An Islamic bank guarantee is the bank's commitment, based on the Kafalah contract, to pay a beneficiary if its customer fails to meet an obligation, with the bank entitled to charge for its services and costs but not for the risk itself.
Kafalah, the legal basis of every guarantee
Under Kafalah, the guarantor adds its liability to that of the principal debtor towards the creditor. The beneficiary may claim from either party; a guarantor that pays then has recourse against the debtor to recover exactly the amount it paid.
The three parties and their commitments
The applicant, often a contractor or exporter, requests the guarantee; the bank issues it; the beneficiary, a public or private client, holds it. The wording sets the maximum amount, the expiry, the obligation covered and the documents required to make a claim.
What may the bank charge for its guarantee?
The prevailing view, adopted by AAOIFI and the OIC Fiqh Academy, forbids charging for the act of guaranteeing itself, since it would mean profiting from a commitment treated as a potential loan. Actual costs of assessment, issuance and monitoring may still be recovered.
Flat fee or percentage of the guaranteed amount
Because the price should not reflect risk, many Sharia boards prefer a fee tied to administrative work rather than an annual percentage of the guaranteed amount. In practice some banks apply market-like scales, which is why reading the relevant fatwa matters.
Cash margins and how they are treated
When the customer deposits a cash margin covering the guarantee, the bank may hold it in a non-remunerated current account or invest it under Mudaraba with the customer's consent. A fully cash-covered guarantee usually justifies lower fees than an uncovered one.
Bid bonds in public tenders
A bid bond protects the purchasing authority if the winning bidder withdraws its offer or refuses to sign the contract. It is usually a small percentage of the bid value and expires once the performance guarantee is delivered.
Performance and advance payment guarantees
A performance guarantee covers defects in works or deliveries, while an advance payment guarantee ensures the client recovers the down payment if work never starts. Both are frequently reduced in stages as the project progresses and milestones are certified.
On-demand guarantees: a sensitive issue
A guarantee payable on simple demand, without proof of default, is standard in international trade. Several Sharia boards accept it because it remains tied to a real obligation, but they check that it is not used to secure an interest-bearing debt.
What a guarantee can never cover
An Islamic bank cannot guarantee a conventional interest-bearing loan, a transaction involving alcohol or gambling, or a partner's capital in a Musharaka or Mudaraba, because guaranteeing that capital would cancel the required sharing of losses.
Paid third-party guarantees of sukuk
In the Malaysian Islamic capital market, the Shariah Advisory Council of the Securities Commission has accepted that a third party, including a sister company of the issuer, may guarantee certain partnership or investment agency sukuk and receive a fee for doing so.
Counter-guarantees and correspondent banks
For contracts abroad, the beneficiary often requires a guarantee from a local bank, issued against a counter-guarantee from the applicant's own bank. Every link in the chain must respect the same rules on fees and on the lawful purpose of the underlying contract.
Questions to ask before requesting one
Ask which fees are charged and on what basis, whether a cash margin is required and how it is invested, who reviews the guarantee wording, which law governs a claim, and whether the Sharia board has approved the standard template.
Specialist external source
The Securities Commission Malaysia publishes its Shariah Advisory Council resolutions, including those on third-party guarantees of sukuk and fees charged for them.