Trade finance plays an important role in facilitating trade transactions between buyers and sellers. It is a form of short term banking facility to help the buyers and sellers in managing their cash flow in the short run. For years banks worldwide have been practicing the conventional method of trade financing until in the last few decades when Islamic Banking emerged. The system has become very popular because it offers an excellent alternative to customers.
Islamic trade finance operation is a specialised area of Islamic banking utilising various concepts that need to be understood by the parties involved, particularly bankers and traders. Essentially, the underlying contracts in trade finance such as guarantee (Kafalah) and agency (Wakalah) are similar to those in conventional finance. However, the financing mechanisms that accompany these types of contracts vary significantly.
This is mainly because interest based financing (in conventional finance) is replaced with Shariah approved financial arrangements. Malta is gradually gaining momentum in international trade finance. This is mainly attributable to financial institutions registered in Malta with mainly foreign shareholding which use Malta as a hub for trade finance. This hub concept can also be used for Islamic trade finance.
The most common trade finance used are, for example, the documentary credit/letters of credit. In Islamic Finance letters of credit are basically based on a Kafalah (guarantee) contract complemented with a Wakalah (agency) contract in order to affect the undertaking/guarantee. There are three different main underlying contracts in Islamic letters of credit, namely the Musharakah, Murabahah and Wakalah with their particular modus operandi.
The financing amount with the Musharaka LC is basically an arrangement entered into between the financial institution and the customer for an identified commercial purpose. Basically the buyer/importer and the financial institution will share the profit from the venture as provided by the Musharakah (partnership) agreement. On the other hand a Murabahah LC (cost plus mark up) is a facility that has similar features to the conventional LC coupled with a finance element for the buyer to finance the trade.
There is also the Wakalah letter of credit. In this type of facility the financial institution will act as the agent for the customer and issue a LC to effect payment for the imported goods on behalf of the customer. No financing is required from the financial institution in the case of the Wakalah LC.
Qatar is investing heavily in international business. The Emir of Qatar, Hamad Bin Khalifa Al Thani, has stated that the State of Qatar is going a long way in diversifying its economy. Indeed it is doing so and the strong welcome given to the President of Malta and the Maltese business delegation is evidence of this. Maltese and Qatari businesses and enterprises now have an opportunity in front of them. The possible increase in trade will also lead to an increased activity in financial services between the two countries.
In order to facilitate this trade with Qatar but with also other Muslim communities, Maltese financial services institutions may want to consider tapping into this lucrative market of alternative method of finance while assisting the commercial community to increase their international trade. Visits like the Qatari one should be followed and nurtured regularly also through ensuring that the necessary basic infrastructure to service the trade between the two countries is fully operational. Is Malta achieving this?
Furthermore, Maltese Financial Institutions may wish to ride upon the opportunity that Qatar is offering. The Qatar Financial Services Authority is gearing itself to gain substantial momentum in the growth of the sector. Various international organisations are looking positively at Qatar given the opportunities that it offers.
Certain Maltese financial institutions may have the sufficient resources to ride upon the openings given by a wealthy state which aims to excel in financial services. While there is both Islamic and conventional finance in Qatar, it seems that the largest business is determined by the Islamic finance institutions. In this context, Maltese organisations may want to start gearing themselves to provide these type of alternative finance too.
There are various parts of Islamic finance that are not new to Malta and hence with sufficient knowledge one may build upon Malta's own history. Also, given Malta's political interface and portfolio of double taxation treaties (including that with Qatar) Malta financial institutions are at an advantage over other countries' organisations targeting Qatar.
The media in Malta has already reported that Maltese businesses have closed interesting deals with Qatari organisations. Given the lack of appropriate Islamic financing in Malta one wonders whether these transactions will result in higher activities for Islamic Banks elsewhere. I am however, optimistic that Maltese financial institutions will take the opportunity and create a hub of services in Islamic finance. Qatar may be Malta's first opportunity to start heading towards its vision of becoming a centre of Islamic finance in the Mediterranean.
The author is managing director at Erremme Business Advisors and chairman of the education section of the Malta Institute of Management.
Rueben Buttigieg
rmb@erremme.org
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