Towards restructuring the legal framework for payment system in international Islamic trade finance

Purpose – The purpose of this paper is to examine the current legal framework for payment system in international Islamic trade finance vis‐à‐vis the new regime introduced by the Uniform Customs and Practice for Documentary Credits (UCP) 600 as well as the Sharī'ah Standard on Documentary Credits issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Sharī'ah Resolutions of selected Sharī'ah Boards of Islamic financial institutions. Design/methodology/approach – A partial comparison of both the UCP 600 and the Sharī'ah framework for documentary credit is given through the content analysis of relevant sources. Findings – The AAOIFI Sharī'ah Standard on Documentary Credits, as well as other applicable Sharī'ah resolutions of Islamic financial institutions, does provide a good framework for a Sharī'ah‐compliant documentary credit system, which is unique to trade in Islamic finance products, but there is scope for further improvement, taking into consideration the two possibilities proposed in the available literature on the subject – harmonization or bifurcation of rules. The UCP 600 also allows for the exclusion or modification of the rules to suit the specific needs of the Islamic finance industry. Research limitations/implications – This study focuses only on UCP 600 and the Sharī'ah framework on Documentary Credits, though bearing mind that there are other frameworks for documentary credit systems such as the International Standby Practices (ISP98) and letters of credit issued under Article 5 of the New York Uniform Commercial Code. Practical implications – Islamic financial institutions should implement the provisions of the AAOIFI Sharī'ah standard on documentary credits but may require a different framework for international trade financing involving both Islamic banks and conventional banks. Originality/value – Though few studies have been conducted on Sharī'ah issues regarding the application of the documentary credits, this seems to be the first time where a more proactive step is taken to propose two different frameworks for transactions involving Sharī'ah compliant financing.