. The bank then draws a bill onthe customer who accepts the bill at the
mark-up price. The holder of the bill, i.e. the bank can sell the bill to the third party at a price not
less than the cost. Such sale is basedon the bay al dayn contract. Bay al dayn refers to the
sale of a debt arising from a tradetransaction with a deferred payment.

Islamic Accepted Bills are widely used in financing imports and exports. It is an alternative to the
Bankers Acceptance Bill that is used to finance purchases and sales by conventional banks.
Islamic Accepted Bill, however, is used only in transactions involving halal goods and services.
Examples of using Islamic Accepted Bills in import sand exports are as follows:

Islamic Accepted Bill-Imports (Al-Murabahah/Bai Al-Dayn)

The customer can approach the bank to provide financing for his working capital requirements
to import inventories or raw materials. The bank purchases the required goods and settles the
purchase price from its own funds. Then, the bank sells the goods to the customer at an agreed
price comprising its purchase price and a profit margin and allows the customer to settle this
sale price on a deferred term of 30 days, 60 days or 90days. Lastly, on the due date the
customer pays the Bank the agreed sale price on maturity date of the financing. The sale of
goods by the bank on deferred payment term constitutes the creation of debt. This debt is
securitized in the form of a bill of exchange drawn by the bank on the customer for the full
amount of the banks selling price payable at the maturity. Islamic Accepted Bills are traded in
the secondary market based on bayal dayn concept. This makes them an attractive financing
instrument with low cost.

Islamic Accepted Bill Exports or Sales ( Bai Al-Dayn )

The bank finances exports and sales under the principle of Bai Al-Dayn. Under this bill, an
exporter who wishes to avail himself of this facility, prepares export documents as required
under the sale of contract or letter of credit. He represents these documents to the Bank to be
purchased. As the export documents have to be sent to the buyer overseas, the exporter is
requests by the bank to draw another Bill of Exchange drawn on the bank. This bill is known as
Islamic Accepted Bill-Exports (IAB-Exports). The IAB-Exports can be traded in secondary
market.

Determining the Price of Islamic Accepted Bill

The holder of the Islamic Accepted Bill may resell it to any other person. The price of anIAB
used for financing sales is determined using the following formula
:P = FV ( 1 rt / 36500 )

Where, P = Market Price or sale proceeds

FV = Face or maturity value
r = Annual rate of profit (in percentage)
t = Number of days remaining to maturity
The price of an IAB used for financing purchases is determined using the following formula:
P = IV ( 1 + rt / 36500 )
Where,P = Market Price or sale proceeds
IV = Invoice value
r = Annual rate of profit (in percentage)
t = Number of days remaining to maturity
A certain commission may be charged for services related to IAB acceptance. In case of IAB for
sales, the drawer of an IAB may pay to the bank the commission of acceptance service. On the
other hand, in case of IAB for purchases, the drawer may charge the acceptor a commission for
the drawing services. Where such a commission is payable, the rate of commission shall be
determined on the basis of the agreed proportion of the maturity face value of the IAB,
expressed in percentage per annum.

Features of the Islamic Accepted Bill

As mentioned earlier, Islamic Accepted Bills are similar to Bankers Acceptance and but were
introduced as an alternative for Islamic institutions that can get the same benefits of Bankers
Acceptance facility used by conventional banks. There are a number of features that make
Islamic Accepted Bill distinct from Bankers Acceptance. Some of these silent features of Islamic
Accepted Bill are as shown below:
1. There are two types of financing under Islamic Accepted Bill facility, namely: Import sand local
purchases; and Exports and local sales.
2. The financing would be done under Murabahah concept whereby a customer purchases the
required goods from the seller on behalf of the bank which pays for the goods and resells them
to the customer at a price inclusive profit margin and based on deferred payment. The
maximum time allowed for a deferred payment is up to 200 days.
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3. The deferred payment constitutes a creation of debt. This debt is securitized in the form of bill
of exchange drawn by the bank and accepted by the customer for the full amount of the banks
selling price including cost and profit margin payable on the day of maturity. Islamic Accepted
Bill can be sold in the secondary market at an agreed price using the concept of bay al-dayn.
Here, it is the bank that draws an Islamic Accepted Bill while the importer or purchaser becomes
the acceptor.
4. Similar to letter of credit arrangement, an exporter who wants to use Islamic Accepted Bill
prepares and sends export documents to the importers bank. The exporter draws on the
domestic bank a new bill of exchange and this becomes an Islamic Accepted Bill. The bank
purchases the Islamic Accepted Bill at a mutually agreed price using the concept of bay aldayn. The proceeds will be credited to the exporters account. In this case, it is the exporter who
draws the Islamic Accepted Bill and the bank is an accepting party.
5. Islamic Accepted Bills can be purchased and sold using forward purchase and forward sales
agreements. Forward Purchase is a separate agreement whereby the purchasing party agrees
to purchase Islamic Accepted Bills at an agreed price on a future specified date. On the other
hand, Forward Sale is an agreement to sell Islamic Accepted Bills at an agreed price on a future
specified date. There shall be two undertaking agreements in forward purchase and forward
sale transactions.

Guidelines and Regulations on Islamic Accepted Bills

After its introduction in 1991, Islamic Accepted Bill facility became very popular in the areas of
trade and finance. With such a significance development in that product, in 1992,the Bank
Negara saw a need to revise the Guidelines on bankers Acceptance and undertaken a full
review to revise the Islamic Accepted Bill guidelines issued first in1989. These guidelines are
briefly presented below:
1. An IAB can be drawn on and accepted by a bank or purchaser under the following
circumstances only :
a) The IAB is drawn to finance geniue in trade transactions
b) The drawer, in case of IAB sale, makes a declaration that he has not obtained or will not
obtain another source of financing.
c) The goods involved in the trade transaction are tangible and halal goods. Services will not be
eligible unless specifically provided for in Guidelines .
d) Adequate documentary evidence must be presented to the accepting or drawing bank.

2. An IAB may be drawn to finance a trade transaction between two related companies,
provided that:
a) The related companies are separate legal entities
b) The transaction was undertaken resulting in a genuine transfer of title to thegoods
concerned, evidenced by the proper and documents.
3. An IAB shall not be drawn to finance any trade transaction between two businessentities of
sole proprietorships where the proprietor is the same person or between two business entities of
partnerships where the majority of partners are the same persons.
4. An IAB shall not be drawn to finance a sales transaction on which the seller has provided a
leasing, hire purchase or factoring facility to the buyer for the settlement of that transaction.

Application of Islamic Accepted Bills

As we already mentioned earlier, there are two types of financing under Islamic Accepted Bill
(IAB) facility:
1. Imports and local purchases
2. Export and local sales

Imports and Local Purchases

The financing of this contract will be under al-Murabahah working capital mechanism. For this
concept, the bank appoints the customer as the purchasing agent for the bank. The customer
then purchases goods required from the seller on behalf of the bank, then the bank pays the
seller and resells the goods to the customer at a price inclusive of a profit margin. The customer
will be allowed for a deferred payment term up to two hundred days. After maturity of alMurabahah financing, the customer will pay the bank the cost, original plus the profit margin.

Al-Murabahah Working Capital Financing

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The bank finances exports and sales according to the concept of Bay al-Dayn. Bay al- Dayn or
debt financing is a short term financing facility. It is where the bank purchases the customers
right to the debt which is normally securitized as Islamic Accepted Bill. The customers account
will be credited with purchase price less banks charges. The price of al-dayn will be agreed
upon the customer and the bank. After this, al-dayn may be sold to a third party.
The sale of goods on a deferred payment term creates debt. This debt in the form of a bill of
exchange drawn by the bank on and accepted by customer for the full amount of the banks
selling price payable at maturity. The bank may sell the Islamic Accepted Bill to at hird party,
then the concept of Bay al-Dayn will be used whereby the bank will sell the Islamic Accepted
Bill at an agreed price.

The purchase of debt by the bank will at the current financing rate at the market. However, Bank
Negara Malaysia, in its effort to encourage exports from Malaysia, has introduced a scheme
known as the Export Credit Refinancing Scheme, using this scheme the bank may resell this
debt or al-dayn to Bank Negara Malaysia at a special price. Bank Negara Malaysia, however,
limits the availability of this financing scheme to certain goods only.
Shariah Point of View on Islamic Accepted Bills

We have seen in the above section that the application of Islamic Accepted Bill creates debt or
al-dayn and in this section of our assignment we will discuss Shariah point of view regarding
the sale of al-dayn.
The Nature of Bay` Al-Dayn
The issue of bay al-dayn arises when the IAB are traded in the secondary market. We may now
discuss Bay` al Dayn to show its nature according to Islamic point of view. According to alMajallah, dayn defines as the thing due i.e the amount of money owed by a certain debtor. So
also a sum of money not existing is considered a debt, as also a certain sum of money from
things which exist or are present, or from a heap of wheat which is present before it is separated
from the mass. Al-Dayn can be either monetary, or a commodity, like, food or metal. Based on
the aforementioned of al-Dayn, and the literal meaning of Bay al-Dayn we can define it as the
sale of payable right either to the debtor himself, or to any third party. This type of sale is usually
for immediate payment or for deferred payment (al Nasiah)
Sale of Al-Dayn to a Third Party
According to most of Hanafis, Hanbalis and Shafis jurists, it is not allowed to sell al Dayn to nondebtor or a third party at all. Such opinions are based on the forbidden sale of al Kali Bil al Kali,
sale of a Gharar , sale which the seller does not possess.
A prophetic tradition which clearly states: Do not sell what you do not possess

Selling al-Dayn to a third party is allowed with conditions

As an exception Malikis, Hanafis and some Shafis jurists allowed selling al-dayn to at hird party.
They said that there is no authentic source which prohibits such kind if selling. Therefore, it
should be allowed and permitted since the Dayn is Mustaqir (confirmed debt). Since the creditor
has the right to sell it to the debtor, as well as he has the right to sell it to a third party provided
the following rules must be observed:
a) The Dayn must be Mustaqir (confirmed debt) and the contract must be performed on the
spot, not deferred in order to avoid any relationship with the sale of a debt for a debt which is
prohibited by Islamic law.

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b) The debtor must be a financially capable, must accept and recognize the sale, in order that
he will not deny the sale. This condition aims to avoid any dispute between the parties, and the
debtor must be easily accessible so that the creditor knows whether he has the capacity to pay
his debt or not.
c) The sale should not be based on selling gold with silver or opposite, because, any exchanges
between these items necessitates the immediate possession, and if the debt is money, its price
in another debt should be equal in terms of amount of quantity.
Furthermore, the selling of al-dayn must avoid the occurrence of Riba between the two debts,
and must also avoid any kinds of Gharar which may be raised at the level of inability of the
buyer from possessing what he bought, as it is not permitted that the buyer sells before actual
receipt of the purchased item. It is important to note that Muslim scholars have unanimously
prohibited the trading of debt (bay` al-dayn) at anything other than face value. Where the price
paid for a debt is not the same as the face value of that debt, the transaction would be
tantamount to riba al-Nasiah and is therefore prohibited. Any profit created from the sale and
purchase of adebt is riba.

"And whatever riba you give so that it may increase in the wealth of the people, it doesnot
increase with Allah." [Ar-Rum 30:39]
Prophet Muhammad (S.A.W) said: That every loan entailing benefit is usury

The IAB would have been acceptable from an Islamic point of view if the application of the mode
of financing would be based on the legal maxim of al-Ghunmu bil ghurmi meaning that no
person is allowed to invest in a way that generates profit without exposing himself to the risk of
loss. It would expose both parties to the outcome of their deal, be it a profit or a loss, and thus
avoid of usury as matter of Islamic principle.

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Conclusion
Islamic Accepted Bills is indeed a low cost financing for businesses in purchases and sales of
inventories, raw materials and finished goods. The low cost is due to the exchange of Islamic
Accepted Bills in the secondary market. After its introduction in1991, Islamic Accepted Bill
facility in Malaysia became very popular in the areas of trade and finance. A set of guidelines
were issued by the Bank Negara of Malaysia in regulating the transactions involving Islamic
Accepted Bills. Islamic Accepted Bills are based on Murabahah and Bay al Dayn concepts.
Consequently, the Shariah ruling for Islamic Accepted Bills is similar to the one applied to Bay
al Inah which involves Bay al dayn. That is, majority of ulama in the Middle East do not agree
with such transactions, while some of the ulama, have accepted them based on the valid
external evidence of sale.

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EXPORT CREDIT REFINANCING - i

The meaning of export credit refinancing
The scheme is funded by EXIM Bank and is available to direct and indirect
exporters. The ECR-i is formulated based the Shariah contract of Murabahah and
Bai Dayn.
Islamic export credit means that a credit opened by an importer with a bank in an
exporter's country to finance an export operation followed based on shariah
compliant.

Function of Islamic Credit Refinancing

Export Credit Refinancing-i (ECR-i) provides an alternative short term pre-and postshipment financing to direct/indirect exporters to promote export of manufactured
products, agriculture products and primary commodities that are Halal, via the
provision of Shariah compliant financing facilities. It is available to a manufacturer
or trading company with ECR-i credit line duly established with any participating
commercial bank. The pre-shipment ECR-i facility facilitates the production of
eligible goods for export prior to shipment and to encourage the backward linkages
between the exporters and local suppliers in industrial development. The postshipment ECR-i facility bridges the funding requirement of exporter from shipment
to receipt of payment of the export bill.

Objectives
To promote the export of manufactured products, agricultural products and selected
primary commodities by providing financing at very competitive rate of this product.
It must be HALAL and permissible according to Syariah principles via the provision
of credit facilities as a supplement source of fund, prior to or upon shipment of the
products.

Two Types of Facilities under the Scheme

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 Pre-Shipment Islamic Export Credit Refinancing (ECR-i Pre)

Post Shipment Islamic Export Credit Refinancing (ECR-i Post)

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Modus operandi Islamic Export Credit Refinancing

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IECR pre-shipment
Similar conditions as per conventional ECR shall apply as follows:

Lodgment similar condition that of conventional ECR

Draw down (Booking)
Draw down (Creation)

The screen should show as follows:

Financing amount
Financing rate
Tenor
Selling Price

IECR post-shipment
The same conditions as per the conventional ECR shall apply, as follows:

Registration
Booking
Refinancing
Early discharge
Redemption
Retirement

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Bank using Islamic export credit refinancing

Bank Islam offer product Islamic export credit by using Mudharabah contract and
Bai al Dayn contract.. This is describing these products shall be towards practical
aspects, including highlighting some of the constraints in implementing the
products and also some legal issues relating to it (Malaysian legal aspects).
Most of the Islamic banking products are well documented but sometimes, the
products can be rendered as non-shariah compliant (whether the users are aware of
it, is a challenge), when it comes to implementation. Examples (to highlight a few)
on how the products can be rendered as non-Shariah compliant are as follows:
a) Using conventional accounting entries instead of Islamic accounting entries;
b) Signing of sale agreement first instead of purchase agreement when signing legal
documents of debt (trade) related products;
c) Using wrong terminology in legal documents etc.
Of course, these products are not spared shall highlight some of the differences in
term of opinion (basically, not to confuse the reader but to analyses what are the
differences and what consensus can be reached for better understanding and
offering of the products).
To ensure, Islamic banking income are not tainted due to wrong processes (basically
due to lack of experience and sometime due to staff working attitude etc), those
responsible (in Malaysia now, it's the responsibility of Shariah audit and Shariah
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review staff in the Islamic banks) must be able to trace these discrepancies so that
tainted income will not be mixed with "halal income" where unknowingly we
are depriving income from Islamic banks of Allah's blessing according to
surah Al-Baqarah (276) that reads as follows:

"Allah does not bless usury, and He causes charitable deeds to prosper,
and Allah does not love any ungrateful sinner" ( , Al-Baqarah).

Implementation from Bank Islam

Export Credit Refinancing-i (ECR-i)
ECR-i (Pre-shipment)
Pre-Shipment ECR-i is a financing facility based on Murabahah contract, granted to
exporters to prepare goods prior to shipment. It is an effort to encourage the
exports of Malaysian agriculture products and manufactured goods.

ECR-i (Post-shipment)
Post-shipment ECR-i is a financing facility based on Bai Dayn contract, available to
direct exporter who exports eligible products on sight or usance terms. For sight
term, the financing period shall not exceed 60 days.

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Journal about export credit financing

Feb 4 Credit guarantees are gaining traction in Islamic finance, helping a wider
range of firms to tap the market for sharia-compliant debt, which remains
stubbornly reliant on sovereign and quasi-sovereign issuers.
A growing number of guarantors are developing expertise in this area, aiming to
facilitate Islamic transactions both large and small.
Among them is Britain's export credit agency, UK Export Finance, which plans this
year to guarantee an Islamic bond (sukuk) issue for the first time under a capital
market guarantee product that it launched in 2010, a UKEF spokesperson said. This
would facilitate a deal for a Gulf-based customer of Airbus, whose identity has not
been disclosed.

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Demand is also growing for guarantees in markets where credit and political risks
pose a greater challenge.
In December, Export Development Canada helped secure $78 million for a deal
involving the lease of four Bombardier planes to Ethiopian Airlines, the first shariacompliant transaction in Africa's aviation sector.
Last

month,

GuarantCo,

specialised

guarantor

indirectly

owned

by

the

development agencies of Britain, Switzerland, Sweden and the Netherlands,

provided a partial credit guarantee for sukuk from Pakistan Mobile Communications.
"There is significant potential to combine the use of guarantees with Islamic
finance," said Chris Vermont, head of GuarantCo, which is managed on a
commercial basis by London-based Frontier Markets Fund Managers.
"It is certainly our wish that our guarantees widen the universe of issuers who can
tap Islamic sources."
GuarantCo is currently in discussions on potential transactions in the power sectors
in Nigeria and Pakistan.
Such efforts could help to break the global sukuk market's longstanding dependence
on sovereign and quasi-sovereign issuers, which last year provided a combined 82
percent of total issuance, according to Zawya, a Thomson Reuters company.
Last year, sukuk issuance reached a total $115.6 billion through 806 deals globally,
up from $110.4 billion through 839 deals a year earlier. The vast majority of
corporate sukuk came in the Malaysian market

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Conclusion
The ECR-i facility is funded by the Export Import Bank of Malaysia
Berhad (EXIM Bank) at a special rate. The financing only covers Shariah
compliant products and those not listed in the EXIM Banks Negative
List Guideline. The financing rate is determined by EXIM Bank from
time to time. The Bank can add on amaximum margin of 1% to the
ECR-i financing rate for financing you as our customer.

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References
http://www.islamicbankingway.com/2011_10_01_archive.html
https://news.google.com/newspapers?
id=gks1AAAAIBAJ&sjid=h3gFAAAAIBAJ&pg=1434%2C4093471
http://www.maybank2u.com.my/Islamic/en/business/trade/export-credit-refinancing-i.page

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