INSTRUCTOR’S MANUAL

CHAPTER International

3 Payment Terms or
Documentary Credit

Learning Outcomes
After reading this chapter, the students should be able to:
ü Explain banking functions in international trades
ü Discuss the types of Documentary Credit
ü Choose the most secured payment model when doing international trade

Key Teaching Points

Key Terminologies
Letter of credit (LC): is payment assistance by the appointed bank based on the conditions agreed
earlier by the importer/buyer. The LC makes international transaction more secured and faster
clearance. LC is another name for Documentary Credit (DC)

LC on sight: payment to be released by the bank on sight of document

Revocable LC: banking facility is not secured and can be cancelled by the bank
Irrevocable LC: secured banking facility which the bank fully guarantees that payment is to be made
upon submission of proper document

Confirmed LC: payment secured and shall be paid upon submission of proper document

Wakalah: Islamic banking for agency relationship payment

Murabahah: Islamic banking for deferred lump sum sale or ‘cost plus’ concept

Mudharabah: Islamic banking that allows the banks to become the ‘financier’ and will provide 100%
of the capital requirement.

Teaching Tip: Malaysia’s Islamic banking facilities has matured and become exemplary for the world’s
Islamic banking model. Discuss with the students the impact of Islamic banking to the world. Also find out
their opinion, which is the preferred facility in Malaysia: Islamic banking or conventional banking.

Requirements of Buyers and Sellers

There are four basic requirements that satisfy both buyers and sellers:
ü contract fulfilment
ü convenience
ü financial risks
ü professional assistance
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Teaching Tip: The instructor is to discuss with the students each of the requirements by the buyer and seller
based on the 4 components above. This shall cement the students understanding of the subject.

About Documentary Credit

There are four major elements in documentary credit:
ü agreement of sales and purchase
ü issuance of documentary credit
ü presentation of document
ü settlement between the banks

There are two types of documentary credit:

ü conventional method
ü Islamic method

Teaching Tip: The instructor is to explain in detail each type of documentary credit (conventional method –
like sight document credit, revocable credit, irrevocable credit etc

The instructor is to explain in detail the Islamic methods – like wakalah, murabahah, mudharabah and
musyarakah system

Teaching Tip: The instructor is to explain why banks will not confirm the documentary credit as shown in the
‘words of wisdom’ at the end of the chapter.

Teaching Tip: Use the PowerPoint in Chapter 3 for visual aid.

Teaching Tip: The students are encouraged to answer the multiple choice questions that are readily
available in the companion website.