Principle of strict compliance in letter of credit: a comparative study from legal and Shariah perspective
Letter of credit (LC) is a payment mechanism which is used to facilitate trade. One of the fundamental principles that govern the LC operation is principle of strict compliance. This principle indicates that in order to be paid; seller’s documents must strictly comply with the LCs’ requirement. Th...
| Main Authors: | , |
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| Format: | Conference or Workshop Item |
| Language: | English English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://irep.iium.edu.my/38356/ http://irep.iium.edu.my/38356/ http://irep.iium.edu.my/38356/1/3rdICBER2012_Proceeding_Strict_Compliance.pdf http://irep.iium.edu.my/38356/4/000_000_3rdICBER2012_Proceeding_Content.pdf |
| Summary: | Letter of credit (LC) is a payment mechanism which is used to facilitate trade. One of the fundamental principles that
govern the LC operation is principle of strict compliance. This principle indicates that in order to be paid; seller’s
documents must strictly comply with the LCs’ requirement. This practice seems peculiar to the inherent nature of the
contract of sale where the goods are customarily considered to be the only “factor” in making a payment. On the
other hand, in LC transaction, banks are confined to handling financial and papers only, as provided by the UCP,
“Bank deals with documents only”. Accordingly, payment for the goods is not honored upon compliance of the goods
sold but it is paid on compliance of seller’s documents. Likewise, it is established that commercial banks worldwide,
including Malaysian banks, adopt the same approach in dealing with documents in Islamic LC. The aim of this paper
is to look at this practice which is originally conventional, from Shariah’s perspective. In order to determine the
permissibility of stipulating such condition (a condition that payment in LC is honoured only upon compliance of
documents) from Shariah’s point of view, it is imperative to study the position of Islamic law relating to freedom of
stipulating condition in sale contracts. Among other things, this paper discusses the origin of the principle of strict
compliance in LC transactions and the rationale of its application. Furthermore, it highlights Shariah issues in the
principle of strict compliance in LC. Last but not least, it focuses on the views of the Muslim jurists in the issue of
freedom of stipulating condition in sales contract. It is only by looking into the basic principles highlighted by the
Muslim jurists on this issue; the permissibility of strict compliance principle can be ascertained. |
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