TING LEUNG HUA 255082
Question: Do you think that earning returns on Islamic Letter of Guarantee offered
by Islamic bank is Shariah compliant?
I am of the view that earning returns on Islamic Letter of Guarantee (LG) offered
by Islamic bank is Shariah compliant. This is because LG acts as a pure business transaction
mechanism which is regarded as a tool needed for business execution and come with a cost.
The Shariah Advisory Council members of Bank Negara Malaysia opined that the fee shall
be permissible for LG with the view that a tabarru contract is metamorphosed into a
muawadah (exchange) contract insofar as the contracting parties reached an agreement to
that effect. Hence, LG should be treated as an exchange contract as the guarantors expends
resources and the guaranteed benefits by making a profit from the business venture. In
addition, guarantor puts in effort and commits funds in the issuance of the LG and therefore
it is considered as a service provided to the guaranteed. With that being said, the guarantor
should be entitled to earn a return from exchanging resources and efforts with guarantee’s
business for which the LG was issued, and thus, it is Shariah compliant since it does not
involve any elements of riba, gharar and maysir.
Besides, according to the view from Nazih Hammad, Nazih opined that “there are
benefits derived in kafalah as in the other contracts and therefore it can be the subject
matter of monetary reward in exchange”. The issuance of LG is similar to providing
services to the client, thus charging fee on it will be allowed as it becomes like wakalah
and wadiah ah bi ajr. This is relevant considering the fact that offering an LG to a client
may also include setting aside financial resources for it.
Further, from the perspective of maslahah (public interest), charging fee on LG
saying that LG is a necessity for societal well-being is being justified. Al-Zuhaili opined
that guarantor can charge fee on issuing an LG based on the public good and necessity. For
instance, in the circumstance where the law requires that a prospective contractor has to
provide an LG as part of the bidding process and at the same time the banking regulation
provides that the guarantor has to make provision for the LG in respect of working capital,
it is thus justifiable for the guarantor to charge a fee to enable provision of the service based
on maslahah, and therefore, it is Shariah compliant.
Moreover, OIC Fiqh Academy and AAOIFI are of the view that an Islamic bank
charge the fee on the basis of wakalah (agency) when the LG is fully covered by the
guaranteed because the Islamic bank acts as an agent who manages funds for the principal
(the client). The fee is therefore being view as the fee for agency services but not the
guarantee. On the other hand, if the LG is unsecured or is only partially covered by the
customer, Islamic bank will act merely as a guarantor and is thus prohibited from charging
fees on the LG itself. In this instance, permissibility of charging fees is related only to the
banking costs in respect of the LG issuance.
In sum, the earning returns on Islamic Letter of Guarantee offered by Islamic bank
is considered as Shariah compliant based on the ground of statements aforementioned
which are LG is a pure businesss transaction mechanism, issuance of LG is likened to
providing service to customers, the fee charged is based on concept of maslahah and
agency services.