Letter of guarantee
A bank's written guarantee to a beneficiary; AAOIFI and Bank Negara Malaysia take different positions on charging for it.
A letter of guarantee is a written undertaking by a bank to pay a beneficiary if the bank's customer fails to meet an obligation. AAOIFI's guarantees standard does not permit a fee charged as consideration for the guarantee itself, because the amount and duration would then be priced, but allows the applicant to bear administrative expenses at a level not exceeding what others charge for the service. Bank Negara Malaysia's kafalah policy document allows the guarantor to charge a fee, either fixed or as a percentage of the guaranteed amount. Fee design therefore depends on which authority governs the product.
Sources
- AAOIFI Shari'ah Standards, English edition (full text, PDF): Shari'ah Standard No. 5, Guarantees, items 6/1/1 and 6/1/2
- Bank Negara Malaysia, Kafalah policy document, 2017: imposition of fees or charges on kafalah
This entry explains a term; it is not a Shariah ruling. Approving a product is for each institution's own Shariah board and regulator.