- Published on
Islamic Contract – Chronological Flow of Letter of Credit (LC) and Bill of Lading (B/L)
Example Scenario
A Malaysian customer wants to import:
RM200,000
The customer asks:
STEP 1 — Customer Requests Financing
The customer approaches the Islamic bank and says:
“I want to import a car from Japan but I need financing.”
The Islamic bank agrees to finance the transaction.
STEP 2 — Islamic Bank Issues Letter of Credit (LC)
The Islamic bank sends:
a Letter of Credit (LC)
to the Japanese exporter.
What Is the LC?
The LC is:
the bank’s promise to pay the exporter
provided:
Important LC Instruction
The LC states:
the Bill of Lading (B/L) must be issued:
Why Does the Bank Want This?
Because:
STEP 3 — Exporter Ships the Car
The Japanese exporter:
STEP 4 — Shipping Company Issues Bill of Lading (B/L)
After receiving the car,
the shipping company prepares:
the Bill of Lading.
What Is the Bill of Lading?
The B/L is:
IMPORTANT PART
The B/L says:
Consignee
➡ Islamic bank
or
➡ “to the order of Islamic bank.”
Meaning:
the shipping company will only release the car to whoever lawfully holds the endorsed original B/L.
Why Does the B/L Give Control Over Goods?
Because:
whoever controls the original B/L effectively controls access to the goods.
STEP 5 — Exporter Receives Original B/L
The shipping company physically gives:
Important Clarification
Although:
to submit documents to the bank and obtain payment.
STEP 6 — Exporter Submits Documents to Bank
The exporter sends:
This happens:
STEP 7 — Bank Checks Documents
The Islamic bank examines whether:
✅ bank pays exporter.
STEP 8 — Bank Now Controls the Goods
Now the bank possesses:
✅ the bank controls release of the car.
Why?
Because:
STEP 9 — Ship Arrives in Malaysia
The ship reaches:
❌ customer still cannot collect the car yet.
Why?
Because customer still does not possess:
STEP 10 — Bank Releases/Endorses B/L to Customer
After:
the bank transfers the right to claim the goods.
STEP 11 — Customer Presents B/L at Port
The customer now presents:
STEP 12 — Shipping Company Releases the Car
Once verification completed:
✅ shipping company releases the car to customer.
Now:
✅ customer obtains possession of the car.
Overall Timeline Summary
Step 1
Customer requests financing.
⬇
Step 2
Islamic bank issues LC.
⬇
Step 3
Exporter ships car.
⬇
Step 4
Shipping company issues B/L naming bank.
⬇
Step 5
Exporter receives B/L physically.
⬇
Step 6
Exporter submits B/L to bank.
⬇
Step 7
Bank checks documents and pays exporter.
⬇
Step 8
Bank now controls goods through B/L.
⬇
Step 9
Ship arrives Malaysia.
⬇
Step 10
Bank endorses/releases B/L to customer.
⬇
Step 11
Customer presents B/L at port.
⬇
Step 12
Shipping company releases car.
Islamic Finance Perspective
This structure is important because:
constructive possession (qabd hukmī)
which supports:
Important Principle
The:
original endorsed Bill of Lading represents legal control and right to claim the goods.
Therefore:
Example Scenario
A Malaysian customer wants to import:
- a Toyota car from Japan.
RM200,000
The customer asks:
- an Islamic bank to finance the import transaction.
- a Letter of Credit (LC).
STEP 1 — Customer Requests Financing
The customer approaches the Islamic bank and says:
“I want to import a car from Japan but I need financing.”
The Islamic bank agrees to finance the transaction.
STEP 2 — Islamic Bank Issues Letter of Credit (LC)
The Islamic bank sends:
a Letter of Credit (LC)
to the Japanese exporter.
What Is the LC?
The LC is:
the bank’s promise to pay the exporter
provided:
- exporter ships the goods properly;
- exporter submits required shipping documents.
Important LC Instruction
The LC states:
the Bill of Lading (B/L) must be issued:
- “to the order of the Islamic bank”
or - naming the bank as consignee.
Why Does the Bank Want This?
Because:
- the bank is paying first;
- the bank wants control over the goods;
- the bank must establish ownership/control for Sharī‘ah compliance.
STEP 3 — Exporter Ships the Car
The Japanese exporter:
- loads the car onto the ship.
- the shipping company receives the car for transportation.
STEP 4 — Shipping Company Issues Bill of Lading (B/L)
After receiving the car,
the shipping company prepares:
the Bill of Lading.
What Is the Bill of Lading?
The B/L is:
- receipt of goods;
- shipping contract;
- document of title/control over goods.
IMPORTANT PART
The B/L says:
Consignee
➡ Islamic bank
or
➡ “to the order of Islamic bank.”
Meaning:
the shipping company will only release the car to whoever lawfully holds the endorsed original B/L.
Why Does the B/L Give Control Over Goods?
Because:
- the port/shipping company refuses to release goods without the original B/L.
whoever controls the original B/L effectively controls access to the goods.
STEP 5 — Exporter Receives Original B/L
The shipping company physically gives:
- the original B/L documents
to the exporter.
Important Clarification
Although:
- exporter physically receives the B/L first,
- the Islamic bank as consignee/controller.
- exporter cannot simply release goods himself.
to submit documents to the bank and obtain payment.
STEP 6 — Exporter Submits Documents to Bank
The exporter sends:
- original B/L;
- commercial invoice;
- insurance documents;
- packing list
This happens:
- while the ship is still travelling.
STEP 7 — Bank Checks Documents
The Islamic bank examines whether:
- shipment complied with LC terms;
- documents are correct.
✅ bank pays exporter.
STEP 8 — Bank Now Controls the Goods
Now the bank possesses:
- the original B/L.
✅ the bank controls release of the car.
Why?
Because:
- the shipping company only releases goods to:
- lawful holder of original endorsed B/L.
STEP 9 — Ship Arrives in Malaysia
The ship reaches:
- Port Klang.
❌ customer still cannot collect the car yet.
Why?
Because customer still does not possess:
- endorsed original B/L.
STEP 10 — Bank Releases/Endorses B/L to Customer
After:
- financing documents signed;
- murābahah completed;
- customer obligations fulfilled,
- endorses/releases the B/L to customer.
the bank transfers the right to claim the goods.
STEP 11 — Customer Presents B/L at Port
The customer now presents:
- original endorsed B/L
to shipping company/port authority.
- authenticity;
- endorsement chain.
STEP 12 — Shipping Company Releases the Car
Once verification completed:
✅ shipping company releases the car to customer.
Now:
✅ customer obtains possession of the car.
Overall Timeline Summary
Step 1
Customer requests financing.
⬇
Step 2
Islamic bank issues LC.
⬇
Step 3
Exporter ships car.
⬇
Step 4
Shipping company issues B/L naming bank.
⬇
Step 5
Exporter receives B/L physically.
⬇
Step 6
Exporter submits B/L to bank.
⬇
Step 7
Bank checks documents and pays exporter.
⬇
Step 8
Bank now controls goods through B/L.
⬇
Step 9
Ship arrives Malaysia.
⬇
Step 10
Bank endorses/releases B/L to customer.
⬇
Step 11
Customer presents B/L at port.
⬇
Step 12
Shipping company releases car.
Islamic Finance Perspective
This structure is important because:
- Islamic bank must genuinely:
- own/control goods;
- bear ownership risk.
constructive possession (qabd hukmī)
which supports:
- murābahah financing;
- istijrār financing;
- Sharī‘ah-compliant trade finance.
- the arrangement may resemble:
❌ conventional interest-based lending.
Important Principle
The:
original endorsed Bill of Lading represents legal control and right to claim the goods.
Therefore:
- whoever lawfully possesses the endorsed B/L generally controls:
- release;
- access;
- practical possession of the shipment.
0 Comments