Islamic Trade Financing

Assessing the Appeal of Islamic Trade Finance

Across Malaysia’s Corporate Sector

Keynote Presentation for The Malaysia Trade & Export Finance Conference

Daud Vicary Abdullah

President & CEO,
INCEIF
27 October 2015
Mandarin Oriental, Kuala Lumpur
CONTENT 1. WHAT IS TRADE FINANCE :
Conventional vs. Islamic Trade
Finance (ITF)

2. THE CURRENT STATE OF ISLAMIC

TRADE FINANCE

3. SHARI’AH ISSUES IN ISLAMIC

TRADE FINANCE

4. THE RISK SHARING MODEL IN

ISLAMIC TRADE FINANCE

5. NEXT STEPS – THE FRAMEWORK

1. What is Trade Finance?

3
What is Trade Finance? 1
Conventional Trade Finance vs. Islamic Trade Finance

Conventional Islamic
Trade transactions are financed exclusively through
credit, even it is tied or untied to the commercial Interest (riba) is prohibited, the trade operation must be financed
transaction.  through shari’ah compliance instruments

Payment

Marked-up
Partnership
or cost-plus
(Musyaraka
h) (Murabahah)
Risk The Four
Mitigation Pillars of Financing
Trade Finance

Agency-based
(Wakalah)
Information

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INCEIF 2012.
2014.
International Centre for Education in Islamic Finance (INCEIF) (Company No.718736‐K) 4
 2. The Current State of Islamic Trade Finance

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2014. 5
The Current State of Islamic Trade Finance 2

Total OIC Exports and Imports (US$ bln) Foreign Trade of the OIC Member States between 2005-2014
(US$ bln)
3000
4500 25%

4000
2500
20%
3500

2000
3000

USD bln

% of Intra OIC Trade
15%
2500
USDbln

1500

2000
10%

1000 1500

1000
5%
500
500

0 0%
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
2006 2007 2008 2009 2010 2011 2012 2013 2014
Total World Trade Total Intra OIC Trade Intra OIC Trade Share (RHS)
TOTAL OIC EXPORT TOTAL OIC IMPORT
Sources: WTO, ITFC Annual Report 2014, ICDT 2014

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© © INCEIF
INCEIF 2012.
2014.
International Centre for Education in Islamic Finance (INCEIF) (Company No.718736‐K) 6
 The Current State of Islamic Trade Finance 2

Total Trade Approvals by ITFC (US$ mln)

6000
5048 5204

Based on the ITFC annual report, the Asia/CIS region held the 5000 4466

largest share (47.3%) of the total approvals in 2014, followed by the 4000

MENA region (44.0%) and Sub-Saharan Africa (8.6%).

USD mln
3000 2554
2167
2000

1000

ITFC Total Trade Approvals by Region (US$ mln) 0

2009 2010 2011 2012 2013

2013 2464 2291 449

2012 3405 1409 234

2011 3086 1171 209

2010 1544 849 161

2009 1477 530 160

0 1000 2000 3000 4000 5000 6000

USDmln

Asia/CIS MENA Sub-Saharan Africa

Sources: WTO, ITFC Annual Report 2014, ICDT 2014

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© © INCEIF
INCEIF 2012.
2014.
International Centre for Education in Islamic Finance (INCEIF) (Company No.718736‐K)
 3. Shari’ah Issue in Islamic Trade Finance

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2014. 8
Shari’ah Issues in Islamic Trade Finance
3

Islamic Trust Receipt

• Interest Payment
(ITR)

Islamic Shipping • Ujarah

Guarantee (SG) • Kafalah

• Interest Payment
Islamic Accepted Bills
(IAB) • Sale of Debt
(Bay’ al-Dayn)

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International Centre for Education in Islamic Finance (INCEIF) (Company No.718736‐K)
 4. The Risk Sharing Model

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2014. 10
The Risk Sharing Model 4

Why is it Important and Less Risky

Banks would accept deposits for  An investment component would 
safekeeping without accruing any  function as a financial 
The Islamic Financial System return, and must maintain 100%   intermediary, channeling savings 
reserves.  into investment projects. 

Sources: Askari, Hossein. Islamic Finance, Risk‐Sharing, and International Financial Stability.Yale Journal of International Affairs, March 2012, pp. 1 ‐ 8. 

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© © INCEIF
INCEIF 2012.
2014.
International Centre for Education in Islamic Finance (INCEIF) (Company No.718736‐K)
 5. Next Steps : The Framework

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2014. 12
Next steps 5

The framework

• Shariah / Legal governance

S framework

• Tax environment
T
• Accounting standards
A
• Regulatory environment
R
• Standards, eg. human capital
S development and education

© INCEIF 2015
© © INCEIF
INCEIF 2012.
2014.
International Centre for Education in Islamic Finance (INCEIF) (Company No.718736‐K) 13
 Thank You

Daud Vicary Abdullah

President & Chief Executive Officer

INCEIF, The Global University of Islamic

Finance
Lorong Universiti A , 59100 Kuala
Lumpur,
Malaysia
Tel: +603 7651 4141
Email: dvicary@inceif.org
Website: www.inceif.org
INCEIF 2015