Islamic Contract – Chronological Flow of Letter of Credit (LC) and Bill of Lading (B/L)

​Islamic  Contract – Chronological Flow of Letter of Credit (LC) and Bill of Lading (B/L)
Example Scenario
A Malaysian customer wants to import:

• a Toyota car from Japan.

Car Price
RM200,000
The customer asks:

• an Islamic bank to finance the import transaction.

The Islamic bank uses:

• 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.

Now:

• 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:

1. receipt of goods;
2. shipping contract;
3. 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.

Thus:
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 B/L legally names:

• the Islamic bank as consignee/controller.

Thus:

• exporter cannot simply release goods himself.

The exporter’s purpose now is:
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

to the Islamic bank.
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.

If everything complies:
✅ bank pays exporter.


STEP 8 — Bank Now Controls the Goods
Now the bank possesses:

• the original B/L.

Thus:
✅ 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.

BUT:
❌ 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,

the bank:

• endorses/releases the B/L to customer.

This endorsement means:
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.

The port verifies:

• 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.

The B/L helps establish:
constructive possession (qabd hukmī)
which supports:

• murābahah financing;
• istijrār financing;
• Sharī‘ah-compliant trade finance.

Without such ownership/control:

• 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.