The Concept of Letter of Credit in Islamic Banking
S J Tubrazy
It is a facility extended by the banks to the traders and the businessmen. The purpose of opening letters of credit is to facilitate quick and easy payment and the transfer of money from one place to another. This facility, being a lawful service, has to be properly compensated in terms of Shariah. If the payment of compensation or remuneration is linked with the volume of service, the Shariah has no objection. In this case it will be a kind of service charge which has’ been already considered and approved by almost all the contemporary scholars and learned bodies. In this case it will be necessary that the rate of service charge is determined keeping in view the magnitude of the service, quickness of the payment and the level of credibility and performance of the bank concerned. Since it is related with the time or duration of payment and is collected in terms of percentage of the amount paid, it becomes Riba. There is no objection if the banks require collateral or hypothication of certain assets or securities to ensure timely repayment. provided the guarantor does not charge any interest and the mortgage is controlled by the law of Riba. The payment made by the bank 2o an importer or a purchaser under a letter of credit is again in the nature of Qard because it does not fall in any other legitimate category of transaction As such it is to be regulated under the law of Riba. It seems worthwhile if the State Bank of Pakistan determines certain fixed rates of service charge to he paid by the importer/purchaser to the bank as a compensation to the service rendered by the Bank. There ma) he different rates for different kinds of transactions provided these rates do not change with any delay in the payment and are not calculated on the basis of the amount of money involved. There may be flat rates for various kinds of transactions whenever letters of credit are needed to be opened.