Dr. Monzer Kahf, a prominent economist and counsellor states: “The letter of credit is a procedure that may or may not include interest. It is merely a methodology to assure the supplier/exporter that payment for goods he/she exports is assured and guaranteed by a local bank based or a letter of credit issued by its correspondent in the buyer land. Receiving the LC is permissible and does not entail any interest. Issuing it or rather for the importer to ask its local bank to issue this letter may entail interest if it is not covers in full (i.e., if it entails a loan from the local or correspondent bank). When the importer deals with conventional banks in his country it may require extra conscious and negotiation with it to avoid interest charged by the correspondent bank for the few days taken by the mail and until payment is received by the correspondent bank. Islamic banks all over the world deal heavily in LC’s and they usually make special agreement with conventional bank correspondent to avoid this interest for these few days.”
Letter of credit
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