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IIG Trade Finance Insights Archive/Past Editions

Islamic Trade Finance: Understanding a Growing Area of Global Trade Finance
IIG Trade Finance Insights, June 2017

Small and medium-size enterprises (SMEs) in developing economies have a critical need for affordable trade finance. SMEs in predominantly Islamic countries are no exception, but also come with the caveat of often requiring a specific type of trade finance that follows the principles of Islamic law. In recent years, the demand for this type of Islamic trade finance has caused more players, both major banks and private investors, to become active in this area. A number of investment funds now focus on Islamic finance in general and, in some cases, Islamic trade finance specifically.

Islamic trade finance is a specialized area that requires certain expertise because these transactions must be carefully structured and carried out in ways that support certain Islamic principles. For example, Islamic trade finance cannot involve usury (the payment of interest). This financing also cannot be used for transactions involving the production or distribution of alcohol or tobacco that will be consumed by humans (transactions involving these products for use in other ways could be supported by Islamic trade finance), gambling, prostitution, pornography or defense and weapons...

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