Special Trade Finance. By Dr.Ahmet Suayb Gundogdu

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1 Special Trade Finance By Dr.Ahmet Suayb Gundogdu Istanbul Sabahattin Zaim University Summer School 2014, June 2014

2 Content 1- Theory 2- Islamic Trade Finance Products (New Frontiers) 2.a Asset Based 2.b Asset Backed 3- Future Direction 3.a Financing Trade in Services 3.b 2-Step Murabaha for Liquidity Management 3.c 2-Step Murabaha STF Lines 2

3 1- Theory International Trade Theories Mercantilism (pre-16th century) Free Trade theories Absolute Advantage (Adam Smith, 1776) Comparative Advantage (David Ricardo, 1817) Infant-Industry (Alexander Hamilton, 1790) Free Trade refined Factor-proportions (Heckscher-Ohlin, 1919) International product life cycle (Ray Vernon, 1966) Gravity Model (Tinbergen (1962) and Poyhonen (1963)) Intra-Industry Trade Trade Facilitation 3

4 1- Theory 4

5 1- Theory Prophet Noah (PBUH) s Arc: 24,000 TDW 5

6 1- Theory 6

7 1- Theory Side Effects of Free Trade: Distribution Islamic Solution: Second Best Policy; barriers to Trade or Zakah 7

8 1- Theory 8

9 1- Theory Singapore Issues, 1996: Transparency in government procurement, Trade and investment, and Trade and competition Trade facilitation 9

10 1- Theory Singapore Issues, 1996: Transparency in government procurement, Trade and investment, and Trade and competition Trade facilitation 10

11 1- Theory Trade Facilitation: Port Efficiency Single Window Mutual Recognition Agreements Etc. 11

12 1- Theory Those who gorge themselves on usury behave but as he might behave whom Satan has confounded with his touch; for they say, "Buying and selling is but a kind of usury" - the while God has made buying and selling lawful and usury unlawful. Hence, whoever becomes aware of his Sustainer's admonition, and thereupon desists [from usury], may keep his past gains, and it will be for God to judge him; but as for those who return to it -they are destined for the fire, therein to abide! (2:275) 12

13 2- Islamic Trade Finance Products Controversies Bai Al-Inah Islamic Discounting (Factoring) Commodity Murabahah based on Organized Tawarruq Mudaraba Direct Murabaha 2-Step Murabahah 13

Differed by 12 months Resource Mobilizing $100 million Immediate

14 2- Islamic Trade Finance Products Commodity Murabaha based on Organized Tawarruq Liquidity Managing Sale for $102 million Repayment Differed by 12 months Resource Mobilizing $100 million Immediate Payment Sale $100 million Cost $102 million Commodity Trader-1 Commodity Trader-2 14

15 2- Islamic Trade Finance Products Asset Based v.s. Asset Backed 15

16 2.a Islamic Trade Finance Products (Asset Based) Direct Murabaha Importer (3-a) Repayment of Sale Price (1-a) Shipment (1-b) Request (1-b) Notificatio n Exporter (2-b) Payment of Purchase Pric (2) Payment of Purchase Price (3-b) RMB (2-a) (3) Repayment of Sale Price Bank-A Source: ITFC Mudaraba Agreement 16

17 2.a Islamic Trade Finance Products (Asset Based) 2-Step Murabaha to Reach SMEs (4) Payment of Purchase Price Supplier (3-b) Advise (3-b) Notification LMB (6) Repayment of 2 nd Sale Price RMB (5) Repayment of 1 st Sale Price (3-b) Request (2) Shipment SME (1-a) 1 st Murabaha Agreement (1-b) 2 nd Murabaha Agreement Source: ITFC 17

18 2.a Islamic Trade Finance Products (Asset Based) Disbursement Mechanism (L/C) 2B. L/C Copy LMB Local Bank 3.B ICR Copy 2A. L/C advised 3.C ICR Copy 3.A ICR Bank-B s LMB s Paying Correspondent Agent Bank/Paying Agent 7. Lodges claim with documents complied Advising/Negotiating Bank 8.A Reimbursement 1. L/C Opening Importer 5. Goods 4. L/C advised Exporter 6. Document s 8.B Payment Source: ITFC 18

A ICR Bank-B s LMB s Paying Correspondent Agent Bank/Paying Agent 7.

19 2.a Islamic Trade Finance Products (Asset Based) Disbursement Mechanism (Documentary Collection) 2B. L/C Copy LMB Local Bank 3.B ICR Copy 2A. L/C advised 3.C ICR Copy 3.A ICR Bank-B s LMB s Paying Correspondent Agent Bank/Paying Agent 7. Lodges claim with documents complied Advising/Negotiating Bank 8.A Reimbursement 1. L/C Opening Importer 5. Goods 4. L/C advised Exporter 6. Document s 8.B Payment Source: ITFC 19

20 2.a Islamic Trade Finance Products (Asset Based) Letter of Credit (L/C) Source: ITFC 20

21 2.a Islamic Trade Finance Products (Asset Based) Irrevocable Commitment to Reimburse (ICR) Source: ITFC 21

22 2.a Islamic Trade Finance Products (Asset Based) 2-Step Export Financing Source: ITFC 22

23 2.a Islamic Trade Finance Products (Asset Based) Export Financing Source: ITFC 23

24 2- Islamic Trade Finance Products (Asset Based) Risk in Asset Based Murabaha 24

2.b Islamic Trade Finance Products (Asset Backed) Asset

Warehouse Sugar Refinery 2 1 5 3 100% Payment LMB Documents

Raw ITFC Client Sugar sends pays takesthe DEPOSIT is for

(15% and for the of Warehouse, portion the docs.

25 2.b Islamic Trade Finance Products (Asset Backed) Asset Backed Import Financing 4 Collateral Manager Client 6 7 Warehouse Sugar Refinery % Payment LMB Documents presented Suppliers Collection Account Raw ITFC Client Sugar sends pays takesthe DEPOSIT is for delivered release delivery shipped supplier instruction of to (15% and for the of Warehouse, portion the docs. Raw mini Raw tosugar up of CMSugar the presented 35%) shipment issues WR to ITFC Source: ITFC 25

26 2.b Islamic Trade Finance Products (Asset Backed) Managing Price Fluctuation 26

27 2.b Islamic Trade Finance Products (Asset Backed) Managing Price Fluctuation 3 Months Tenor 6 Months Tenor 9Months Tenor Mean Mean Mean Standard Error Standard Error Standard Error Standard Deviation Standard Deviation Standard Deviation Sample Variance Sample Variance Sample Variance Kurtosis Kurtosis Kurtosis Range Range Range Minimum Minimum Minimum Maximum Maximum Maximum Sum Sum Sum Count 357 Count 354 Count 351 Security Coverage Security Coverage Security Coverage needed 16.12% needed 21.81% needed 25.70% Cash Deposit needed 13.88% Cash Deposit needed 17.91% Cash Deposit needed 20.45% 27

28 2.b Islamic Trade Finance Products (Asset Backed) Margin Call for 6 month financing Month Price, US cents per Pound Change in 1 month Change in 2 month Change in 3 month Change in 4 month Change in 5 month Change in 6 month Jan % -2.04% -8.67% -9.83% % % Feb % 0.00% -4.49% % % % Mar % -0.96% 1.58% -2.98% -9.54% % Apr % -4.01% -6.41% -4.01% -8.32% % May % % % % % % Jun % % % % % % Jul % 12.28% 1.25% -4.33% -2.82% -5.25% 28

Suppliers/Cooperatives ITFC Export Release

Instructions Exported WR (principle assigned

29 2.b Islamic Trade Finance Products (Asset Backed) Asset Backed Export Financing Warehouse Exporter 1. LMB Offtakers 7.Offtakers The 1.Suppliers/Cooperatives ITFC Export Release Coffee CM Pay pays issues contracts ITFC Instructions Exported WR (principle assigned to + ITFC sent Shipping + / mark-up) delivers Farmers to CM ITFC. Docs + the remaining Coffee sent Beans amount into the warehouse. Exporter Source: ITFC 29

30 2.b Islamic Trade Finance Products (Asset Backed) We hereby inform you that in the context of financing agreement No:XX dated XX/XX/XXX, concluded with the financier, the contract proceeds was assigned to the financier. Therefore, you are kindly requested to irrevocably commit to pay any amount pertaining to the contract to in the following account of the financier: Account Name: A/C No: Bank Name: SWIFT Code: The Contract No: XXXX Please sign and stamp below for your confirmation end send it to the financier. We hereby acknowledge and confirm to pay the proceeds of the above mentioned contract into the financier account. Name: Signature: Stamp: 30

31 2.b Islamic Trade Finance Products (Asset Backed) 31

32 2.b Islamic Trade Finance Products (Asset Backed) Risk in Asset Backed Murabaha 32

33 3- Future Direction a) Financing Trade in Services b) 2-Step Murabaha in Stock Exchange as Alternative to Commodity Murabaha in Liquidity Management c) 2-Step Murabaha STF Lines 33

34 3.a Future Direction (Financing Trade in Services) Trade in Services scope extends, as classified in GATS, to wider: (a) from the territory of one Member into the territory of any other Member; (b) in the territory of one Member to the service consumer of any other Member; (c) by a service supplier of one Member, through commercial presence in the territory of any other Member; (d) by a service supplier of one Member, through presence of natural persons of a Member in the territory of any other Member. 34

35 3.b Future Direction (2-Step Murabaha for Liquidity Management) 35

3.a- Future Direction (2-Step STF Lines) 5a) Goods Delivery 9b) Goods Release

Order Local Traders International Bank 2b) Security 7a) Sales 2a) Security

Payment 3b) 1b) Security Shipment Margin 3a) Security 1a) Shipment Bank Margin

36 3.a- Future Direction (2-Step STF Lines) 5a) Goods Delivery 9b) Goods Release Suppliers Bonded Warehouse 4a) Shipping Docs 4b) Payment 5b) WR 9a) Release Order Local Traders International Bank 2b) Security 7a) Sales 2a) Security Invoice 7b) Sales Invoice Margin Invoice Local Margin Invoice 8b) Payment 8a) Payment 3b) 1b) Security Shipment Margin 3a) Security 1a) Shipment Bank Margin 6b) Purchase Finance Payment Request 6a) Purchase Finance Payment Request Request Source: ITFC 36

37 We are ready to suspect any person of being defective in selfishness. THANK YOU! 37

ISLAMIC TRADE FINANCE & TRADE PROMOTION PROVIDER

ISLAMIC TRADE FINANCE & TRADE PROMOTION PROVIDER SOMETHING ABOUT US SERVING MEMBER AND NON-MEMBER COUNTRIES ITFC became operational in January, 2008 with the purpose of advancing trade to improve the economic