Introduction: In general, trading finance can be described as a science that covers a number of different activities, mainly related to international

trade. As is the nature of these things, both are accurate. In one form it is quite a precise science managing the capital required for international trade to flow. Yet within this science there are a wide range of tools at the financiers disposal, all of which determine how cash, credit, investments and other assets can be utilized for trade. One of these financial tools include the Islamic trading financing that basically follows the same pattern as any other financing tools but the is banking activities under this description are consistent with the principles of Islamic/Sharia law and its practical application is carried out through the development of Islamic economics. Therefore, this essay aims to look into this system of financial trading as a tool to carry out business. Objective: The main objective of this research is to evaluate and analyze Islamic trading financing as a tool used to carry out business. This research looks into aspects such as the nature and background of Islamic financing, the features that make it different from other financing tools as well as the limitations of the tool that hinder it from functioning effectively as compared to other financing tools.

Background: Basically, the Islamic Trade Finance was established in order to advance trade and improve the economic situation and livelihoods of people across the Islamic world. As stated, During the 1990s, Islamic finance has enjoyed successes that have made it more accessible to western clients, more pertinent to international trade finance and projects and more competitive for clients and investors. These include a broadening of the institutions involved, better management, greater sophistication of investors and an increase in the number of instruments. Andrea Quirk, asset manager at the Islamic Investment Banking Unit of The United Bank of Kuwait in London, looks at using Islamic trade finance in the conventional market as a conventional marketing tool . The demand for acceptable assets from Islamic investors, be they institutions or individuals, is therefore growing with billions of dollars left untapped. It is estimated that there is some US$80 billion in Islamic funds under management and there are some 150 institutions active in the area. This is expected to increase to US$100 billion by 2000 with private investors with some US$800 billion. The Islamic Investment Banking Unit (IIBU) of The United Bank of Kuwait plc (UBK) manages more than US$1 billion of funds. (Wilmington Publishing & Information Ltd, 1999) However, the main property of this kind of financing is to be able to apply techniques and financing solutions on both the local and international levels, and adapt them to be consistent with Islamic rules and contracts. Although, the contracts and products offered by Islamic financial institutions and tools applied are now as comprehensive as those offered by conventional banks, there are still some limitations whereby some commodities and business activities are prohibited. Some of the principal commodities prohibited by this trading financing practice include gold, alcohol and tobacco, hogs/pigs and armaments and any goods that are seen as a taboo by the Sharia law. Once these parameters are established, then the usage is vast.

The fundamentals of many economies, especially in Islamic regions are based on trade, both locally and internationally. In the Islamic financing sector, Islamic banks, like conventional banks, have excess liquidity and require assets with different maturities, assets classes and dollar amounts, thus creating a more balanced portfolio and varied demographic profile. Studies and research suggest that he growth in Islamic finance is also visible in the expanding range of services and products that comply with the basic precepts of Sharia law. One example is the burgeoning global market interest in Islamic bonds Sukuks many of which are increasingly being issued and bought outside the Islamic world. This suggests that non-Islamic investors in general are becoming comfortable with Sukuks. The broadening appeal of Islamic finance is also evident in the move by large international banks and other private sector financial institutions to provide Islamic financial services. This includes the establishment of exchange-traded funds that are screened to ensure their conformity with Islamic investment principles, as well as offering takaful or Islamic insurance. (Mr Malcolm D Knight, 2007)

Limitations of Islamic Trading finance: In general, Islamic trading financial tools follow a set of strict rules that forbid making or receiving interest payments. However, to get around this prohibition, trade financing is obtained by buying inventory that will be resold at a pre-determined price on a future date, which is called Murabaha. In addition, financing for capital projects is called Musharaka, which is funding by two or more parties who may be active managers in a partnership. Losses are shared on the basis of the capital contribution. Profits may be shared in any way the partners decide. Other examples that show these characteristics of Islamic trading financing are such as the Istisna investment & finance tools. In this finance structure, Istisna is an Islamic finance contract which allows one to manufacture goods, assemble or process them, or to build a house or other structure according to exact specifications and a fixed timeline.

Payments are made as work on the property is finished. Istisna avoids making or receiving interest payments, which is forbidden by the Islamic. (Wiley Publishing, Inc, 2010) Also, Qardhul Hasan investment and finance is the term used for an interest-free loan in the Islamic religion, which forbids loaning or borrowing money to earn interest. Thus, the borrower repays only the amount borrowed. In contrast, Riba, which is basically a contract under Islamic religious law that calls for interest to be paid, is often unenforceable because most interpretations of Islamic law dont allow interest to be charged. Therefore this poses as a problem and contradiction thus hardly practiced during the carrying out of Islamic trading finance practices. Financial instruments: The following are some of the financial instruments offered by bank that utlilize Islamic banking. ISLAMIC ACCEPTED BILLS-i This is a financing product provided under the Islamic Shariah principle of Murabahah used to finance purchases of raw materials and other tradeable goods. It can be used to finance both your local purchases and/or imported goods from overseas. Payment of AB-i to the bank is usually from proceeds of your sales. ISLAMIC TRUST RECEIPTS-i Under this financing product, its functionality involves the financing of purchases and imports of goods. This is a service provided by RHB Islamic Bank which provides TR-i as a financing tool complementing the issuance of Islamic Letter of Credit-i (LC-i). It is also an alternative financing tool to Islamic Accepted Bills-i (AB-i). Payment of TR-i to the bank is usually from sales of goods purchased under the Banks LC -i. TR-i is provided under the Islamic Shariah principle of Murabahah. Apart from Islamic Trade Financing products, and also provide Islamic Trade Services products to meet trading and other business requirements.

ISLAMIC LETTER OF CREDIT-i This financing instrument allows one to procure goods locally as well as imports from overseas with the Bank providing suppliers an undertaking to pay them upon shipment of goods and presentation of shipping documents complying with the terms and conditions of the LC-i. In addition, by getting the Bank to issue LC-i one their customers behalf to procure the goods, those under this instrument would also avail their customers subsequent financing for the goods purchased, either by TR-i or AB-i when the payment for the goods is due to the supplier. LC-i is provided under the Islamic Shariah principle of Wakalah (agency arrangement). ISLAMIC SHIPPING GUARANTEE-i Islamic Shipping Guarantee-i (SG-i) allows you to obtain the goods from shipping company in the absence of Bills of Lading, which can happen in the event of delay in documents received or documents lost/misplaced in transit. SG-i would prevent delays in clearing and getting your goods even if you have not received the shipping documents yet. SG-i is provided under the Islamic Shariah principle of Kafalah (guarantee arrangement). ISLAMIC BANK GUARANTEE-i This instrument allows a firm to expand their businesses or enter into dealings where their counterpart requires BG-i as part of the business arrangement. When issuing the BG-I under the RHB Islamic Bank for example, it provides guarantee to the counterpart dealing with the firm, that the bank will pay them to cover their losses in the event of default, breach of contract or non-performance by the firm undertaking this Islamic trading instrument with the bank . BG-i would act as an added comfort to their clients counterpart that the firm will live up to their obligation in the business dealings the firm have with them.

This is also a guarantee arrangement provided under the Islamic Shariah principle of Kafalah. OTHER ISLAMIC TRADE SERVICES PRODUCTS: Other Islamic trade services offer financial instruments that also provide other standard Trade Services products such as inward and outward collection of documents, advising of Letter of Credits and presentation of LC documents to issuing bank for payment which are provided under the Islamic Shariah principle of Wakalah (agency arrangement).

Conclusion: As can be seen through this report, Islamic financing tools instruments have helped the Islamic trading financing system grow globally as well as enabled it to establish itself as a convenient way of doing business. Therefore, with the growing importance of Islamic banks and Sharia-compliant financial innovation, it will be increasingly important to ensure sound Islamic financial institutions going forward. In addition, the financial system can be used to encourage banks as well as businesses to improve their risk management systems, controls and transparency through this religious-backed financial system , which will in turn help ensure the stability and soundness of the international banking system in general.

REFERENCE: ISLAMIC FINANCE: You dont have to be religious but it helps, By Wilmington Publishing & Information Ltd, 1999 Website: http://www.tfreview.com/xq/asp/sid.0/articleid.596AFDEF-ED84-4D96-9B93C1DE25B06F1B/eTitle.ISLAMIC_FINANCE_You_do_not_have_to_be_religious__but_it _helps/qx/display.htm (Viewed on 6th May 2012) Istisna investment & finance definition, By Wiley Publishing, Inc, 2010 Website: http://invest.yourdictionary.com/istisna (Viewed on 6th May 2012) Islamic Trade Finance, RHB Bank Website: http://www.rhb.com.my/business_banking/islamic_banking/enterprisebanking/trade_main.html (Viewed on 6th May 2012) Expanding Trade financing opportunities through Islamic Finance, By Scott Schmith, Website: http://www.ita.doc.gov/td/finance/publications/Islamic_Banking.pdf (Viewed on 6th May 2012) Islamic Trade Finance, By En Sharuddin jaafar, En. Azlan Abdul Samad & Pn Jamaliah Abd Malik, Website: http://www.ibbm.org.my/pdf/Islamic%20Trade%20Finance%202_GC.pdf (Viewed on 6th May 2012) The growing importance of Islamic finance in the global financial system, By Mr Malcolm D Knight, 2007 Website: http://www.bis.org/speeches/sp071210.htm (Viewed on 6th May 2012)