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Fatwa Number : 3474

Subject : Ruling on Letters of Guarantee and Taking a Commission for them

Classified : Current Financial Issues

Fatwa Type : Search Fatawaa


Question :

What is the legal evidence upon which some Islamic banks based their taking a commission on letters of guarantee issued by them where the commission constitutes a percentage from the value of that letter and is linked to a certain time. For example, charging (2%) from the value of the guarantee?


The Answer :

Praise be to Allah, the Lord of the Worlds.

A letter of guarantee is a pledge by a bank to pay a sum of money to the person to whom the letter is issued at the request of the customer requesting the guarantee in the event that he is unable to fulfill the obligations towards the beneficiary, and usually this letter takes a certain time period.

It is a mere pledge to pay the beneficiary immediately on behalf of the customer. Accordingly, it consists of two transactions: the guarantee and the authorization, and each is permissible in accordance with their own conditions.

The ruling of Sharia on the wage (commission) obtained by the bank from issuing and executing the letter of guarantee varies according to the manner in which the customer covers it:

If the letter is covered by the customer in full, then the commission becomes a paid authorization, because the customer, in this case, has deputized the bank to carry out the procedures of the letter from his own balance, and thus the authorized is permitted to obtain a wage from the authorizer.

If the letter of guarantee is not covered by the client, it becomes a suretyship {Kafalah}, and then the bank is not entitled to take a wage against it, except for the actual direct administrative expenses and in accordance with the established standards of Sharia. However, the additional wage isn`t permissible. In addition, it isn`t permissible to link the wage with the amount of the guarantee or its duration. This aims to prevent the suspicion of taking a wage for the guarantee transaction.

The latter impermissibility arises from the fact that when the guarantor covers the debt of the customer where the latter becomes indebted to the former. In this situation, the guarantee is similar to a loan, and taking a compensation for it makes it a loan yielding a benefit, and this is prohibited. Al-Hattab, a Maliki jurist, says, "Scholars are agreed on the impermissibility of guarantee against conditional payment. This is because, from the perspective of Sharia, both guarantee and loan are conducted to please Allah. Therefore, taking a compensation against them is unlawful."{Mawahib Al-Jaleel, 4/391}.

This conclusion was arrived at by resolution No. (2/12) of the International Islamic Fiqh Academy, which states, "First, it isn`t permissible to receive a wage against guarantee-where the sum and duration are taken into consideration-whether it is covered or not. Second, charging the actual expenses for issuing both types of guarantee letters is permissible provided that no additional payments are charged."

Al-Ayofi says, "It isn`t permissible to receive a wage against guarantee-where the sum and duration are taken into consideration-whether it is covered or not."{Sharia Standards, standard (5)}. And Allah the Almighty knows best.




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