Kafalah is the Islamic law contract by which a guarantor, the kafil, adds their own liability to that of a debtor towards a creditor, so that the creditor may claim the unpaid debt or the unperformed obligation from the guarantor without the claim itself changing hands. It is the Sharia-compliant guarantee: the debtor stays bound, the surety is bound beside them, and the undertaking is given as a service of goodwill rather than sold for a price.
Where a Kafalah guarantee is requested
Kafalah is requested in everyday commerce more often than people expect. A landlord asks a relative of the tenant to guarantee the rent, a supplier asks a parent company to stand behind a subsidiary's invoices, a bank asks a founder to guarantee a company's financing, a public buyer asks a contractor's bank for a performance guarantee. In each case a creditor wants a second person to answer for the same obligation.
The undertaking can cover a sum of money, the delivery of goods, the performance of works or the appearance of a person. What it can never do is guarantee a return on an investment: a Kafalah that promises the investor a profit would reintroduce the fixed gain that Sharia forbids and would no longer be a guarantee in the juristic sense.
Three parties around a single debt
The contract brings together the guarantor, known as the kafil, the principal debtor, or makfool anhu, and the beneficiary creditor, or makfool lahu. The debtor's consent is not required for validity, but it decides whether the guarantor can later be reimbursed.
Adding liability rather than transferring it
Under Kafalah, the debt remains owed by the debtor and the guarantor's liability is added to it. Hawala works differently: it moves the debt to a new debtor and releases the original one. Mixing them up can cause unpleasant surprises on default.
Can the creditor go straight to the guarantor?
According to most jurists, the creditor is free to claim from the debtor or the guarantor, or both. One Maliki view requires the creditor to turn first to a debtor who is solvent and present, an arrangement that can be written into the contract.
Can a future or unknown debt be guaranteed?
Most schools accept guaranteeing a debt that does not yet exist or whose amount is not fixed, such as a supplier's future invoices. The contract should then set a ceiling and a time limit to contain the uncertainty borne by the guarantor.
Writing the Kafalah: ceiling, duration and scope
A well drafted Kafalah names the kafil, the principal debtor and the beneficiary, identifies the obligation guaranteed and states the maximum amount. It should say whether the guarantee covers only the principal or also costs of enforcement, and whether it expires on a fixed date or when the underlying obligation is discharged. These details decide how much risk the guarantor has really accepted.
The guarantor should also check whether the undertaking is limited to one debt or extends to every sum the debtor may owe in future. An open-ended text signed in a hurry can expose a family member or a shareholder to obligations that did not exist on the day of signature, which is precisely the uncertainty that careful ceilings and time limits are meant to prevent.
Why the Kafalah guarantee itself cannot be sold
Kafalah is an act of benevolence. Jurists hold that charging for the promise would amount to pricing a potential loan, since a guarantor who pays becomes a creditor. The OIC Fiqh Academy therefore prohibits charging for the undertaking itself.
Administrative costs a bank may recover
The bank may, however, recover its actual costs: credit assessment, drafting and monitoring. The AAOIFI standard on guarantees separates these justified expenses from a fee proportional to the amount and duration, which would resemble interest.
Covered versus uncovered letters of guarantee
If the customer deposits the full guaranteed amount, the bank acts mainly as an agent and may earn a Wakala fee. If the letter is uncovered, the bank commits its own credit, and only genuine costs remain permissible.
The guarantor's recourse after paying
When the guarantor has paid in the debtor's place and the guarantee was given at the debtor's request, they may recover exactly the amount paid, with no mark-up. Without such a request, several jurists treat the payment as a gift.
Costs a bank can charge on a Kafalah letter of guarantee
Customers often ask why a bank that issues a letter of guarantee cannot simply quote a percentage per year, as conventional banks do. The answer is that a charge proportional to the amount and the duration prices the bank's credit exposure, which is the logic of interest. The bank may instead recover the expense of assessing the file, preparing the document and monitoring it.
Where the client has deposited the full amount with the bank, the arrangement is usually analysed as an agency, and a fixed fee for the service of issuing and administering the guarantee is easier to justify. Customers comparing offers should ask the bank to break its charges into those categories and to explain which part is an administrative cost and which part is remuneration for acting as agent.
Kafalah over a person rather than money
Alongside the financial guarantee there is Kafalah bi al-nafs, by which the guarantor undertakes to produce the debtor before a judge or creditor. It survives in some legal procedures, but banks rely almost exclusively on guarantees of sums of money.
Third-party guarantees on Mudaraba capital
The manager of a Mudaraba cannot guarantee investors' capital, otherwise the contract turns into a loan. The AAOIFI standard does, however, accept that an independent third party with no ownership link to the manager provides a free and separate guarantee.
Kafalah, Rahn and Takaful as separate protections
Rahn pledges a specific asset as security for repayment, Kafalah relies on a person's creditworthiness, and Takaful pools a risk among participants. A financing can combine these mechanisms, provided each one complies with its own rules.
Before you sign as guarantor
Read the maximum amount committed, the duration, whether you can be called before the debtor, the fees charged and your right of recourse. Ask the institution's Sharia board whether its pricing respects the ban on charging for the guarantee.
What happens when the Kafalah guarantee is called
When the debtor defaults, the creditor sends a demand to the kafil, who pays up to the agreed limit. The kafil then looks to the debtor for reimbursement, but only for the amount actually paid. Any additional charge on top of that amount, or a payment calculated by the time that passed before reimbursement, would turn the recovery into a profit on a loan.
Documentation matters at this stage. The guarantor should obtain a copy of the demand, proof of the default and a receipt for the payment, because these papers support the claim against the debtor and prevent the creditor from claiming twice. If the guarantee was given without the debtor's request, the right to reimbursement may be disputed, so the request should be in writing.
- Keep the signed text of the Kafalah and every amendment.
- Note the ceiling and the expiry date in your own records.
- Inform the debtor in writing when a payment is made on their behalf.
- Ask for a release letter once the guaranteed obligation has been discharged.
The delivery guarantee
Alongside the guarantee of a sum of money, the Kafala bi al-taslim aims to ensure that goods or services will be delivered as agreed in a contract. It applies notably in construction or manufacturing contracts, where a delay or a failure to meet specifications can result in penalties.
Providers offering these services
- Maybank Indonesia (Sharia guarantees) : Maybank Indonesia presents its Sharia bank guarantees based on Kafalah, including standby letters of credit and demand guarantees.