Murabaha Letter of Credit

Product Definition

Murabaha LC is a letter of credit issued by Al Rajhi Bank in favor of a beneficiary (exporter) on behalf of the applicant (importer).  Al Rajhi commits and accepts to pay against trade documents drawn in compliance with the letter of credit terms.  Al Rajhi Bank’s credit worthiness replaces that of the applicant.

Murabaha contracts allow customers to purchase raw materials, capital goods and other consumables from local and international markets.  These goods are first bought by Al Rajhi Bank for its account on orders of the customers by paying cash or through LC as the case may be and then sold to the customers with profit margin on deferred payment basis. Payments on deferred basis can be made to the bank in installments or in one lump sum amount.

Features and Benefits

• There is no fund outlay from the importer at the time of opening the letter of credit
• Convenience of payment to the bank through installments, on deferred payment basis or on bullet payment basis
• Immediate notification to importer upon receipt of documentation
• Importer improves his negotiating position through Al Rajhi Bank’s payment guarantee

Transaction Mechanism

After the Murabaha LC is opened, when the goods arrive, there are three options available to the importer.

• Al Rajhi sells its share in Murabaha to the customer on cash payment or deferred basis at an agreed profit margin
• The customer sells its share to Al Rajhi on cash payment or deferred basis
• Both sell their shares in the market together