Return on the Letter of Guarantee: Issues and New Proposals in Structuring the Product
DOI:
https://doi.org/10.31436/ijema.v25i3.426Abstract
The paper aims at discussing the issues surrounding earning of return on Letters of Guarantee (LG) issued under kafÄlah by Islamic banks and to propose alternative ways of structuring it by sharī‘ah compliant Islamic banks. The paper proposes structuring LG as a service contract under wakÄlah or as a reputation-based partnership. Letter of guarantee can be issued as a service contract and the Islamic Bank can charge service fees commensurate with the direct and indirect costs of issuing the cover. The paper further proposed that an Islamic Bank and a client (prospective guaranteed) can set up a reputation-based partnership for an underlining project where the Islamic Bank contributes through the issuance of the LG with profit sharing agreed upon and losses borne proportionate to capital contribution. The paper contributes to Islamic bank practice in the financial intermediation role by providing an instrument for such banks to meet unique needs of their clients with financial solutions fulfilling the dual needs of financial intermediation and sharī‘ah compliance.
References
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Ahmad, B. Hidayat. Studies in the Islamic Law of Contracts: The Prohibition of GharÄr. Kuala Lumpur: International Law Book Services, 2000.
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Ahmed, A. “Global Financial Crisis: An Islamic Finance Perspective.†International Journal of Islamic and Middle Eastern Finance and Management 3, no. 4 (2010): 306-20.
Al-HÌ£atÌ£tÌ£aÌ„b, MuhÌ£ammad MuhÌ£ammad Al-Ru‘yanÄ«. TahÌ£rÄ«r Al-KalaÌ„m fÄ« MasÄ’il Al-IltizaÌ„m. Edited by ‘Abd Al-SalaÌ„m MuhÌ£ammad Al-SharÄ«f. Beirut: DÄr Al-Gharb Al-IslaÌ„mÄ«, 1984.
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Ayub, Mohammed. Understanding Islamic Finance. England: John Wiley and Sons, 2008.
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Hammad, Nazih. “Extent of Permissibility of Payment for Guarantee (Kifalah) in Islamic Fiqh.†Journal of King Abdulaziz University: Islamic Economics 9, no. 1 (1997): 95-120.
Hassan, K.B. “Shari‘ah Controls to Work on the Base of Bridging the Excuses and Their Applications in Modern Financial And Banking Transactions.†5th Shura Conference Resolutions. Kuwait, 2013.
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Teoh, A.B. Exporting and International Trade. Kuala Lumpur: Cyclair, 2008.
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Sundararajan, Vasudevan, and Luca Errico. Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead. International Monetary Fund Working Paper Vol. 2, WP/02/192. Washington: IMF, 2002.
Syed Alwi, Sharifah Faigah, Uzaimah Ibrahim, and Mohd Fuad Sawari. “A Few Methods in Charging Fees for KafÄlah Bank Guarantee-I among Islamic Banks in Malaysia.†ISRA International Journal of Islamic Finance 6, no. 1 (2014): 51-66.
The Economist. “Big interest, no interest. The market for Islamic financial products is growing fast.†2014. http://www.economist.com/news/finance-and-economics/21617014.
Usmani, M. Taqi. An Introduction to Islamic Finance. London: Brill, 2002.
Van Greuning, Hennie, and Zamir Iqbal. “Banking and the Risk Environment.†In Islamic Finance: The Regulatory Challenge, edited by Simon Archer and Rifaat Ahmed Abdel Karim, 9-39. Singapore: John Wiley & Sons, 2007.
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Sharī‘ah Standards. Bahrain: AAOIFI, 2010.
Ahmad, B. Hidayat. Studies in the Islamic Law of Contracts: The Prohibition of GharÄr. Kuala Lumpur: International Law Book Services, 2000.
Ahmed, Tigani A. “Comment on Extent of Permissibility of Payment for Guarantee (Kifalah) in Islamic Fiqh.†Journal of King Abdulaziz University: Islamic Economics 9, no. 1 (1997): 159-64.
Ahmed, A. “Global Financial Crisis: An Islamic Finance Perspective.†International Journal of Islamic and Middle Eastern Finance and Management 3, no. 4 (2010): 306-20.
Al-HÌ£atÌ£tÌ£aÌ„b, MuhÌ£ammad MuhÌ£ammad Al-Ru‘yanÄ«. TahÌ£rÄ«r Al-KalaÌ„m fÄ« MasÄ’il Al-IltizaÌ„m. Edited by ‘Abd Al-SalaÌ„m MuhÌ£ammad Al-SharÄ«f. Beirut: DÄr Al-Gharb Al-IslaÌ„mÄ«, 1984.
Al-Zarqā, Muṣṭafā Aḥmad. Al-Madkhal Al-Fiqhī Al-‘Ām. Damascus: Dār Al-Qalam, 2004.
Al-Zuḥailī, Wahbah. Al-Fiqh Al-Islamī wa Adillatuh. Damascus: Dār Al-Fikr, 1997.
Ayub, Mohammed. Understanding Islamic Finance. England: John Wiley and Sons, 2008.
Bakar, Mohd Daud. “Contracts in Islamic Commercial Law and their Application in Modern Islamic Financial System.†In Essential Readings in Islamic Finance, edited by Mohd Daud Bakar and Engku Rabiah Adawiyah Engku Ali, 47-84. Kuala Lumpur: CERT Publications, 2008.
Bank Islam Malaysia Berhad (BIMB). Islamic Banking Practice from the Practitioner’s Perspective. Kuala Lumpur: BIMB, 1994.
Bank Negara Malaysia (BNM). “Shari‘ah Issues in Relation to the Operations of Supporting Institutions in Islamic Finance.†http://www.bnm.gov.my/microsites/financial/pdf/resolutions/10_part04.pdf.
Hammad, Nazih. “Extent of Permissibility of Payment for Guarantee (Kifalah) in Islamic Fiqh.†Journal of King Abdulaziz University: Islamic Economics 9, no. 1 (1997): 95-120.
Hassan, K.B. “Shari‘ah Controls to Work on the Base of Bridging the Excuses and Their Applications in Modern Financial And Banking Transactions.†5th Shura Conference Resolutions. Kuwait, 2013.
Ibn Qudāmah, ‘Abdullah ibn Aḥmad ibn Muḥammad Al-Maqdisī. Al-Mughnī wa Al-Sharḥ Al-Kabīr. Beirut: Dar Al-Kitāb Al-‘Arabī, 1983.
Ilie, D. “Credits and Bank Guarantee Letters in Entrepreneurship Development During Crisis.†Amfiteatru Economic 17, no. 38 (2015): 212-27.
Iqbal, Munawar, and Ausaf Ahmad. Islamic Finance and Economic Development. London: Palgrave MacMillan, 2005.
Iqbal, Munawar, Ausaf Ahmad, and Tariqullah Khan. “Challenges Facing Islamic Banking.†Occasional Paper No. 1, Islamic Research and Training Institute, Islamic Development Bank, 1998.
Islamic Fiqh Academy of the OIC. Resolutions and Recommendations of the Council of the Islamic Fiqh Academy 1985-2000. Jeddah: Islamic Research and Training Institute, Islamic Development Bank, 2000.
International Shari‘ah Research Academy (ISRA). Islamic Financial System: Principles and Operations. Kuala Lumpur, 2011.
Kahf, Monzer. Islamic Finance Contracts. Lexington, USA: Monzer Kahf, 2015.
Lee, Mei Pheng, and Ivan Jeron Detta. Islamic Banking & Finance Law. Kuala Lumpur: Pearson, 2007.
Mohd Ariffin, Noraini, Salina Kassim, and Dzuljastri Abdul Razak. “Exploring Application of Equity-Based Financing through MushÄrakah MutanaÌ„qisÌ£ah in Islamic Banks in Malaysia: Perspective from the Industry Players.†International Journal of Economics, Management and Accounting 23, no. 2 (2015): 241-261.
Mohd Noor, Azman, and Muhamad Nasir Haron. “Charging Fee for Guarantee (al-Kafalah bi al-ajr) and its Application by Deposit Insurance Corporation Malaysia (PIDM) for Takaful Benefits Protection Scheme.†Paper presented at the 8th International Conference on Islamic Economics and Finance, Centre for Islamic Economics and Finance, Qatar Faculty of Islamic Studies, Qatar Foundation, Doha, Qatar, 19-21 December 2011.
Qatar Islamic Bank Annual Report, 2015.
Qatar National Bank Annual Report, 2015.
Teoh, A.B. Exporting and International Trade. Kuala Lumpur: Cyclair, 2008.
Thompson Reuters. “State of the Global Islamic Economy, 2015/16.†2016. http://www.tief2015.org/pdf/report/1910_2_1_alberto_brugnoni.pdf.
Sundararajan, Vasudevan, and Luca Errico. Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead. International Monetary Fund Working Paper Vol. 2, WP/02/192. Washington: IMF, 2002.
Syed Alwi, Sharifah Faigah, Uzaimah Ibrahim, and Mohd Fuad Sawari. “A Few Methods in Charging Fees for KafÄlah Bank Guarantee-I among Islamic Banks in Malaysia.†ISRA International Journal of Islamic Finance 6, no. 1 (2014): 51-66.
The Economist. “Big interest, no interest. The market for Islamic financial products is growing fast.†2014. http://www.economist.com/news/finance-and-economics/21617014.
Usmani, M. Taqi. An Introduction to Islamic Finance. London: Brill, 2002.
Van Greuning, Hennie, and Zamir Iqbal. “Banking and the Risk Environment.†In Islamic Finance: The Regulatory Challenge, edited by Simon Archer and Rifaat Ahmed Abdel Karim, 9-39. Singapore: John Wiley & Sons, 2007.
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Published
2017-11-29
How to Cite
Kahf, M., & Ibrahim, A.-J. (2017). Return on the Letter of Guarantee: Issues and New Proposals in Structuring the Product. International Journal of Economics, Management and Accounting, 25(3), 549–579. https://doi.org/10.31436/ijema.v25i3.426
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