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In this paper, you are asked to provide a report on How do Islamic banks cooperate with conventional banks in international trade to do banking. You are asked to discuss discounted of bills of exchange and commodity based deals between the Islamic banks and the foreign banks and foreign exchanges and confirmation of letters of credit Islamic banks and the foreign banks in your report.
2) Main points of discussion
1. Dealing with foreign banks (looking at case by case basis; it’s important to mention that there is no current unified system for all Islamic banks to cooperate together because of the lack of unification on the matter, and the fact that most Islamic banks interpret things differently eg. example of Malaysia and Iran. It’s also important to discuss how some countries have pushed their central bank to abide Islamic principles such as Iran, while certain foreign countries have accepted legislation changes not for all the Islamic products to accept for example selling foreign Islamic bonds such as the UK). (3 to 4 pages) consider Islamic banks Positions
2. How do banks process international financing or trade, and support islamic based org. abroad. This will look at the dealings with correspondent banks with the aspects of foreign exchange dealings, confirmation of letters of credit and discounted of bills of exchange drawn under letters of credit. Islamic banks and the foreign bankd
Part 1: foreign exchanges and confirmation of letters of credit Islamic banks and the foreign banks (3 to 4 pages)
Part 2: discounted of bills of exchange and commodity based deals between the Islamic banks and the foreign banks (3 to 4 pages)
In the system of Islamic banking under the Islamic banks, there are no provisions for interest institutions. This is because Shari’ah laws prohibits taking of interest. The Muslim laws contrasts taking of interest with unlawful gains. Islamic financial institutions operation model therefore is opposed to the debt financing strategy employed in conventional banking system. Debt financing model demands for insurance deposit to shield the bank from possible financial losses. An Islamic financial institution is not allowed to indict any prearranged return on deposit finances in advance. The bank however participates in sharing the yield that may result from deposited amount in the proportion of the defined ratios. Islamic financial institutions also pursue risk in investment on the same fixed ratios (Ali, 2011).
This paper aims at showing how Islamic banks contend with conventional banks in regard to specific financial areas highlighted in the respective parts of the paper. The first part provides a general overview of how the Islamic banks transact with conventional banks; part two provides Islamic banks stand in regard to dealings in foreign exchange; the third part shows how Islamic banks deals with confirmation letters of credit; while part four shows the practices of Islamic banking in consideration of exchange of discounted bills and commodity based deals.