ISLAMIC LETTERS OF CREDIT IN MALAYSIA: MAPPING LC-I STRUCTURES AND SHARĪʿAH CONTRACT APPLICATIONS

Abstract

Letters of Credit (LCs) serve as an important mechanism for mitigating risk in international trade. As a leading hub for Islamic finance, Malaysia has developed sophisticated Islamic LCs (LC-i) structures that achieve functional equivalence with conventional instruments while strictly complying with Shariah principles. This article analyses the operational structures and Shariah contracts employed in LC-i by three prominent Malaysian financial institutions: EXIM Bank, Maybank Islamic, and Affin Islamic. Adopting a qualitative approach based on the analysis of product disclosure sheets and institutional data, the study found that Malaysian IFIs demonstrate high level of maturity in structuring LC-i to accommodate diverse needs of customers. This has been achieved by adopting suitable Shariah contracts according to commercial functions of the corresponding LC-i. In standards LC-i, dual-contract has been used, where Wakalah (Agency) is employed for cash-backed 'at sight' settlements and Murabahah (Cost-Plus) is employed for 'usance' transactions requiring financing. Furthermore, Wakalah bil Ujrah is predominantly used for advance LC-i services such as advising, transfer, confirmation, while Kafalah (Guarantee) is used for Islamic Standby Letters of Credit (SBLC-i). Further, the study also uncovers institutional innovations, such as the "Express LC-i," which expedites issuance without prior credit facilities. These insights confirm the maturity of the Malaysian ecosystem and offer a practical takeaway for policymakers and practitioners in other jurisdictions seeking to develop robust Islamic trade finance instruments.