Letter of credit (L/C): it is an instrument, crediting the seller that the due payment by buyer is made soundly to the seller in a prescribed date. Should the buyer could not make its payment to the seller, the bank is bound to pay the seller the balance or the complete purchase amount. Often, L/C is used to assure the receipt of the amounts payable, at international transactions. For import of most importable goods like: cloths, cars, agricultural and industrial items L/C is used which includes different types as follows:Import / Export L/C The L/C opened by buyer for the import in its country is import L/C , and for the seller of goods, in another country, is export L/C.Revocable L/C In this type of L/C, the buyer or the L/C opening bank (beneficiary) can make any change or amendment in the L/C conditions, without prior seller’s permission. Obviously, such an L/C is not workable, as the seller is not confident to credibility of the L/C and the buyer’s fulfillment of its commitments. It is amazing, that if the Iranian buyer wants to open a revocable L/C, it will have to provide the special certificate of the Central Bank, according to the banking system; but, it is really not necessary to carry such permission.Irrevocable L/C In this irrevocable L/C any change in the L/C conditions, by the buyer or opening bank depends on the seller’s agreement and consent. The sellers usually more welcome this type of L/C. If in the L/C, to it is not referred or kept silent, whether is …

Letter of credit (L/C): it is an instrument, crediting the seller that the due payment by buyer is made soundly to the seller in a prescribed date. Should the buyer could not make its payment to the seller, the bank is bound to pay the seller the balance or the complete purchase amount. Often, L/C is used to assure the receipt of the amounts payable, at international transactions. For import of most importable goods like: cloths, cars, agricultural and industrial items L/C is used which includes different types as follows:

Import / Export L/C
The L/C opened by buyer for the import in its country is import L/C , and for the seller of goods, in another country, is export L/C.

Revocable L/C
In this type of L/C, the buyer or the L/C opening bank (beneficiary) can make any change or amendment in the L/C conditions, without prior seller’s permission. Obviously, such an L/C is not workable, as the seller is not confident to credibility of the L/C and the buyer’s fulfillment of its commitments. It is amazing, that if the Iranian buyer wants to open a revocable L/C, it will have to provide the special certificate of the Central Bank, according to the banking system; but, it is really not necessary to carry such permission.

Irrevocable L/C
In this irrevocable L/C any change in the L/C conditions, by the buyer or opening bank depends on the seller’s agreement and consent. The sellers usually more welcome this type of L/C. If in the L/C, to it is not referred or kept silent, whether is revocable or irrevocable, then such an L/C will be deemed irrevocable, according to the latest regulations of the International Chamber of Commerce.

Confirmed L/C
It is an L/C that urges the buyer to have the issued L/C by its bank confirmed by another reliable bank, at the seller’s discretion. This type of L/C indicates, either the issuing bank is not creditable or the buyer’s country’s political or economic situation is shaky. Now many foreign sellers, demanding confirmed L/C from the Iranian buyers, which is due to two problems, firstly, it is because of political and economic rather instable conditions, and secondly as during the years of Iran-Iraq post-war there was shortage of foreign currencies in the banks, the Central Bank encouraged the buyers to open L/C with “usance” (not cash), but as the Central Bank, off and on, was not able to pay the amounts of the L/C, at the maturation date, which in turn led to differed payments of the L/C amounts by the buyers, the sellers were reluctant at the Iranian bank transaction.

Unconfirmed L/C:
This type of L/C, in a routine condition, is opened without a need to have it confirmed by another bank. If the “confirmed” wording is not mentioned in the L/C conditions, then it is considered an unconfirmed L/C.

– Transferable L/C
It is an L/C, according to which the original beneficiary has the right to transfer the whole or a part of the opened L/C to another person(s). In fact, this type of L/C is a privilege for the seller.

– Non transferable L/C
It is an L/C, according to which the beneficiary has no right to assign the whole or a part of it to another. In the international trades, it is customary the L/C to be non-transferable, likewise in Iran, in order to open a transferable L/C, the Central Bank’s certificate is required.

Usance L/C : (not cash)
It is an L/C that the L/C money is not immediately paid after submission of the documents by beneficiary, at the contrast, the bill payment is made after the date, fixed. Actually, the seller gives the buyer a dead line, based on which the goods price should be paid after its delivery and sale. The “usance” transaction is usually practiced in the countries suffering from shortage of currencies.

– L/C at sight
It is an L/C, according to which the notifying bank immediately pays the money after seeing (or receiving) the shipping documents, submitted by the beneficiary (seller), provided that all the L/C conditions are observed by it.

– Back to Back L/C
This type of L/C has two separate letters of credit. The first is opened, in favor of the beneficiary, as it cannot supply and send the goods for any good reason. Therefore , having relied on the L/C already opened in favor of it, another L/C is opened by the first beneficiary for the second seller ( 2nd beneficiary ) who can supply and send the goods.

– Red (ink) L/C:
In this type of L/C, seller can receive money, as an advance payment, from the notifying bank (or confirming bank), prior to shipping the goods. The reason of naming such an L/C is for highlighting the L/C conditions; as for the first time, when it was opened, the opening bank, to attract the notifying bank’s attention, that some amount of this L/C is paid as an advance payment, it was written in red ink, so since then it is commonly called red (ink) L/C .
– Revolving L/C :
it is an L/C that every time is used up by the beneficiary, the same amount is added up to the original amount of the L/C , indeed, the existing credit is renewed by itself without any need to open or amend the new L/C.

Usance :
Usance letter of credit (L/C), attached to the goods shipping documents, as a promissory bill, sent by the issuing (opening) bank is called “usance”. The bill bearing the issuing bank’s credit acceptance is called “bank acceptance,” in this state, if the beneficiary (creditor) needs cash it can exchange the bank acceptance at “discount market”. The buyer, by the usance of letter of credit of the goods or services pays the amount payable to the goods seller, in credit. When the goods seller ( the L/C beneficiary) attempts to send the goods and submit the documents to the concerned bank, without any discrepancy, it will be entitled to receive its goods amount as from the date of the documents, submitted and after the expiration date of the usance . By the usance, the seller agrees to receive the real amount of the goods at a specific date, after delivery of the goods. For example, when the buyer wants to make sure if the imported goods are delivered safely and soundly, this practice is used.

Financing
Sometimes, seller is not willing to receive its goods money by a dated letter of credit, in other hand, the buyer is not able to pay cash letter of credit, due to lack of cash money; in this state, the buyer usually asks a bank or a credit firm to pay the seller the letter of credit, in cash, and receive the whole loan amount , paid and its interest from the buyer, during a specific (fixed) period; this payment practice is called “financing, and the money lending firms are called “financier”. For example, when buyer doesn’t have the total purchase money, available but it is capable to pay it in a period of time, such a practice is used.

Refinancing
Utilizing their branches, in foreign countries and the foreign banks resources, banks attempt to pay short-term foreign exchange funds, in credit refinancing (lines) framework; based on this fact, that the interest rate of such funds is much lower than the funds in Rials (Iranian), therefore in order to reduce the goods cost prices, it would be very helpful for the importers. The short term fund period utility is maximum for one year as from the transaction date of the documents. Also, the refinance can be used in (three, six and nine months ) periods, provided that this special credit line has the time condition, with under one year period, at the (executive) bank. This practice, is similar to finance, but the difference is : relying on their credibility, the local executive banks use the foreign banks resources.

-Sukuk( sukk singular): (Islamic securities):
One of the instruments, to change it into a security bond at the country’s capital market, is Sukk (Sukuk) . “Sukk” is an Arabic word, meant: letter (or a deed), money acknowledgement receipt, and promissory note. At the present, this word, in Arabic, is used for all types of bank drafts, guarantees, or property judgment notes.
The legitimate standard (number 17) of the certificates has an identical face value, which after subscription process, indicates the payment of the face value amount, mentioned in it, is made to the publisher by the buyer, and its bearer is the owner of one asset or a series of assets, and the profits from an asset; or is the beneficiary (the stake holder) of a project or a special investment activity. For example in this practice, the owner of goods sells its goods to a third party, and then the same goods is rented from the buyer, under the ownership condition.

Types of Muskuk:
– rent, Istisna (or manufacturing orders), percentage, contribution, dormant partnerships, farmletting contract, contract for harvesting against share, proxy, advance money

– providing Sukk service for the rights of concession to assets ownership to be established, in future

– the definition of the rent deeds (bills); it is security bills, named: tradable and transferable indicating, the ownership of the original undivided share is for the publisher.

The Sukk publication elements:
– author (sponsor): legal person, aimed for financing
– broker’s institution : the legal personality who attempts to perform the subject of the Islamic contracts for financing and publishes the sponsor’s securities.

Other elements:
– seller: a legal person attempting to sell the assets to broker’s institution.
– sales agent: a legal person attempting to supply the rent bonds on behalf of . the publisher for sale
– payment agent:
it is the central depositing company of the securities and the fund settlement, who attempts to make the payments, relevant to the investors at the fixed maturity dates of the rent deeds
– guarantor:
it is a legal person, who guarantees the payment of the money of the rent, and in terms of the price of the asset purchase, under the rent, which is to be made to the broker’s firm by the sponsor
– the rent deeds:
the aim: is providing financing resources, required for the purchase of one . . asset or a series of several assets and their rent to the sponsor.
– The asset bases for the publication of the rent deeds:
– land
– building and installations
– machinery and equipment
– transportation means
percentages deeds :
It is transferable securities indicating the bearer of the limited share ownership is on the financial asset (on the credit), which has been obtained, according to the percentage contract.
Istisna bonds (deeds) :
– Istisna word means “ manufacturing /construction order”, and in expression , it means a contract , according to which either party of the contract undertakes against another to make and deliver a product or a specific design, in return for a fixed amount , and in the period of fixed time
– Ministries, municipalities and governmental and private firms who intend to implement and develop a specific project like a massive housing project and they don’t have necessary funds to perform it, in cash; they can use Istisna security and gradually pay it from the annual funds or through letting the completed apartments, according to a fixed time schedule.

– The variety of Istisna types are:
– Parallel Istisna
– The rent Istisna on possessory condition
– Parallel Istisna;
In this practice, sponsor (ministry or municipality or private company) refers to the trustee and establishes “link financing company”, and assigns the project implementation to it, according to Istisna contract, and pays Istisna security bonds, bearing prescribed maturation dates, instead of paying the project price.
The link company orders the construction of the intended project to the relevant contractor against its project price payment commitments, according to the second Istisna contract and based on the prescribed time schedule; then the bonds link pays its debt to the contractor, by selling the public the Istisna securities, indicating the sponsor’s dept, through the financing company.
– Rent Istisna on possessory condition
In this practice, the sponsor refers to the trustee and establishes the link company and undertakes if the link (or itself) implements a specific project or makes a product, it will receive (the debt) on possessory condition. The link orders implementation of the intended project or product to the contractor, according to the Istisna contract, then having obtained all required permissions, the link publishes the Istisna bonds, and consequently on behalf of them as an agent pays the contractor their collected monies.
The link, on behalf of the bonds(or securities) owners, takes the project from the contractor and rents it to the sponsor, on possessory condition; the sponsor pays the original investment and the bonds owners’ profit to them, in the legal rent framework.
The Sukk Risks:

– Collection of cash money at required amount to purchase property
– the link abuses the money, received
– the goods is not sold to the link
– the goods is not rented by consumer
– losing the whole or a small part of the property
– the property costs, under the rent
– rent is not paid timely
– bank public bonds

The bonds issue
The bonds are issued by government, municipality governmental/private companies, for the purpose of providing securities for the country’s development projects. Preparation of the executive instructions, and the regulations for supervision on the bonds issue are the Central bank’s responsibility . According to the Central bank’s instructions; the bonds are securities, which are issued by the current organization , based on the central bank’s permission, in order to provide a part of the financial resources, required for profitable production and service projects ( exclusive of commercial affairs), within the framework of the civil bonds contract. The holder’s civil shares rate is mentioned in each bond. For example, there are bonds issued by government, dealing with construction of roads, mines, etc. . . .
Furthermore, the bonds are instruments, according to which the issuing company undertakes to pay the defined amounts (annual interest) in specific intervals, and pay the original amount at the specific time (maturation date).
The bonds owner, as a creditor, has its right to receive the original and its interest, but it has not any ownership in the company.
The issuer is debtor to the buyer, in the security bonds. This instrument has maturation date, and its amount is paid at the latest date, by the issuer. These bonds have the interest coupons and the relevant interests are paid in prescribed intervals by the central bank, representing the bonds issue. For example, the security bonds, issued by the government for the construction of power plants.

More