Documentary Credit — practice questions

Correct answer: A. Clause 3/1/1: Dealing in documentary credit includes agency for providing procedural services, the most important being examination of the documents, and the provision of an institutional guarantee to the importer. As both agency and guarantee contracts are permissible, documentary credit is permissible subject to the Standard’s conditions. It is not in itself a loan or a sale of documents; Clause 3/1/2 then permits the Institution to open, issue, confirm, notify, amend and execute all types of credit, subject to Clause 3/1/3.

Correct answer: C. Clause 3/3/1: The Institution may charge the actual expenses of issuing a credit and a fee for the services provided, whether a lump sum or a percentage of the credit amount, provided the duration of the credit is not taken into account in determining it. The guarantee aspect per se must not be considered in estimating fees (Clause 3/3/1(a)), the credit must not involve or become a means for Riba (3/3/1(b)), and a combination of contracts may not be used to take a commission for a guarantee or loan (3/3/1(c)). Where an amendment involves rescheduling the credit’s duration, only actual expenses may be charged.

Correct answer: B. Clauses 3/3/1(a) and 3/3/2: The guarantee aspect must not be taken into account in estimating fees. Accordingly, the Institution may not charge an amount in addition to the actual expenses incurred for endorsing (confirming) a credit issued by another bank, because confirmation is an addition over guarantee. The same rule applies to participation in issuance and endorsement and to standby credits where no services or obligations are required, and it applies equally between the Institution and other banks. Commissions for accompanying letters of guarantee follow Shari’ah Standard No. (5) (Clause 3/3/3).