ISLAMIC INTERNATIONAL TRADE AND FINANCING

BWBS 3053

INDIVIDUAL ASSIGNMENT:

THE IMPACT OF COVID-19 ON INTERNATIONAL TRADE

( SHIPPING GUARANTEE )

PREPARED FOR:
DR. NORIZA ABD. AZIZ

PREPARED BY:

NAME MATRIC NO.

HAMSE RASHID IBRAHIM 249890
MUHAMMAD HAZIM BIN MOHAMMED HAFIZ 252685
SYAZWAN FIKRI BIN SAMSUL UZRI 255496

ISLAMIC BUSINESS SCHOOL (IBS)

UNIVERSITI UTARA MALAYSIA

GROUP PARTNERS
 NAME : MUHAMMAD HAZIM BIN
MOHAMMED HAFIZ
NICKNAME: HAZIM
MATRIC NO: 252685

NAME : HAMSE RASHID IBRAHIM

NICKNAME: HAMSE
MATRIC NO: 249890

NAME : SYAZWAN FIKRI BIN SAMSUL UZRI

NICKNAME: FIKRI
MATRIC NO: 255496

TABLE OF CONTENT
 Content Page
Table of Content 1
Introduction – About The Product 2
Workflow and Impact on International Trade 11
Solution ( Problem Solving ) 14
Conclusion 18
References 19

INTRODUCTION

SHIPPING GUARANTEE (SG)

 A Shipping Guarantee (SG) is an indemnity document made by the Bank forwarded

to the shipping company on the instruction of the importer to take over delivery of
goods from the shipping company or its agent in the absence of the original bill of
lading.
  In the absence of the original bill of lading, the shipping company will distribute
goods against the guarantee given by the bank, i.e. the SG.
 The bank accepts to compensate the shipping company or its agent against all
consequences or liabilities relating to the delivery of the merchandise under this
guarantee.
 SGs are legal indefinitely, means, no expiry date and amount. They are legal until
such time as the original bill of lading is presented to the shipping company or agent
for redemption.
 Shipping Guarantee is a facility where the Bank protects the shipping company for the
delivery of goods to the buyer/importer without the presentation of the original Bill of
Lading.
 Issued under the Kafalah contract, it can be classified as a surety provided by a party
to the owner of the goods, who had put his goods with the shipping company, which
the following claim by the owner for his goods must be encountered by the guarantor
(the Bank).

(Oseni, Umar A., S. Nazim Ali, 2019)

Example of Shipping Guarantee Certificate

(Amulet Jewel Company "Guarantee Certificate for Gold Jewelry" 2020)

Al- Kafalah

 Kafalah is derived from the root word kafala (‫ )كفل‬which means junction – joining
combination obligation or guarantee.
 The promise given by the guarantor (al-kafil) to a creditor (al-makful lah) on behalf of
the principal debtor (al-makful anh) to safeguard that the guaranteed (al-makful bih)
,the debtor, will be appear at a specific location, e.g. to pay his debt, or fine, or, in the
case of retaliation, to take punishment.
 According to The SAC of BNM, Kafalah is a guaranteed contract on a specific asset,
usufruct or service given by a guarantor to the parties involved.

Al-Kafalah Shipping Guarantee

 Al-Kafalah Shipping Guarantee is a type of promise offered by the Bank to the owner
of the goods, who had put his goods with a third party, applied under the concept of
Al-Kafalah or Al-Dhamanah which the following claim by the owner for his goods
must be encountered by the guarantor and the third party.

(Billah, Masum, 2019)

 BILL OF LADING

1. Definition

Bill of Lading is a document released by the shipping company or his agent conceding the
receipt of cargo on board. This is a responsibility to distribute the goods as in original
condition as received to the consignee or his agent on receipt of freight, the shipping
company is permitted to. It is a vital document to the exporter as it represents document of
title to the goods. 

2. Objectives

Bill of Lading has three main objectives:

(A) As a document of title to the goods
(B) As a receipt from the shipping company
(C) As a contract of delivery of goods.

3. Functions

(A) Functions to the Exporter

1. It is a recognition from the shipping company that the goods have been accepted for the
purpose of shipment.

2. After receipt of B/L, it eases him to deliver the shipping advice to the importer.

3. If any loss happens to the cargo during shipment, he can claim the shipping company
responsible, if he has received clean bill of lading.

4. A copy of bill of lading must be assigned with the application form to claim the
incentives

5. It is a contract of carriage between the exporter and the shipping company.

 (B) Functions to the Importer

1. It is a document of title to the goods, which allows him to transfer the title by
endorsement and delivery.

2. The exporter can deliver a non-negotiable copy of B/L as advance indication of

shipment to the importer.

3 It allows him to pay the freight amount as the B/L contains freight informations.

(C) Functions to the Shipping Company

1. It eases the shipping company to receive the freight amount from the exporter or
importer.

2. Shipping company can defend itself from the unlawful claims of exporter/importer
by including condition of goods at the time of receipt. In case the shipping company,
accidentally, fails to mention the adverse condition, at the time of receipt, advantage
can be claimed by exporter/importer, by presenting unlawful claim. 

(Møllmann, Anders, 2018)

Example of Bill of Lading

(C. H. Robinson "What is Bill of Lading?" 2020)

IMPACT ON INTERNATIONAL TRADE

 The COVID-19 pandemic is a fear for developing countries. Most developing
countries depend strongly on imports to meet their demands of medical necessities crucial to
fight COVID-19. Lately enforced export constraints by top manufacturing countries could
trigger major interferences in supplies for developing countries and may possibly further
cause price increases of medical necessities. Considering multiplier effects, prices for
medical necessities are projected to increase by up to 23% on average. Tariffs and other
constraints to imports further weaken the movement of critical products to developing
countries.

On the other hand, China has been the world's major exporter of goods since year
2009. Trade experts proposed that Chinese exports are amounted to $2.097 trillion in year
2017. Since year 2013, China has also become the largest trading country in the world.
Hence, the lessening of Chinese supply of transitional inputs can disturb the productive
capacity and thus, the exports of other country relying on how dependent its industries are on
Chinese manufacturers. For instance, most of the European car manufacturers might
encounter the lack of important components for their operations, companies in Japan may be
difficult to get the parts required for the assembly of digital cameras and others. For several
companies, the inadequate use of inventories carried by a just-in-time manufacturing process
would result in scarcities which will affect their production capacities and total exports.

The diagram shows a report by sector the potential effect of COVID-19 on exports in
the most exposed countries to Chinese supply disruptions. Overall, the most impacted
economies will be the European Union (machinery, automotive, and chemicals), the United
States (machinery, automotive, and precision instruments), Japan (machinery and
automotive), the Republic of Korea (machinery and communication equipment), Taiwan
Province of China (communication equipment and office machinery) and Viet Nam
(communication equipment).

Diagram below shows the Global effects of China’s slowdown through global value chains,
20 most affected economies
 There are still doubts about the impact of the COVID-19 on China’s beneficial
capability, the latest statistics point to a substantial decline. The effect of COVID19 on
international value chains will turn out to be clearer in the upcoming months. Nevertheless,
one significant issue is how a interference in Chinese supply of intermediary inputs will have
an effect on the rest of the world. Even if the epidemic of COVID-19 is confined mainly
within China the fact that Chinese suppliers are important for many companies around the
globe indicates that any interference in China will be also affected outside China’s borders.
American, European and Asian value chains will be interrupted. The approximate worldwide
effects are subjected to change depending on the inhibition of the virus and or alterations in
the resources of supply.

(United Nations "United Nations Conference on Trade and Development - Global trade
impact of the coronavirus (COVID-19) epidemic" 2020)
 BELOW ARE THE DIAGRAM EXPLAINING THE WORKFLOW OF
ISLAMIC SHIPPING GUARANTEE (KAFALAH):

EXPORTER’S 3. DELIVER BILLS POSTERIOR ISSUING

BANK TO THE ARRIVING DATE OF BANK
GOODS

4. SUBMIT 8. RETURN 5. SHIPPING

APPLICATION TRUST GUARANTEE
RECEIPT

IMPORTER
2. DELIVER
DOCUMENTS

7. EXCHANGE SHIPPING
6. COLLECT
GUARANTEE WITH
THE GOODS
ORIGINAL BILLS OF LADING

SHIPPING
EXPORTER 1.DELIVER COMPANY
GOODS ( CARRIERS)
HOW WAS SHIPPING GUARANTEE IS IMPLEMENTED?

1.Basic prerequisites for issuing a shipping guarantee include:

a. Settlement is done by letter of credit 
b. Transportation is done by ocean;
c. The letter of credit requires submitting the whole set of shipping documents to the
exporters’ bank;

2. The importer apply for shipping guarantee from the issuing bank;

3.The importer is required to maintain credit line or have single credit extension approved by
the shipping guarantee issuance bank.

4.When applying for shipping guarantee, the importer is required to submit:

a. The application for shipping guarantee;
b. Letter of shipping guarantee;
c. Duplication of invoice;
d. Duplication of bill of lading;

5.The importer is required to pledge to the bank issuing the shipping guarantee that the
documents would not be rejected no matter whether or not there are discrepancies.

6 The importer can collect the goods that have been delivered by exporter through shipping
company.

7.When the original Bill of Lading arrives, the importer is required to exchange the Shipping
Guarantee with bill of lading at the shipping company and return the shipping guarantee back
to the issuing bank for cancellation.

8. The importer need to return the rrust receipt to the issuing bank for giving the shipping
guarantee.
SOLUTION (PROBLEM SOLVING)

Shipping guarantee is for the most part applied as advantageous agreement in mix with others
to structure various items. It can likewise be an essential agreement and the subject of
primary exchange. The use of agreement of Shipping guarantee in Islamic banking can
prominently be found in three occasions The principal example is for the third party
guarantee for the financing sum where the client is required by the bank to designate an
underwriter to guarantee instalment of the financing. The second instance is for the third
party guarantee in mudharabah and musharakah contracts where the underwriter is ensuring
the gatherings in instances of carelessness. In any case, right now, underwriter isn't permitted
to ensure the capital or benefit for what it's worth contrary to the rule of mudharabah or
musharakah. The third example is SG dependent on Shipping guarantee where the bank
consents to release the risk of the third party on account of default by such third party.

A guarantee by the bank for client's benefit to ensure that the client's liabilities will be met
and it is given under the Shariah agreement of Shipping guarantee. The kinds of certifications
gave are delicate assurance/offer bond, execution ensure, advance instalment assurance and
guarantee upkeep ensure.

Current issues facing importer to get products from the exports in a deferred payment is the
Coronavirus disease 2019 (COVID-19) is an infectious disease caused by severe acute
respiratory syndrome coronavirus 2 (SARS-CoV-2). The disease was first identified in
December 2019 in Wuhan, the capital of China's Hubei province, and has since spread
globally, resulting in the ongoing 2019–20 coronavirus pandemic.

Shipping guarantee Solutions in Cases of Unforeseen Delay in The Arrival of Bill of

Lading, mitigation of risk and saving charges.

1- Source of finance with the less purchasing power

 Facilitate transaction with the recent low purchasing power The coronavirus crisis has
sent the economy into a tailspin around the globe. The restaurant industry has ground
to a halt. So have air travel, auto manufacturing, hotels, gyms, and cruise lines. The
stock market has posted enormous losses and wild daily swings, to the point that
trading has sometimes been paused altogether, and the price of oil has plummeted.
 Layoffs across the country are taking place in waves. We’re producing less, spending
less, and consuming less.

 Now we are deliberately shutting down the world’s major economies for at least
several months. Factories are closing, shops, gyms, bars, schools, colleges, and
restaurants shuttering. For sectors like the airline industry, the impact will be far
worse. In the oil industry, the prospect of market contraction has unleashed a ruthless
price war among OPEC, Russia, and shale producers. This will stress the heavily
indebted energy sector.

 With all those factors service economic will be shuttered which in turn cause for
individuals and corporation in situation with less purchasing power to involve in
business overseas with their current financial state so in that case the role of shipping
guarantee will be used as bank being the guarantor of the money for the exporter and
as an importer after the pre-date of payment importer will be able to settle the
financing with the bank.

2- Saving on port charges and demurrage fees etc.

3- Cost-saving
 Avoid excessive storage and demurrage port charges.

4- Improve cash flow

 Sell the goods without delay

5- Low commission charges for SG issued under Letters of Credit.

6- Obtain goods faster.

 Another ongoing issue has emerged in the advanced transportation condition
particularly with gas tankers, where it is hard for the ace to state payload delivered
in evident great request and condition, since the shipment see the obvious request
for this load or have the methods for checking it. In such conditions, this may
influence a few arrangements of the BOL, which the need of SG will rise.
7- Mitigate risk
 shipping Guarantees assist organizations with mitigate any hazard emerging from
either side of the transaction, and assume a huge job in encouraging high-esteem
exchanges. The agreed sum is referred to as the ensured sum and will consistently
fall for a recipient. In Ventures where parties are committed to play out specific
obligations so as to effectively finish an exchange, the two gatherings regularly
use Bank Guarantees as a method for indicating their validity and budgetary
wellbeing additionally, on the off chance that one gathering comes up short, the
other party would then be able to summon the bank ensure by recording a case
with the loaning foundation and get the ensured sum. In contrast to LOC's,
shipping Guarantees secure the two parties included.

8- Take delivery of goods prior to the receipt of the transport documents.

 This BOL has confronted some extensive issues encompassing the gatherings'
privileges and liabilities. Different shows and domestic laws have attempted to
handle these issues, anyway few have been fruitful, because of the fast
development of the cutting edge transporting condition.
Essentially, reasonable issues have emerged in the course of recent years inferable
from the standard BOL necessity, to introduce the BOL at the releasing port so as
to achieve conveyance of the payload.

There is a developing number of situations where such records, for example BOL,
will arrive at the recipient at its goal after the load has shown up at its goal. The
explanation behind this postponement is the methods at the banks just as the
overall gradualness of the postal administrations, which would now be able to take
longer than the vehicle itself. For example, carriage of mass cargoes, for example,
oil and gas on a short ocean courses will ordinarily be conveyed in a shorter time
period than its related reports.

In such cases, the transporter has just constrained options preceding conveying the
payload. Right off the bat, in the event that it demands the introduction of the
BOL, as it might be unconscious of the personality of the present holder of the
BOL, at that point the transporter might be obliged to keep the load installed the
boat if no storerooms are accessible, while hanging tight for the introduction of
the first BOL. This may prompt a few stream on issues, for example, the duty
regarding demurrage charges or harms that might be guaranteed by the bearer on
the off chance that it is a charterer, for the confinement of the load. The boat
proprietor may likewise hazard losing its next sanction. The transporter will
without a doubt be worried about its calendar, particularly in a liner exchange.
Moreover, the payload proprietor might be influenced by the deferral, since the
products are regularly liable to fluctuating costs.

Secondly, on the off chance that the bearer is sure of the personality of the
collector of the freight and conveys the merchandise without acquiring the first
bill of lading, it might unintentionally mis-convey the payload (and regardless of
whether conveyance was in compliance with common decency) and the
transporter will be considered answerable for paying the full estimation of that
load to the legitimate proprietor. Much of the time the transporter won't have the
option to safeguard itself right now may imperil its spread or option to confine his
obligation under the pertinent systems and shows.

A third alternative for the bearer is to look for a repayment from the shipper or the
collector before conveying the load without introduction of the bill of lading. The
most secure reimbursement for the transporter would be a shipping, anyway it is
dependent upon the bearer to demand a corporate assurance/repayment.
CONCLUSION

In conclusion Generally, Shipping guarantee is also known as Islamic Bank Guarantee, which
the issuing bank guarantees the card holder to the buyer (trader). Shipping guarantee itself is
a recognized contract in Islamic transaction. Shipping guarantee literally is assurance; its
original meaning is related to joining and commitment. Shipping guarantee indicates to a
contract that develops a guaranteed party’s implied liability as a joint liability of the
guaranteed party and the guarantor. Shipping guarantee is utilized by the IFIs to offer
guarantee services, such as shipping guarantee and letter of credit, in the view of Islamic
financial services.
Bank Negara Malaysia in its Shipping Guarantee Concept Paper defines shipping guarantee
as a contract where the guarantor (kafīl) conjoins the guaranteed party (makful „anhu) in
assuming the latter’s specified liability. The Shipping guarantee contract is still enforceable
unless the beneficiary allows the guaranteed party an additional period to settle down the
liability,

The impact of existence of Shipping guarantee is it helps to make clear goods without having
to wait for complete import documents in a long period. Of course, this facility is very
practical, which it makes the importer feel comfortable because it allows them to trade their
goods easily and smoothly.Saving, investing and goods purchase with corona virus being
the solely the cause of the pandemic every one of those components administration monetary
will be covered which thusly cause for people and enterprise in circumstance with less buying
influence to include in business abroad with their current budgetary state so all things
considered the job of delivery assurance will be utilized as bank being the underwriter of the
cash for the exporter and as a shipper after the pre-date of instalment merchant will have the
option to settle the financing with the bank.

Corona virus impact on international trade between countries with most nations declared
lock downs for their terminal and commodities estimated $1trillion stuck in borders for
almost a month in that period several business declared that they are short in cash and they
add if the lock down continue for another 2 or 3 coming months they will declared
bankruptcy they won’t be able to purchase their desired goods as a solution of the shipping
guarantee can facilitate and entertain commodities to reach their distant places.Also other
solutions and benefits of shipping guarantee are Saving on port charges and demurrage fees,
low commission charges for SG issued under Letters of Credit, obtain goods faster, mitigate
risk and take delivery of goods prior to the receipt of the transport documents

REFERENCES

INTERNET:

 Faziha, Zee. 29 Apr. 2017, “Kafalah Bank Guarantee.” LinkedIn SlideShare,

www.slideshare.net/ZeeFaziha/kafalah-bank-guarantee.
 Emerald.com. 2020. Practical Application Of Kafalah In Islamic Banking In

Malaysia | Emerald Insight. [online] Available at:

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 Pbebank.com. 2020. Trade Financing. [online] Available at:

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For-Working-Capital/Trade-Financing.aspx

 Trade Finance Global. 2020. Letter Of Credit (Lcs) Versus Bank Guarantees

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https://www.tradefinanceglobal.com/letters-of-credit/difference-between-

lcs-and-bank-guarantees

 jsrp.org. 2020.: Retrieved from http://www.ijsrp.org/research-paper-

0717/ijsrp-p6797.pdf

 Islamicbankers.files.wordpress.com. 2020.Retrieved from

https://islamicbankers.files.wordpress.com/2013/12/2013-ed-kafalah.pdf

 Bank of China, (2010), Shipping Guarantee, Retrieved from

https://www.bankofchina.com/hu/en/cbservice/cb3/201005/t20100518_1039191.h
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 Cimbislamic.com.my. 2020. Shipping Guarantee-I (SG-I). [online] Retrieved from
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 “Guarantee Certificate for Gold Jewelry.” Affordable Gold Jewelry, Fine 18k Gold,
Thai Baht Gold, Hoop Yellow Earrings Online Sale,
 www.amuletjewel.com/index.php?tpid=0281
 “What Is Bill of Lading?” Freightquote, 13 Apr. 2020, www.freightquote.com/how-
to-ship-freight/bill-of-lading

BOOK
- Ariff. M (2017), Islamic Finance In Malaysia: Growth & Development, Kuala Lumpur
Pearson Malaysia Sdn Bhd

-Møllmann, Anders. Delivery of Goods Under Bills of Lading. Routledge, 2018.

.CONFERENCE PROCEEDINGS

“Global Trade Impact of the Coronavirus (COVID-19) Epidemic.” United Nations, Global
Trade Impact of the Coronavirus (COVID-19) Epidemic, 4 Mar. 2020, https://unctad.org/en.

JOURNAL
- Hasnat, Md & Alom, Shahedin. (2017). The Implementation of Kafalah in Islamic Banking
and Finance Organizations in Malaysia. International Journal of Scientific and Research
Publications (IJSRP). 7. 768-2250.