Contract of Kafālah (Guarantee) in Islamic Finance
CONTRACT OF KAFĀLAH (GUARANTEE) IN
ISLAMIC FINANCE: EXTENDING THE
FRONTIERS OF ISLAMIC LAW
Abdulqadir Ibrahim Abikan
Associate Professor of Islamic Law,
Department of Islamic Law,
Faculty of Law, University of Ilorin,
P.M.B. 1515, Ilorin, Kwara State, Nigeria,
abikan.ia@unilorin.edu.ng
ABSTRACT
In the traditional application of kafālah (guarantee) agreement
under the Islamic law, the kāil (guarantor) is not expected to make
proit from offering to guarantee. However, in the contemporary
Islamic inancing, a huge volume of national and transnational
transactions are built around kafālah in form of bank guarantee,
standby letter of credit and shipping guarantee. The Islamic
inancial institutions have thus redesigned the traditional concept
to take advantage of the robust return, like their conventional
counterparts, accruable from kafālah transactions. This raises
fundamental question of possible infraction of the Shariah or
contrivance of legal device (hiyal) to permit the impermissible.
This paper therefore, conducts a study of the traditional concept
of kafālah with a view to examining the possible contrivance
in and/or infraction of Shariah in the process of its redesign
and application. The goal is to screen the product for Shariah
compliance and the methodology adopted is qualitative. It
concludes that rather being a contrivance of Islamic traditional
precept the practice is an ingenious extension of the frontiers of
Islamic law to the contemporary needs.
Keywords: kafālah, frontiers, Islamic inance, law
INTRODUCTION
Kafālah is one of the age-long transactions evolved by man to bridge the gap
that may exist in inancial dealings as a result of the parties’ lack of conidence,
Journal of Shariah Law Research (2017) vol. 2 (1) 157-178
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suspicion and lack of detailed knowledge of one another on the one hand. On
the other hand, it gives assurance that a particular person would discharge his
obligation in certain relationships without being constrained for lack of such
assurance. The longevity of the usage of the contract is evidenced, as will be
shown hereunder, by the age of the event in the story of Prophet Yūsuf which
has remained the main proof of its validation in Islamic law. Islam adopted
kafālah and encourage its practice in reversal of the negative perception,
informed by peoples experience, in which it was held. The perception is
expressed in a way that a guarantee is immediately followed by the guarantor
blaming himself and being blamed by others, then he regrets his act when
demanded to pay on behalf of the guaranteed party, and he inally loses some
of his property (al-Zuhayli, 2003: 6). Islam therefore adopts the product within
a legal framework that makes it adaptable to new transactions of different era.
The reemergence of institutionalized Islamic inancing in the last four
decades and its continued development has occasioned a reengineering of
the traditional inancial contracts including kafālah, to suit, especially, the
contemporary banking and inance. Other similar inancial instruments adapted
include mushārakah (partnership), muḍārabah (sleeping partnership), salām
or salaf (advance purchase), ijārah (lease), ju‘ālah (reward or commission
transactions), muzāra‘ah (share cropping) and musāqāh (irrigation).
This paper therefore, conducts a study of the traditional concept of kafālah
with a view to examining the possible contrivance in and/or infraction of
Shariah in the process of its redesign and application by Islamic inancial
institutions (Saiful Azhar Rosly & Mahmood Sanusi, 2001: 274-275).1 The
research is conducted in ive parts. Following this introduction, part two looked
into the deinition of the instrument under the Islamic law tracing its legality to
the two primary sources of Shariah (Qur’ān and sunnah) and ijmā‘. Part three
examines the types of kafālah along with the juristic views on its development.
Part four of the work looks into the justiication for charging fees for kafālah
vis-à-vis its contemporary application by Islamic inancial institutions and the
work is concluded in part ive.
DEFINITIONS AND LEGALITY OF KAFĀLAH
In this section, both literal and juristic deinitions of kafālah as well as it the
validating sources of Islamic law relating thereto are considered.
1
This is necessary in the light of heavy criticism attracted by some of the products
devised by Islamic inancial institutions like bay‘ al-‘inah (buy back sale) popularly
used in Malaysia on the understanding that it is allowed by Shāi‘ī school of law.
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1. Deinitions
In its literal usage, kafālah means surety, bail, guarantee, responsibility or
amenability (Khan, 2003: 335; Ibn Rushd, 2006: 355).2 It was in this literal
sense that Allah SWT used the term in the holy Qur’ān where He says:
ﯰ ﯱ ﯲ ﯳ ﯴ ﯵ ﯶ ﯷ ﯸﯹ
“...so, her Lord (Allah SWT) accepted her with goodly acceptance.
He made her grow in a good manner and put her under the care
of Zakariyya (Zechariah)….”
(Surah Alī-‘Imrān, 3: 37)
The term kafālah as used in the verse was a reference to the upbringing
of Maryam the mother of Prophet ‘Īsā AS under the responsibility of Prophet
Zakariyya. In this same manner, Prophet Muhammad SAW used the term
where he was reported to have said that:
ُ ّ َس ْه َل ْب َن َس ْع ٍد َع ْن ال ّنبِ ّي َص ّل
َ ْ يم ِف
َ ال َع َل ْي ِه َو َس ّل َم َق
ال ّن ِة
ِ ِال َأ َنا َو َك ِاف ُل ا ْل َيت
َ َه َك َذا َو َق
الس ّبا َب ِة َوا ْل ُو ْس َطى عن
ّ ال بِإِ ْص َب َع ْي ِه
Sahl Ibn Sa‘d narated: The Prophet, peace and blessings be
upon him, said: “I and the person who looks after an orphan and
provides for him, will be in paradise like this,” putting his index
and middle ingers together…” 3
Reference to kail al-yatim (lit. guarantor of orphan) in the above ḥadīth
was used literally to mean guarantor of good welfare of orphan. Legally,
the term guarantee is deined as the conjoining of the guarantor’s dhimma
(faculty by which a person bears liabilities) to that of the guaranteed in a way
that the debt or other responsibility of the original bearer is established as
a joint liability of the two of them (Ibn Qudāmah: 1983: 70). The contract
provides an assurance that an obligation or liability of the guaranteed party
will be fulilled. It may relate to a person (kafālah al-nafs), inance (kafālah
bi al-māl) or performance of an act (kafālah wajh) (Bank Negara Malaysia
(BNM), 2015: 6) kafālah relating to a person involves the production of the
person for whom the kafālah (bail) has been given. Kafālah relating to inance
implies an obligation. Kafālah relating to an act or performance ensure the
2
3
It is also call hamalah, ḍamānah and za‘amah.
Muhammad Ibn Ismā‘il al-Bukhāri (1987), Sahih al-Bukhāri, vol. 8, ‘Bab Fadlu
man Ya’ul al-Yatim’, hadith no. 34, Beirut: Dār al-Fikr, 23.
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performance of a certain act, the failure of which may render the surety liable
and responsible.
One important point to be stressed is that kafālah, unlike hiwalah (transfer
of debt), would not release the principal debtor in whose favor the contract
is concluded because kafālah is only an obligation in addition to the existing
obligation. While the guarantee agreement establishes a joint liability of both
the guarantor and the guaranteed, it does not increase the creditor’s right to the
original debt. This is because once the debt is claimed from either of them, no
claim can be laid on the other and a discharge of one of them from liability for
performance exonerates the other.4
2. Legality of Kafālah
Contract of guarantee inds its bases from the Qur’ān, sunnah and consensus
of Muslim jurists. In the Qur’ān the event of Prophet Yūsuf and his brothers
where the former feigned the loss of the King’s measure and stood guarantor
for a reward for whoever retrieve it gave validity to the contract under the
Islamic law. The relevant of Qur’ān portion provides:
ﭧﭨﭩﭪ ﭫﭬﭭ ﭮﭯ ﭰﭱﭲﭳ
They said: “We have lost the (golden) bowl of the king and for
him who produces it is (the reward of) a camel load; and I will be
bound by it…”
(Surah Yūsuf, 12: 72)
The word za‘im used in the verse signifying being bound by obligation
was said to have been interpreted by Ibn ‘Abbās to mean kafīl i.e. guarantor.
Imam al-Razī in his exegeses of Qur’ān also interpreted the verse as a basis
for kafālah contract especially as it was conirmed by the later practice and
saying of the Prophet but made exception of the subject of the guarantee in the
verse, which was to reward a return of a purported stolen item (al-Razī, 1981:
179-180).
In further validation of the contract, the Prophet SAW was reported in a
ḥadīth narrated by Jabir to have gone for the funeral of a man to pray for his
soul. He asked those present at the funeral:
4
Bakar, D. (2008), “Contracts in Islamic Commerce and their Application in
Modern Islamic Financial System,” Iqtisad Al-Islami Khalifa Institute, http://
islamic-world.net/economics/contract_03.htm, accessed 1 April 2010.
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“..did he leave any wealth?”, they replied “No.” He asked
further, “did he die with any debts outstanding?”, they replied
“yes, he owed two dinār” (in some narrations three dinār). The
Prophet SAW was about to leave when he said “then pray on
your companion.” Abu Qatādah al-Anṣārī interceded and said:
“I guarantee his debt, Oh Messenger of Allah SWT” and the
Prophet SAW then pray on his soul…” 5
In another tradition, the Prophet SAW was reported to have said:
“The guarantor (al-za‘im) is a debtor.” 6
The Muslim jurists are also unanimous on validating contract of guarantee
because it is essential for a low of commercial dealings as it gives protection
to the debtor and assurance and conidence about repayment to the creditor
(Shabir, 2001: 94). In inancial transactions, guarantee is intended to secure
obligations and protect amount of debts from being uncollectible or from
being in default. It takes the form of written documents, attestations, personal
guarantees, pledges, cheques and promissory notes. Guarantee is effective in
contract of exchange, like contract of sale or contracts of rights, e.g. right of
intellectual property but it does not affect the validity of the original contract
in which it is required. More than one guarantee may also be contained in one
contract, as in incorporation of personal pledge with the pledge of security in
the same contract (AAOIFI, 2002: 57).
THE JURISTIC VIEWS ON THE DEVELOPMENT OF KAFĀLAH
Having agreed generally on the legality of kafālah contract, many juristic ink
have lown in the expression of divergent views of Muslim scholars on the
nitty-gritty of especially its composition, conditions for its validity, knowledge
of the guaranteed liability and exoneration of its principal bearer.
a) Composition of Contract of Guarantee
Majority of the Muslim jurists comprising of Mālikī, Ḥanbalī, Shāi‘ī and
some views in Ḥanafī schools agreed on four components of a contract of
guarantee. These are: (a) al-Kāil (the guarantor) with capacity to transact in
5
6
al-Bukhari (1987), Sahih al-Bukhari, vol. 3, “Kitab al-Hawalah,” Beirut: Dar alFikr, no. ḥadīth 492, 276.
Abu Dawud (1984), Sunan Abu Dawud, vol. 3, Beirut: Dar al-Fikr, no. ḥadīth
3343, 247.
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his own property, (b) a right susceptible to representation, (c) the form (offer
by the guarantor) and (d) al-Makfūl ‘anhu (the guaranteed party), who bears
the liability originally, dead or alive (Ibn Juzayy, n.d.: 325). According to
Shabir (2001: 94), the major area of difference between this group and the
minority group comprising of Abu Hanifah and his disciple, Muhammad, is in
the form of the contract where the latter insist that an offer by a guarantor must
be accepted by the guaranteed. The majority is contented with only the offer as
constituting the contract relying on the fact that the ḥadīth of Jabir cited above
was not anticipatory of acceptance from the deceased debtor. This view seems
to be more convincing.
b) Conditions for the Validity of Kafālah Contract
Several conditions are stipulated for the validity of kafālah contract. The
conditions relate to the guarantor, the guaranteed party, object of the guarantee
and details of the language of guarantee contract. As for the guarantor, Muslim
jurists are unanimous on the requirement that he must have legal capacity7
to enter into gratuitous contract relating to his property and must as well be
free from restriction to enter into the contract. These two conditions exclude a
child and an insane as well as a slave from being guarantors. However, these
conditions are extended by Mālikī jurists by further excluding a woman from
guaranteeing a liability that covers more than 1/3 of her property without the
consent of her husband (al-Zuhayli, 2003: 16).
Divergent views emerged as to the conditions to be satisied by the
guaranteed party. Abū Ḥanifah excludes a bankrupt deceased person from
eligibility to guarantee as according to him, all liabilities on the juristic
personality of a deceased person must have perished with his death. However,
his two disciples, Abu Yusuf and Muhammad and jurists of Mālikī and Shāi‘ī
schools viewed differently. They relied on the ḥadīth of Jabir to insist that
the debt of a deceased person whose estate cannot repay his debt can be
guaranteed. Shāi‘ī and Ḥanbalī jurists also held contrary views to Ḥanafīs
insistence that a debtor to be guaranteed must be known to the guarantor. This,
the former said, is unnecessary since the debtor’s acceptance is not required to
7
The legal capacity of a person, from Shariah perspective, is deined as capacity to
assume rights and responsibilities; and capacity to give legal effect to his action.
Among the important conditions are that the person must possess sound mind and
the capacity to distinguish between what is harmful or beneicial to one’s interests.
Legal capacity of a legal entity is deined as eligibility of an entity to acquire rights
and assume responsibilities, see BNM, Kafālah Concept Paper paragraph 13.2, 9.
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form the contract and guarantee as a charitable act can be directed to anyone
(Ibn Qudāmah, 1983: 537).
Bank Negara Malaysia (2015: 10) summarized the object of guarantee as
comprising the following:
a) A inancial liability or obligation of the guaranteed party that is already
established or that will be established in the future;
b) Performance of a certain act by the guaranteed party;
c) Fulillment of an obligation by the guaranteed party; or
d) A combination of any or all of the above.
Jurists are unanimous that a inancial debt must be a valid and binding one
to be guaranteed. This excludes non-debts like the ransom to be paid by a slave
given the option of freeing himself and alimony payment by a husband of a
divorcee before the option of enfranchisement is made or before the alimony
is agreed upon respectively (al-Zuhayli, 2003: 17).
The majority of Muslim jurists, comprising of Ḥanafī, Mālikī and Ḥanbalī
jurists also opined that the object of inancial guarantee must be such that
can be retrieved from the guarantor. This invalidates a guarantee to receive
physical punishment because receipt of physical punishment cannot be done
in proxy. This position placed reliance on the ḥadīth reported by Bayhaqi and
quoted by al-Saywasi (n.d.: 187) where the Prophet SAW was reported to have
said:
ا كفالة ف حد
“There is no guarantee for a physical punishment (ḥadd).” 8
Their position was further fortiied by the contradiction that exists between
the objective of guarantee, that is, to certify and assure the creditor’s right
and the convention of the jurists seeking to avoid the inliction of physical
punishment by looking for grounds to doubt the need to inlict penalties.
The Ḥanafīs however understand this impermissibility as to avoid forcing a
guarantor from producing one. Thus, a voluntary guarantee of presence by the
accused person is valid (al-Kasānī, 1986: 8).
Finally on the object of guarantee, it is the view of the Ḥanafīs that it
must be an established liability borne by the debtor. Thus, non-fungibles held
as a possession of trust cannot be object of guarantee. It is not permissible
to stipulate in trust (inancing) contracts like agency contracts or contract
of deposit that a personal guarantee or pledge be produced, because such a
8
al-Bayhaqi (1994), Sunan Bayhaqi al-Kubra, vol. 6, “Bab: Ma Ja’a fi al-Kafalah
bi badan ma ‘alayh Haq,” Makkah: Maktabah Dār al-Bāz, 77.
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stipulation is against the nature of the contract, unless it is intended to mitigate
risk arising from cases of misconduct, negligence or breach of contract (Ibn
Qudāmah, 1983: 536-539). This position is more stringent in mushārakah
(partnership) (Muhammad Akram Khan, 2003: 136)9 and muḍārabah (proit
sharing) (Muhammad Akram Khan, 2003: 129)10 contracts since the partner or
the manager in these contracts cannot be asked to guarantee the capital or to
promise a guaranteed return. This is more so as the contract cannot be marked
or operated as guaranteed investments.
c) Knowledge of the Guaranteed Liability
Majority of the Muslim jurists comprising Ḥanafī, Mālikī and Shāi‘ī jurists
are of the view that it is not necessary for a guarantor to know the amount or
the extent of the liability he is guaranteeing. This according to them is because
the contract of guarantee is a voluntary gratuitous contract meant to facilitate
transactions and as a result accommodates ignorance of the object (al-Ramli,
nd.: 26). The Shāi‘īs extend the permissibility of guarantee of an unknown
object to guaranteeing the safety of the route through which the objects would
be transported.
Against this background, a valid guarantee may be given for debts, the exact
amount of which is unknown. Similarly, a valid guarantee may be given for
a debt that will arise in the future. It is however permissible for the guarantor
to withdraw such a guarantee before a future debt is actually created, but after
notifying the person having interest in the guarantee. This is called a “market
(business) guarantee” or “guarantee of contractual obligation” (AAOIFI,
2002: 59).
However, later jurist of the same school insist that a guaranteed object must
be known by the guarantor in terms of its amount, characteristics, genus and
speciication. They opined that contract of guarantee establishes property as
9
10
Musharakah Lit: Partnership inancing. Tech: A inancing technique adopted by
Islamic banks by which the bank participates in business enterprises by contributing
a capital which is mixed with others capital. Proit is shared in pre-agreed ration
while loss is borne in the ratio of parties’ contribution to the business capital.
al-Muḍārabah Lit: Proit sharing inancing. Tech: A business relationship in
which a party (rabb al-māl) contributes the capital and the other party (muḍārib)
entrepreneurship, with a predetermined share of proit while the loss is borne
solely by the capital provider except in case of negligence or violation of the terms
of the contract by the muḍārib.
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a liability on the guarantor and like sale; it should exclude ignorance on the
established liability (al-Ramli, n.d.: 403).
d) Exoneration of the Makfūl ‘Anhu (Guaranteed Party)
When a debt is guaranteed, majority of the Muslim jurists comprising of
Ḥanafī, Shāi‘ī and Mālikī jurists, are of the view that the guarantee does not
exculpate the makfūl ‘anhu (guaranteed party) who is the principal debtor,
guaranteed from his original liability. To them, guarantee is only meant to
assure the payment and to give the creditor option of claiming from either
party, except where extrication of the principal debtor is a condition of the
guarantee agreement (al-Zuhayli, 2003: 26). Within this majority, jurists
of Shāi‘ī school disallow stipulating such condition which they viewed as
contradicting the nature of the contract and seen as more of transforming the
contract to ḥawalah (transfer/assignment of debt) (Muhammad Akram Khan,
2003: 192).11 Also, in the exercise of the option of demand of debt, Imam
Mālikī prioritized demand from the principal debtor irst allowing the demands
from the guarantor only when demand from or repayment by the principal
debtor has become impossible (Juzayri, 1998: 286).
Contrary to this majority view, the Zahirī and Imamy schools and few other
scholars constituting the minority opined that once a guarantee contract is
established, the principal debtor is absolved of his initial liability arguing that
the debt is transferred by the agreement to the dhimma of the guarantor. Thus,
the creditor may not demand his debt from him. They premised their argument
on the ḥadīth of Abū Jabir where repayment by the deceased guaranteed could
not have been anticipated.
Obviously, this argument cannot be sustained in the case of a living
guaranteed debtor. The minority’s reliance on the ḥadīth of Jabir cannot
also stand on the face of the ḥadīth where the Prophet was reported by Abū
Hurayrah RA to have said:
نفس امؤمن معلقة بدينه حتى يقى عنه
“The soul of a believer is attached to his debt until it is repaid
for him.” 12
11
12
al-Ḥawalah is an agreement by which a debtor passes on the responsibility of
payment of his debt to a third party who also owes the former a debt.
al-Tirmidhi (n.d.), Sunan al-Tirmidhi, vol. 3, Beirut: Dar al-Kitab al-‘Ilmiyyah,
no. ḥadīth 1078, 389.
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This ḥadīth was relied upon to fortify the majority’s position. It is also
arguable that were the deceased in the ḥadīth of Jabir RA to be solvent before
his death, the debt would have been realized from his estate before distribution
to his heirs.
1. Types of Kafālah
As would be noticed from the deinition above, kafālah is of two types i.e.
kafālah bi al-nafs (physical) and kafālah bi al-māl (inancial). Physical
guarantee or surety-ship for the person is also known as ḍaman wajh. This is
an assumption of liability for the appearance of the debtor or of his agent in a
law suit. Under this guarantee, it is permissible for a person to guarantee the
safe delivery of another for a speciied period of time. Where this is done, it
is the view of the majority of the Muslim jurists that the guarantor is required
to deliver the guaranteed person at the end of the speciied period and is not
responsible for immediate delivery. However, Abū Yūsuf of the Ḥanafī School
opined that the guarantor may be required to deliver the guaranteed person
at any time and would continue to be so responsible until the expiration of
the speciied time. This latter view has been said to agree with the common
practiced based on custom (al-Zuhayli, 2003: 11).
Financial guarantee on the other hand is a pledge given to a creditor by the
guarantor that the debtor will pay his debt, ine or any other personal liability,
thereby joining the latter’s liability to his. Having established the contract, the
creditor is entitled to claim his debt from either the debtor or the guarantor
and he has the choice of claiming his right from either of them. However, the
guarantor is entitled to arrange the order of liability by stipulating in the contract
agreement that the creditor shall irst claim the debt from the principal debtor
and that the creditor would only have recourse to claim from the guarantor if
the principal debtor is unable to discharge his obligation (AAOIFI, 2002:60,
clause 3/3).
Therefore, in consideration of the order of demand, contract of guarantee
is divided into two, viz.: recourse and non-recourse guarantee. A recourse
guarantee is the type where the guarantor has right to claim back from the
principal debtor whatever he uses in the discharge of the latter’s liability
towards the creditor. To be entitled to the right of recourse, the guarantee must
have been created upon the request or with the consent of the principal debtor.
Non-recourse guarantee on the other hand is a voluntary guarantee created by
the guarantor on behalf of the debtor without asking. In this type, the guarantor
cannot claim back anything from the debtor (AAOIFI, 2002: 59, clause 3/1).
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2. Modes of Kafālah
A guarantee may either be unrestricted, restricted by description, suspended
pending a condition or deferred. A guarantee is unrestricted when it is given
plainly on the same term as the original debt for which it was created. No
new condition or description different from the terms of the original debt is
introduced for the convenience of either the guarantor or the principal debtor.
The creditor only needs to wait for the debt due date and lay claim to either the
debtor or the guarantor.
A restricted guarantee is restricted by its description either as current or
deferred guarantees. While a current guarantee operates within the term of
the original debt, it is also permitted to restrict the operation of guarantee
through deferment to a speciied date. It makes no difference whether or not
the terms of the deferred guarantee coincide with the terms of deferment of the
guaranteed debt. The right of demand remains with the creditor and he has the
freedom of contract to enter into different agreement with both the debtor and
the guarantor (al-Zuhayli, 2003: 10). On this basis, jurists of the four schools
of Islamic jurisprudence allow deferred guarantee of current debt and current
guarantee of deferred debt. Where a deferred guarantee is given for a current
debt, the implication may be an advantage of the principal debtor or to the
guarantor only. If a deferred guarantee is introduced at the initial stage of a
current debt contract, the debt automatically becomes deferred. If however, it
is given after the conclusion of the contract, the deferment is going to be to the
beneit of the guarantor only (al-Zuhayli, 2003: 10).
A guarantee contract can also be suspended on the happening of an event,
thereby hanging the liability of the guarantor for the debt until the stipulated
event happens. For instance where a guarantor says: “I guarantee the payment
of the debt on the due date”, he cannot be made answerable for the debt call
back before the due date. However, the permissibility of the mode is premised
on the requirement that the condition upon which the guarantee is suspended
must not contradict the object of the contract of guarantee itself. In other words
it must not be such that would make the realization of the debt impracticable.
Otherwise, the suspending condition would be nulliied and the guarantee
would be established as current (al-Kasānī, 1986: 4). In furtherance of this,
jurists of Ḥanafī School permit a situation where both physical and inancial
guarantee are combined in one transaction and one of them is suspended on the
other. For instance, where a third party guarantees the production of the debtor
at a particular time failing which he agrees to be liable for his debt. Here, the
inancial guarantee is suspended on the failure to fulill the physical guarantee
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and both are valid so long as the principal debtor acknowledges his initial
liability (al-Kasānī, 1986: 4).
A futuristic guarantee is also given a place of validation by the Ḥanafī
jurists. In this mode of guarantee, a person guarantees whatever liability
another person incurs in the future or whatever the latter consumes or the price
of his sale transactions. The only proviso to this mode is that the future event
must be such that give rise to the guaranteed right (al-Zuhayli, 2003: 13).
EXTENDING THE FRONTIERS OF ISLAMIC LAW
As mentioned earlier in this work, the concept of kafālah, like loan arrangement,
is originally gratuitous in nature. However, the signiicant role it played in the
contemporary inancial transactions and the prevalence of its use whether as
stand-alone product or as complement of other products necessitated the need
to structure it in a way to attract beneit to the operators.
1. Charging Fee for Kafālah
In its original form, guarantee is a gratuitous charitable contract for which
the guarantor expects reward only from Allah SWT for easing the inancial
inconvenience of his fellow being. He is not entitled to additional payment over
the amount he paid as the obligation of the principal debtor. Hammad (1997: 96)
posits that majority of the Muslim jurists comprising of the jurists of Ḥanafī,
Shāi‘ī, Mālikī and Ḥanbalī Schools have come up with evidences to support
the non-permissibility of taking fee for giving guarantee, some of which are
hereunder considered (Hammad, 1997: 96).13
Firstly, they argued that the origin of kafālah is a charitable voluntary
contract and making the guaranteed to pay for its offer would transform it to
a contract of exchange and that is not permissible. Secondly, they argued that
the Lawgiver places transactions of guarantee, and loan on the same category in
their closeness and the way they are known as being only for the sake of Allah
SWT and as such taking any remuneration on them is prohibited. Thirdly, they
are of the view that inancial transaction of exchange is permitted by the law
because of the actual exchange of work or property involved. As guarantee is
neither work nor property, taking remuneration in its exchange would amount to
consuming others wealth in vain or taking bribe. Fourthly, the majority opined
that taking a price for offering guarantee has taken the transaction into the
realm of gharar (uncertainty) sale. And lastly, they held that when a price
13
Only Ishaq Ibn Rahawih permits taking fee for the contract.
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Contract of Kafālah (Guarantee) in Islamic Finance
is agreed on the guarantee given, the guaranteed party would return to the
guarantor the amount of the guarantee and the agreed price in addition. This is
not permissible because it is tantamount to granting loan which draws beneit,
and that is ribā (Hammad, 1997: 97-115).
Meanwhile, in a situation where a person requiring guarantee could not ind
any guarantor who would not take fee for granting same and he is in dare need
to have one, he may pay the fee to meet the necessity. Such situation arises
when a person is constrained, for instance, by the need to have guarantee to
secure his admission into foreign land for the purpose of education or earning a
living etc. This permission to pay the fee on the face of necessity is analogous
to the jurists’ permission of payment for good acts like teaching the Qur’ān
or other religious acts which should ordinarily be voluntary charitable acts. It
also goes with the justiication for paying bribe to ind out the truth and remove
injustice and paying money to enemies to protect the people from their danger.
In these cases, the guaranteed would be considered as paying for the beneit he
derived for the guarantee (al-Zuhayli, 2003: 39).
2. Contemporary Applications of Kafālah by Islamic Financial Institutions
(IFIs)
In Islamic inancial institutions, kafālah (guarantee facilities) refers to contracts
or assurance made by the institution to third parties that its customer would
fulill his obligations towards the said third party. In the contract, the inancial
institution gives an assurance that it would assume the liability of its customer
in the event of default or breach of contract entered into by the customer and
the third party. It is an undertaking that the inancial institution would pay an
agreed sum if its customer fails to fulill his/her obligation under the contract
(Bank Islam Malaysia Berhad (BIMB), 1994: 99).
According paragraph 22.1 of BNM (2015:15, para. 22.1) in the Islamic
inance industry, an Islamic inancial institution (IFI) may enter into kafālah
contract in the capacity of a guarantor or beneiciary. In the capacity of a
guarantor, the IFI provides a guarantee services to customers through various
kafālah-based inancial products such as bank guarantee, standby letter of
credit and shipping guarantee. In the capacity of a beneiciary, the IFI accepts
the guarantee provided by a third party for the inancing facilities extended.
In this wise, it is being used as one of the contracts to supplement various
primary Islamic inancial products, predominantly for risk mitigation purposes,
such as mushārakah (participatory inancing), muḍārabah (venture capital
participatory inancing), murābaḥah (cost-plus inancing), salām (forward
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Journal of Shariah Law Research (JSLR)
sale), istisnā‘ (inancing for commissioned production), ijārah (lease) and
tawarruq (resale of purchased commodity) (BNM, 2015: 5, para. 1.5).14
Kafālah is used by the Islamic Financial Institutions (IFIs) to provide
guarantee services, such as bank guarantee, standby letter of credit and
shipping guarantee.
In practice, the customer requests an Islamic bank, for instance, for a credit
line. The bank processes the application and if it is satisied that the customer is
of good credit standing, it will extend letter of guarantee facility to the customer
by means of letter of offer. Letter of guarantee is issued in an Islamic bank for
the following purposes: Tender guarantee; Performance guarantee; Guarantee
for sub-contracts; Custom Bond; Guarantee for exemption of custom duties;
Guarantee for maintaining ledger account; and Guarantee in lieu of Security
deposit or special guarantee (Khan, 2003: 100).
Where letter of guarantee is to be issued by a inancial institution, there
must always be a request from the customer. In other words, an institution
is not entitled to guarantee inancial commitment without right of recourse
to the debtor. The only situation where it can decide to be a non-recourse
guarantor is when it has been permitted by its Article of Association or by
special resolution of the shareholders and investors to make donations or to
perform acts of benevolence.
At this juncture, there is the need to examine benevolent loan (qard hasan),
and see if a non-recourse guarantee can qualify to be one of the benevolence
acts an Islamic Financial Institution may embark on. A benevolent loan or
loan without interest is one of the products of Islamic banks granted on the
grounds of compassion to remove the inancial distress caused by the absence
of suficient money in the face of dire need of their customers or any other
deserving member of the public. However, since banks are proit oriented
organizations, its application constitutes a very low percentage of Islamic
banks mode of inancing. Slight variations exist among different Islamic banks
14
Tawarruq (lit. “turns into silver”) is an Islamic inancial sale product which allows
clients to raise money quickly and easily, a customer buys an easily saleable asset
from an Islamic bank at a marked up price, to be paid at a later date, and quickly
sells the asset in the open market, at the same or discounted price, to raise cash,
Muhammad Akram Khan, Islamic Economics, vol. 24, 182; the product has been
condemned as a trick to give or to get an interest-bearing loan, in April 2009, the
International Islamic Fiqh Academy of the Organisation of the Islamic Conference,
ruled that “organised use” of the tawarruq inancial instrument was prohibited see
Financial Time Lexicon at http://lexicon.ft.com/Term?term=tawarruq, accessed
on 5 March 2016.
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Contract of Kafālah (Guarantee) in Islamic Finance
in the use of the mode. The Faisal Islamic Bank of Egypt provides interestfree benevolent loans to the holders of investment and current accounts, in
accordance with the conditions laid down by its board of directors. The bank
also grants benevolent loans to other individuals under conditions decreed by
its board. On the other hand, the Jordan Islamic Bank Law authorizes it to give
“benevolent loans” (qard hasan) for productive purposes in various ields to
enable the beneiciaries to start independent lives or to raise their incomes and
standard of living.15
Iranian banks are required to set aside a portion of their resources out of
which interest-free loans can be given to (i) small producers, entrepreneurs
and farmers who are not able to secure inancing of investment or working
capital from alternative sources, and (ii) needy customers. It should also be
noted that Iranian banks are permitted to charge a minimum service fee to
cover the cost of administering these funds (Iran, 1988: 257). In Pakistan, qard
hasan is included in the lending mode of inancing. Two important differences
are to be noted: (i) No service charge is imposed on qard hasan loans and (ii)
Qard hasan operations are concentrated in the head ofice of each bank and
branch ofices are not permitted to extend these loans which are granted on
compassionate grounds. These loans are repayable if and when the borrower
is able to pay.
Given the facts that Islamic banks also perform social functions of
community development therefore, it may rightly be said that non-recourse
guarantee would have a place in their operations albeit, it would have to be
clearly spelt out as being transacted under benevolence acts. This is more
particularly so as it is not permissible to charge any fee on the Account of
giving guarantee only. Nonetheless, the fact that the amount usually involved in
inancial Institutions guarantee on behalf of their customers is huge especially
as they involve import guarantee and letter of credit, it will be undesirable
for an institution to engage in non-recourse guarantee even if it is otherwise
permitted by the Article and the shareholders.
Where a customer is to owe a debt to an Islamic inancial institution, it is
permissible for the institution to stipulate that the customer provide guarantor
or guarantors for the debt but the institution is not obliged to enquire into
how a customer obtained a guarantee it produces once the credibility of the
guarantee is satisfactory. Just as in the case of general guarantee, it is permitted
for Islamic inancial institution to ix the duration of a personal guarantee and
to set the ceiling on the amount to be guaranteed. The Institution can also
restrict the guarantee or put it on condition. This condition can be future event,
15
Jordan Islamic Banking Law (1978), Article 7-b (1).
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Journal of Shariah Law Research (JSLR)
like ixing a date at which liability will take effect. Where the date of liability
is deferred as in this case, the guarantor, either the institution on behalf of its
customer or a third party in respect of its customer’s indebtedness towards it,
may validly withdraw the guarantee by giving notice to the creditor before the
accrual of the obligation guaranteed.16
Following from the above exposition on charging fee for kafālah, it is not
ordinarily permissible for an Islamic inancial Institution to take any remuneration
or commission for providing guarantee to its customers. What an Islamic inancial
Institution is allowed to take in excess of the amount of the actual obligation is
whatever it expended in the course of giving the guarantee. This may include
the administrative and all other expenses actually incurred by the institution and
a consideration for merely giving the guarantee would not be accommodated.
Thus, the amount to be charged as service charge should not exceed what would
be charged by other institutions for similar services. Similar charges here are not
in comparison with what is charged by conventional banks as the computation
of the latter’s charges takes into consideration the amount guaranteed and the
duration of the guarantee (al-Zuhayli, 2003: 39).
The most frequented guarantee practice in Islamic banks is issuance of letter
of credit. Issuance of letter of credit is a traditional banking practice by which
the bank’s customer (an importer) satisies the requirements of a corresponding
exporter upon the formers request. A bank would issue such letter as a guarantee
to pay the foreign exporter for the goods that its customer wishes to buy.
Once proof of delivery of the imported goods is produced, the bank pays the
exporter the contract price which was ordinarily the obligation of its customer
it guaranteed (Al-Salusi, nd.:159). In the conventional banks, the customer is
charged interest which comprises its clerical expenses and its proit for providing
the services. It makes no difference whether or not the guarantee is fully covered
by the customer.
However, since Islamic banks are precluded from charging interest, they
practices the contract of guarantee either as issuance of letter of credit through
wakālah (agency) contract, or mushārakah (partnership) contract or murābaḥah
(cost-plus sale) in addition to the original letter of guarantee discussed above. In
the issuance of letter of credit under wakālah contract, the bank acts as the agent
of its customer who informs it of his requirement of the letter and requests it to
provide the facility. When this mode is adopted, the bank requires the customer
to place a deposit to the full amount of the price of the goods to be purchased or
imported which the bank accepts under the principle of al-wadī‘ah yad ḍamānah
(safe custody deposit). The bank subsequently create the letter of credit, pays the
16
AAOIFI (2002) 59, clause 3/1/4.
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Contract of Kafālah (Guarantee) in Islamic Finance
import contract obligations to the negotiating bank using the customer’s deposit
and releases the documents to the customer. It charges the customer fees and
commission for its agency services under the principle of al-ujr (fee) (BIMB,
1994: 100-101).
A striking feature of this mode as could be differentiated from a pure
guarantee transaction on which an Islamic bank cannot charge an increase
relates to the manner of demanding of the contract sum from the customer.
Whereas, in a pure guarantee transactions, a guarantor cannot seek the payment
of the cost involved in the liability from the guaranteed party until after he
might have paid same to the creditor on behalf of the guaranteed party; in
the issuance of letter of credit through the medium of wakālah, the customer
is required to pay the full cost upfront. The bank only acts as a mere trusted
intermediary through which the fees are paid and documents exchanged. This
is the justiication for its taking commission for its services. Also as an agent,
the bank is not personally liable for loss that may result from the third party
breach in the transaction which is not as a result of its fault or negligence.
This practice does not conlict with the prohibition of combining agency
and personal guarantee in one contract at the same time, that is, the same party
acting in the capacity of an agent on one hand and as a guarantor on the other
hand. The reason for non-permissibility of this combination is its contradiction
of the nature of the contracts. Also, a guarantee given by an agent of an
investment fund transforms the transaction from agency to an interest-based
loan. This is so because a guaranteed investment capital added to the proceeds
of the investment is as good as the investment agent taking a loan and repaying
it with an additional sum which is ribā (interest).17
Bank Islam Malaysia Berhad issues Letters of Credit (L/C) under the
principle of mushārakah adopting the following method. The customer is
required to inform the bank of his letter of credit requirements and negotiate
the terms of reference for mushārakah inancing. The customer places with
the bank a deposit for his share of the cost of goods imported which the bank
accepts under the principle of al-wadī‘ah.18 The bank then issues the L/C and
pays the proceeds to the negotiating bank utilizing the customer’s deposit
as well as its own inances, and subsequently releases the documents to the
customer. The customer takes possession of the goods and disposes of them in
the manner stipulated in the agreement. Proits derived from this operation are
shared as agreed (Man, 1988: 76).
17
18
AAOIFI (2002), 57-58.
al-Wadi‘ah. Lit. Deposit, trust. Tech.: A contract whereby a person leaves valuables
as a trust for safe-keeping, see Khan, Islamic Economics, n. 2, 192.
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Journal of Shariah Law Research (JSLR)
Here too, the transaction is distinguishable from a pure guarantee devoid
of additional charges. Both the banks and its customer are partners sharing in
the cost of the contract sum in the way they would share the accruing proits
in accordance with the agreed term and the ensuing loss according to the
percentage of their respective contribution. However, the bank still retains its
role as a reliable institution for the assurance of the payment of the contract
sum to the creditor (exporter). Going by the ruling that contract of guarantee
does not require an acceptance from the guaranteed party, the bank’s customer
in this case, its position as a guarantor in its dealings with the creditor is not
vitiated by either being an agent or partner to the principal debtor.
Another way through which letter of credit is issued especially by Bank
Islamic Malaysia is by operation of murābaḥah (cost plus). Here, a customer
engaging in either trading or manufacturing may require the purchase of
merchandise or raw materials in the course of his business. Apart from the
need for a letter of credit, this customer also has no fund to back up his request
from the bank. In other words, the guarantee he is requesting is completely
uncovered. He therefore requests the bank to purchase or import the goods
giving the promise that he would in turn purchase it from the bank negotiating
the letter of credit on the principle of murābaḥah. The bank appoint the
customer as its agent to purchase the goods on its behalf, establishes the letter
of credit and pays the cost of the goods to the negotiating bank using its own
fund. The goods are sold to the customer at a sale price made up of its cost and
a proit margin under the principle of al-murābaḥah, to be paid on a deferred
term (BIMB, 1994: 102-103).
The grey area in this arrangement as is usually experienced in any discussion
on murābaḥah are the legality of the arrangement and the binding nature of the
promises given by both the customer and the bank to purchase and to buy the
ordered goods from each other respectively. As for the legality, the transaction
has been held to be valid by Imam Shāi‘ī in his exposition as follows (Imam
Shāi‘ī, 2001: 33):
“If an individual shows another, goods and says: buy this and
I will give you this much proit in it; and the second man buys
it, then the purchase is valid. If the irst party said: ‘I will give
you this much proit in it, but I retain an option’, then, he may
conclude the sale or leave it.”
However, a condition to the validity of the arrangement is assumption
of risk by the bank by receiving the purchase item. The appointment of the
customer as an agent in the purchase of the ordered item does not exculpate the
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Contract of Kafālah (Guarantee) in Islamic Finance
bank from being responsible for it before the sale to the customer takes place
even while the customer was still acting as the agent.
As for the binding nature of the promises of the bank and the customer,
Vogel (1998: 142) quoted Ali (n.d.) as being of the opinion that jurists of
Mālikī School recognize such promise as binding ruling that any promise that
does not result in permitting that which is forbidden or forbidding that which
is permitted is binding. This is more particularly so if the promise has lead
another party to undertake a inancial obligation as the bank would have done
in this case.
Unlike the practice in the conventional banks where some investment
deposits are guaranteed, if an Islamic bank manages a transaction on the basis
of muḍārabah or mushārakah or investment agency, it is not permitted for it
to guarantee the luctuation of the currency exchange rate which would ensure
that the investors recover their investment share irrespective of the behavior
of the currency market. Such guarantee is prohibited because it amounts to the
muḍārib or the partner or investment agent guaranteeing the capital of other
partners or investors.19
On the whole, where the creditor discharges the guaranteed party from
the debt, the bank is also discharged from its liability automatically. But the
same position cannot be upheld in a situation where the guarantor is the one
discharged, in which case the principal debtor remains indebted. However, if
in the course of negotiating the guarantee agreement, the guarantor was able
to secure a discount resulting in his paying an amount less than the original
debt, the guarantor would only be entitled to the actual amount he paid to
the creditor. He cannot make the debtor to pay the discount to him as that
would amount to an increase in the amount of the guarantee he paid which is
riba. The situation would be different if the guarantor settled the debt with a
consideration different from the one in which the original debt was designated,
in which case he would be entitled to recover whichever is less of the amount
of the commodity used in settling the debt or the actual amount of the debt.20
CONCLUSIONS
In the foregoing presentation, attempt has been made to examine the contract of
guarantee in its traditional application covering its meaning both literally and
juristically, the proof of its legality drawing evidences from the Qur’ān, sunnah
19
20
AAOIFI (2002), 60, clause 3/3/4.
AAOIFI (2002), clause 3/3/2.
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Journal of Shariah Law Research (JSLR)
and ijmā‘, differences in the understanding of the Muslim jurists in the course
of its development, its types and mode of application and its contemporary
application by inancial institutions. In the course of the examination, it was
established that contract of guarantee is a valid contract under the Islamic law
but of its two types, inancial guarantee is the one applicable to Islamic inancial
institutions. Although given prior permission by its Articles and memorandum
of Association, an Islamic bank can grant non-recourse guarantee, however
by the nature of the customers demand and the amount usually involved, a
non-recourse guarantee is undesirable for an Islamic bank as a business going
concern. It was shown that it is not traditionally permissible for a guarantor
to take remuneration for his offer. However, in the Islamic banking practices,
guarantee is offered as an income generating product. The practice is not a
contrivance of Islamic traditional precept; rather, it is an ingenious extension
of the frontiers of traditional Islamic law concept to the contemporary needs.
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