Application of Collateral in The Islamic Bank Guarantee

Application of Collateral in The Islamic Bank Guarantee Students name: Bushra Fayez Saeed Haj Hamdan (G1723666) Aliyah binti Ahmad Bahari (G1610520) Rita Fatimah Fatah (G1614130) Supervised by: Dr. Akhtarzaite Binti HJ. Abdul Aziz Department of Fiqh and Usul-Fiqh Kulliyyah of Islamic Revealed Knowledge and Human Sciences International Islamic University Malaysia Semester 2, session 2017/2018 Table of Contents Introduction................................................................................................................................ 3 Definitions .................................................................................................................................. 3 Importance of Bank Guarantee ................................................................................................. 5 Elements of Ujrah (Kafalah) ....................................................................................................... 6 Model : Kafalah in RHB Islamic Bank .................................................................................................. 6 Kafalah: The Structure Flow of Islamic Bank Guarantee (IBG) from RHB Islamic Bank ...................... 6 Kafalah: Shariah issues .............................................................................................................. 7 Collateral and its relationship with Rahan:................................................................................ 9 Example of Collateral in issuing bank guarantee....................................................................... 9 Shariah Ruling/Maqashid Shariah ........................................................................................... 10 Definition of Maqasid Shariah .......................................................................................................... 10 Classification of Maqasid Shariah ..................................................................................................... 10 Importance of implementation of Maqasid al-Shariah in developing Islamic economics and finance ...................................................................................................................................... 12 Maqasid Shariah in the prohibition of interet (riba) ................................................................ 13 Maqasid Shariah in Bank Guarantee or Kafalah ............................................................................... 14 Result and Conclusions ............................................................................................................. 14 References ................................................................................................................................ 16 2 Introduction Islamic banking industries have been growing rapidly globally as they are able to provide alternative products and services to their customers based on Islamic principles and values. Bank Guarantee or similarly known as Kafalah is one of the most popular services which Islamic banks have been providing in the areas of international trade, construction, project related finance and other activities using kafalah principle. However, despite the growth of Islamic financial institutions that provide such products and services, it is worth nothing that the extent to which this products and services are shariahcompliant is yet to be comprehensively elaborated. It has been noted that the practice of guarantee fee is criticized and has been categorised as controversial issues of charging bank guarantee in in general and its application in particular Islamic banking industries. These second issues that need to be review regarding the Islamic bank guarantee is the application of collateral in bank guarantee. Usually, most of the bank will make collateral as a compulsory requirement in the process of applying this Islamic bank guarantee. Hence, despite of reviewing the shariah issues in Islamic bank guarantee, this study also undertake to view the application of collateral in Islamic bank guarantee especially from the light of Maqasid shariah and it shariah rulings. Definitions Guarantee is a lawful word that is more inclusive and significant rather than the words “warrantee” or “security”. It is usually assigned as a confidential transaction by one who seeks to gain some confidence, assurance, and reliance, for the beneficiary. It is also specified as a treaty which demands the security of the rights or possessions.1 It is also an official contract that an action will be taken as a promise of responsibility from a bank or organization to settle someone’s loan.2 Bank Guarantee is a written contract that the bank makes or any other pecuniary association or organization to help the person, who owes money to the beneficiary and could 1 Wikipedia, (2018) Guarantee, https://en.wikipedia.org/wiki/Guarantee , accessed on 11 May 2018 at 12.30pm 2 Cambridge Dictionary, (2018) https://dictionary.cambridge.org/dictionary/english/guarantee , Cambridge University Press. accessed on 11 May 2018 at 12pm. 3 not settle the debt, by providing assurance to seal the deal and therefore fulfill the payment in the applicant’s place.3 Due to some issues that the buyers and sellers come across in their trade dealings such as the seller might doubt the buyer’s true intention to buy from him and fulfill his payment, and the buyer might doubt that the seller will do his part of the agreement, a guarantee from the bank can settle this issue.4 So, the buyer appoints a bank to act as a medium between him and the seller, then the bank issues a written contract on behalf of the buyer (his customers) known as a guarantee in which the bank will be held responsible to settle the payment on the buyer’s place in case he failed to do so5. That does not mean that the bank will make a payment for anything such as a payment for some project to be completed or to repair a machine or to deliver goods, but rather, the bank guarantees to settle the buyer’s payment to the seller (the beneficiary), whether be it in whole or in parts. The bank’s role here is to pay not to guarantee that the buyer will attain his part of obligation.6 3 Merriam Webster, (1828) https://www.merriam-webster.com/dictionary/bank%20guarantee ; and Cambridge Dictionary, (2018) https://dictionary.cambridge.org/dictionary/english/bank-guarantee , Cambridge University Press. accessed on 11 May 2018 at 12pm. 4 Credit Suisse, (2010) Bank Guarantees: Your Protection against Non-Performance and Non-Payment, p. 1. 5 Charu, Types of Bank Guarantee, p. 2. https://www.scribd.com/doc/105183805/Types-of-BankGuarantee#close_user_settings_menu , accessed on 11 May 2018 at 4pm. 6 Nordea, (2010) Bank Guarantees in International Trade, Nordea Trade Finance, p. 6. 4 Importance of Bank Guarantee The Guarantee that the bank provides for the buyer holds a huge significance due to the following7: 1. It gives a bonus of creditworthiness to the business, where the bank guarantee provides a reliance and assurance in the in the buyer’s business with the beneficiary. 2. It estimates the nature of the business as the bank guarantee perform as an authentic measure to evaluate the balance and creditworthiness of the companies that apply for their project. 3. It shows some trust in achievement that the bank can be in line with the beneficiary and the buyer’s needs successfully. 4. It lessens the risk and protects the buyer in case the seller does not deliver the good successfully, or if a problem befalls the service, or if the good is damaged before the buyer collects it, so the guarantee that is given by the bank can cover that loss and protects the buyer. 5. It encourages the international and domestic trade to expand and advance further. 7 Sanjay Bulaki Borad, (2018) Bank Guarantee, https://efinancemanagement.com/sources-of-finance/bankguarantee , accessed on 12 May 2018 at 8pm. 5 Elements of Ujrah (Kafalah) Model : Kafalah in RHB Islamic Bank The practice in Malaysia had shown that Kafalah concept is usually practiced by Islamic Banks in trade financing sector in two products which are bank guarantee and shipping guarantee. For this, we can look at bank-guarantee product from RHB Islamic Bank. Below figure illustrates how Kafalah is undertaken in a letter of guarantee by RHB Islamic Bank. Kafalah: The Structure Flow of Islamic Bank Guarantee (IBG) from RHB Islamic Bank 1. Customer enters into a contractual agreement with the beneficiary (e.g. a Statutory Body) to fulfill an obligation. 2. Customer approaches RHB Islamic Bank to request the issuance of Islamic Bank Guarantee (IBG) facility. 3. RHB Islamic Bank issues IBG to the customer, as a surety to discharge the liability of beneficiary in case the customer defaults. In return, a sum amount of fee is charged to the customer. 6 4. In the event of default by the customer, the beneficiary will claim from RHB Islamic Bank. RHB Islamic Bank makes immediate payment on first demand provided the claim meets all the conditions of the guarantee. 5. If there is no default, the beneficiary will return the IBG to the customer followed by RHB Islamic Bank’s cancellation upon maturity. Kafalah: Shariah issues In bank guarantee, the guarantor (RHB Islamic Bank) charges the customer a certain fee. However, this practice remains a matter of debate among Shariah scholars. This is because some scholars like Hanafi, Shafie, Maliki and Hambali schools did not permit charging fee for a guarantee due to the nature of the contract (benevolent contract) and in the condition the customer defaulted, the relationship between the guarantor and guaranteed party will change into debtor-creditor, thus, charging a fee will lead to riba. In contrast, some contemporary scholars like Shaykh Ahmad Ali Abdullah from the OIC International Islamic Fiqh Academy permits charging a fee provided that the guarantee is not in the form of a loan (Qard). Besides that, there is no issue on riba as the commitment provided from the guarantor is considered as counter value following the fiqh maxim – al kharaj bi daman (profit comes with liability). The Shariah Advisory Council of Bank Negara Malaysia has allowed charging fee on letter of guarantee based on this basis. 1. The method used by RHB Islamic Bank in determining the actual cost RHB Islamic Bank used one of the three methods in charging fees on bank guarantee which is by calculating the actual cost. Although this method is allowed by AAOIFI, one thing to ponder is how the bank calculates its actual cost. There are always risks that the bank imposed unnecessary fees to increase the profit margin. 2. The guarantee that the customer will pay back to the bank RHB Islamic bank and some other banks accept collateral or pledge or cash deposits from the customer before agreeing to issue the letter of guarantee to secure the bank’s risks. Islamic banks are not 7 exposed to any cash outlays unless their customer defaults on the performance of a certain act.8 Collateral: It is a guarantee that is given by the buyer as a promise or to confirm that the buyer can settle the payment of a debt, it can be any valuable property like a car or an amount of money. It can be considered as a security of a loan.9 Collateral is mostly needed when the information about the buyer is expensive and unavailable for the bank, so collateral is particularly essential when they try to serve new customers. Lands, real estates, chattel mortgages, cars, houses can be used as collateral.10 Rahn11: Rahn is also known as a collateral, a pledge, a mortgage, and a pawn. Rahn is an Arabic term used in Islamic jurisprudence to refer to a contract between the customer (the buyer) and the bank by which the customer gives the bank valuable property, because it acts as a medium between the buyer and the seller, as a promise to settle the payment of the debt. Even during the rahn, the property belongs to the owner, so the bank cannot use it. If the customer pays the full debt to the seller, he can reclaim the collateral. But according to the contract, if the buyer’s debt was not settled, the collateral can be sold by the bank, and its money can be used to settle the unsettled payment. Rahn is allowed in the Islamic Shariah. It is known in the Hadith that prophet Muhammad (SAW) passed away and his shield was held as a collateral in a Jewish man’s possession. The word Rahn was derived from the following Quranic Verses: 8 Service Based Contract Used in Islamic Finance: A Comparison of Hawalah, Wakalah, and Kafalah, Maryam Sofia Mohd Suhaimi 9 Dictionary.com, (2018) http://www.dictionary.com/browse/collateral ; Cambridge Dictionary, (2018) https://dictionary.cambridge.org/dictionary/english/collateral#dataset-british ; LoveToKnow Corp., (2018) http://www.yourdictionary.com/collateral ; Collines, (2018) https://www.collinsdictionary.com/dictionary/english/collateral , accessed on 13 May 2018 at 9pm. 10 Meyer & Nagarajan, (1995) Collateral for Loans: When does it Matter, Economics and Sociology Occasional Paper No. 2207, p. 3. Wordpress.com, (2006) Contract of Ar-Rahn – Definition and Conditions, https://cief.wordpress.com/2006/03/06/contract-of-ar-rahn-definition-and-conditions/ ; Wiley & Sons, (2013) https://onlinelibrary.wiley.com/doi/10.1002/9781119198956.ch9 ; and 11 Kentaro Kambara, (2017) Economics of Ar-Rahnu (Islamic Pawnbroking): Issues and Cases in Brunei Darussalam, p. 89. Accessed on 13 May 2018 at 11pm. 8 ْ ‫ضا فَ ْليُ َؤ ِّد الَّ ِذي‬ ٌ ‫) " َوإِ ْن ُك ْنتُ ْم َعلَ ٰى َسفَ ٍر َولَ ْم تَ ِجدُوا َكاتِبًا فَ ِره‬2:283( ‫ّل‬ ُ ‫ُوضةٌ ۖ فَإ ِ ْن أَ ِمنَ بَ ْع‬ ً ‫ض ُك ْم بَ ْع‬ َ ‫َان َم ْقب‬ َ َّ ‫ ِق‬ ِ َّ‫اؤتُ ِمنَ أَ َمانَتَهُ َو ْليَت‬ َّ ‫َربَّهُ ۗ َو ََل تَ ْكتُ ُموا ال َّشهَا َدةَ ۚ َو َم ْن َي ْكتُ ْمهَا فَإِنَّهُ آثِ ٌم قَ ْلبُهُ ۗ َو‬ "‫ّلُ بِ َما تَ ْع َملُونَ َعلِي ٌم‬ ٌ ‫َ َر ِه‬ "‫ين‬ َ ََ ‫ٍ بِ َما َك‬ ْ َ ‫) " َوالَّ ِذينَ آ َمنُوا َواتَّبَ َع ْتهُ ْم ُذرِّ يَّتُهُم بِإِي َما ٍن أَ ْل َح ْقنَا بِ ِه ْم ُذ ِّريَّتَهُ ْم َو َما أَلَ ْتنَاهُم ِّم ْن َع َملِ ِهم ِّمن‬52:21( ٍ ‫َْ ٍٍ ۚ ُك ُّ ا ْم ِر‬ ْ َ‫س بِ َما َك ََب‬ "ٌ‫ت َر ِهينَة‬ ٍ ‫) " ُك ُّ نَ ْف‬74:38( Collateral and its relationship with Rahan: Basically, Rahn means collateral, but collateral does not necessarily mean Rahn because (1) Rahn is an Arabic and Islamic term used in Islamic jurisprudence referring to a contract, but collateral is just a term referring to a form of a guarantee. (2) In rahn, the property can be sold in case the debtor could not fulfill the payment, but this process is not found in collateral as it is just a form of security. Example of Collateral in issuing bank guarantee The purpose of a guarantee or pledge given in security for a loan is to secure repayment to the lender, ie the creditor. Although the loan decision is primarily based on the loan applicant’s repayment capacity, the collateral provided in security for the loan is also important. The following covers the main principles on a general level. As the guarantor or pledgor’s liability for the loan is defined in the collateral agreement, it is essential that he/she understands the terms and conditions of the agreement, thoroughly. The bank bears the responsibility of clarifying the contents of the agreement with the guarantor or pledgor. When taking out a housing loan, the property itself is typically the collateral for the debt. A guarantee or pledge given by an external private person in connection with a housing loan is a ‘deficiency guarantee’. If the debtor fails to repay the loan, the loan principal can be collected from the guarantor or pledgor only if the debtor’s residential property serving as collateral does not fully cover the debt repayment. In issuing a guarantee, the guarantor, on the basis of personal property, assumes liability for a loan or an agreed amount. If the guarantee is a directly enforceable guarantee, the creditor may collect the debt directly from the guarantor. So, basically to get the Bank Guarantee is very simple: Customer just need to contact the nearest bank and bring a basic information with him (personal identity). Bank will evaluate your finance track record to know the economy risk of the client. 9 Furthermore, the bank will ask for collateral (This can be in the form of a pledge agreement for assets, such as stocks, bonds or cash accounts) with sufficient amount based on the full amount of bank guarantee. Lastly, you will get the bank guarantee to the beneficiary of your choices. Shariah Ruling/Maqashid Shariah Definition of Maqasid Shariah Literal meaning: Literally Maqasid al-Shariah is the plural of the Arabic word Maqasid whose radical is qasada, which means “sake”, “intend” and “intention”. In the above context the literal meaning of maqasid is objectives.1 Therefore Maqasid al-Shariah means the objectives of the Shariah. The word qasad also has the meaning to be in a position between extravagance and stinginess; and it also means justice12. Technical meaning: Al Imam Al Shatibi who is the founder of Maqasid al-Shariah in Islamic jurisprudence did not provide a definition to Maqasid al-Shariah, however there are two other major definitions that have been provided by other two scholars who came after al Shatiti, namely Ibn Ashur and Alal al-Fasi. Ibn Ashur defined Maqasid al-Shariah based on two aspects, the general aspect, which is the purpose and wisdom behind the enactment of all or most of the Shariah ruling. This definition is more related to the general objective of shariah, thoso overall principles that guide the enactment of Islamic law in their totality. The second definition of maqasid shariah is very specific; it is related to those objectives that are designed to achieve specific benefits to people in their daily activities, for example the validation of contract. Another definition is provided by Alal al-Fasi who defined Maqasid Shariah as the end sought behind the enactment of each of the rulings of Shariah and the secret involved. This definition is more comprehensive because it covers the public maqasid (ama) and the private Maqasid (khasa)13. Classification of Maqasid Shariah14 1. Daruriyah (Necessity) These are the objectives which are must and basic for the establishment of welfare in this world and the world hereafter in the sense that of they are ignored then the coherence and order cannot be established and fasad (chaos and disorder) will prevail in this world and there will 12 Ahcene Lahsasna. 2014. Maqasid al-Shariah in Uqud al-Tawthiqat. International conference on Shariah objectives (Maqasid al-Shariah) in muamalat and contracts. International Institute of Advanced Islamic Studies (IAIS) Malaysia. 28 - 29 January 2014. 13 Ibid. 14 Fauziah Moh. Noor. 2014. Maqashid Shariah (Objective of Islamic Law). UUM 10 be obvious loss in the world hereafter. Daruriyah relates to fice things: protection of faith (din), protection of life (nafs), protection of posterity (nasl), protection of property (mal), protection of reason (‘aql). According to Shatibi, these five protections are daruriyah for the establishment of welfare in this world as well as in the world hereafter. The protection of the above-mentioned elements can be made possible through two types of essential elements. Solah, zakah, fasting and hajj are the elements that are required for the maintance of shariah are said to have the aims that can be labelled as daruriyah including building mosque etc. benefit from drinkables, clothing, housing, is meant to maintain life and hence fulfil the objective of necessities. Such matters and dealings that are required to maintain and protect the five essensial values promote necessities (schools, hospital, etc.). Legal provisions (jinayat), which are required to stop destruction of the above-mentioned elements will also be said to aim at daruriyah from the point of view of the objectives of shariah for example hudud laws or qisas, prison, and asylum. 2. Hajiyah (reqirement) All such provisions of shariah which aim at facilitating life, removing hardship, etc. are said to fulfil the hajiyah. For instance: permission of hunting and use of halal goods for food, lodging, and conveyance. Besides, the permission for qirad (profit sharing through borrowing), musaqat (profit sharing), bai salam (forward buying of a commodity which does not yet exist) are the examples of shariah provision that aim at facilitating life or removing hardship in the life in this world. 3. Tahsiniyah (embellishment) Shariah beatifies life and puts comfort into it. There are several provisions of shariah which are meant to ensure better utilization beautification and simplification of daruriyah and hajiyaj. For instance: permission to use beautiful, comfortable things, to eat delicious food and to have cold drink and so on. Discussing about banking or finance and its product is basically we talk about wealth. Wealth is very essential to continue our life, to sustain the life properly. Not only for person but also for society or ummah. Annisa: 5 ﴾٥﴿ ‫َو ََل تُ ْؤتُوا الَفَهَا ٍَ أَ ْم َوالَ ُك ُم الَّتِْ َج َع َ ُّ اللَّـهُ لَ ُك ْم قِيَا ًما َوارْ ُزقُوهُ ْم فِيهَا َوا ْكَُوهُ ْم َوقُولُوا لَهُ ْم قَوْ ًَل َّم ْعرُوفًا‬ 11 “And do not give the weak-minded your property, which Allah has made a means of sustenance for you but provide for them with it and clothe them and speak to them words of appropriate kindness”. The means of wealth is something we can use it for wealth, like money, and others for instance car, house, and assets. So, it is not closed to money only. In individually side, people need to eat and drink, need cloth to keep from heavy weather. In society, as the association from many people, it will depend also in what they are consist which is a person. If each person is poor, it is impossible to have a wealthy society. If this society stay poor and no body able to help them, they will lose their pride and honor. When the society wealthy, they are financially independent it will increase the pride of the deen or religion (Islam). Even for jihad fi sabillilah, the requirement is also they have to be rich enough to leave their family15. Al-anfal: 60 ُ‫َوأَ ِعدوا لَهُم َّما ا ْستَطَ ْعتُم ِّمن قُ َّو ٍة َو ِمن ِّربَا ِط ْال َخ ْي ِ ُّ تُرْ ِهبُونَ بِ ِه َع ُد َّو اللَّـ ِه َو َع ُد َّو ُك ْم َوآخَ ِرينَ ِمن دُونِ ِه ْم ََل تَ ْعلَ ُمونَهُ ُم اللَّـه‬ ْ ُ‫ف إِلَ ْي ُك ْم َوأَنتُ ْم ََل ت‬ َّ ‫َْ ٍٍ فِْ َسبِي ِ ُّ اللَّـ ِه يُ َو‬ ‫﴾ ۚۚ يَ ْعلَ ُمهُ ْم‬٦٠﴿ َ‫ظلَ ُمون‬ ْ َ ‫َو َما تُنفِقُوا ِمن‬ “And prepare against them whatever you are able of power and of steeds of war by which you may terrify the enemy of Allah and your enemy and others besides them whom you do not know [but] whom Allah knows. And whatever you spend in the cause of Allah will be fully repaid to you, and you will not be wronged”. That is why, wealth is very essential to run the life in the right path. When someone cannot buy food and beverages, he will die because food is primary need for his life. When someone cannot buy for cloth, he cannot perform salat because he doesn’t close his aurah. So, this maqasid shariah of maintain the wealth bring many benefit and reward from Allah. Importance of implementation of Maqasid al-Shariah in developing Islamic economics and finance Maqasid al-Shariah has a significant role in developing Islamic economic and finance. This importance refers to the objectives of Shariah in finance, business transactions and the overall goals of Shariah in wealth. It is strongly recommended to emphasise on the implementation of Maqasid Shariah in Islamicbanking and finance for the following reasons: 15 Muhammas Saud bin Ahmad bin Saud al-Yubi. 1998. Maqasid al-Shariah al-Islamiah wa ilaqatiha bil adillah asy-Sar’iyyah. Saudi: al-Mamlakah al-‘Arabiah Saudiah. 12 - The proper matching connection and strong relationship between the objectives of Maqasid Shariah and the objectives of business transactions; this relationship is observed from the position of wealth in Maqasid Shariah; there is a clear indication from Shariah provisions that wealth must be protected in the community. Disregarding the objectives of Maqasid Shariah in business transactions may lead to hardship in business. - Business transactions, whether they are in the domestic or international trade should be based on the principles of Islamic law; the main objectives of Maqasid Shariah in finance should be taken as a guideline to execute all types of the financial transactions, otherwise it would lead to destructive consequences and unforeseen circumstances in the business. - The objectives of business transactions are a continuity of the general objective of Maqasid Shariah; this shows the strong relationship between the two concepts. - The rules of business transactions should be within the rules, principles and requirements of Maqasid Shariah. - Maqasid Shariah ensures that Shariah principles and their applications are met. Maqasid Shariah in the prohibition of interest (riba)16 from financial point of view, one of the most important objectives in shariah is elimination of interest (riba) in all categories of business transactions. The two main categories of interest (riba) which are sternly prohibited in Islamic law are riba-annasiah, which is interest on lent money, and riba al-fadl which is literally earnings or excess acquired by exchanging or selling commodities of superior value over other commodities given (kahf, 2016). The Holy Quran states: “those who devour usury will not stand except as stand one whom the evil one by His touch hath driven to madness. That is because they say: “Trade is like usury,” but Allah hath permitted trade and forbidden usury (riba)” (Alquran, Albaqarah: 275). According to shariah , both types of riba cause unfairness in business transaction. It generally provides rich individuals easy way to grow their wealth by weakening the other member community. The shariah categorised this type of profit as illegal earnings which are strictly disallowed. Looking from society (maslahah) point of view riba makes the community indolent, unproductive and lower individual’s contributions to the society. As a result, all banks and financial institution must diverge from riba and perform wholesome business transaction excluding riba. It is an extremely challenging task, however it is a devoting responsibility and most important obligation of Shariah in order to enhance supreme Islamic product in banking 16 Mirza Vejzagic, Edib Smolo. 2013. Maqahid Shariah in Islamic Finance: An Overview. 13 and finance. In this sense, it can be further elaborated that the distinction between the Islamic bank and the conventional bank lays in the fact that the Islamic banks, being shariah-compliant, in all business procedures disallow riba. Whereas the conventional bank engages in all form of transaction without considering the illicit nature of riba. Therefore, the Islamic bank assess product from several perspectives including value of the transaction, profit and return, as well as the nature of the products. On the other hand, conventional bank evaluates the product from side of interest and profit only without taking into consideration the condition of the religion in particular transaction (Mohamed, 2006). Maqasid Shariah in Bank Guarantee or Kafalah Kafalah is the act of someone adding himself to another person, and making himself liable to perform the responsibility, together with the other person. Kafalah means to give a guarantee that the person under guarantee will be surrendered to the person to whom the Kafalah has been given. Actually there are two types - physical guarantee and financial guarantee. Islamic finance is more concerned about the financial guarantee which means a pledge given to a creditor by the guarantor that the debtor will pay his debt, fine or any other personal liability, thereby joining the debtor’s liability to the shared liability of his associate, the guarantor. Finally we can conclude that the maqashid shariah of bank guarantee or kafalah is for security and prevent riba. Result and Conclusions After the explanation above, we can understand the point and the conclusion is: Bank Guarantee is a written contract that the bank makes or any other pecuniary association or organization to help the person, who owes money to the beneficiary and could not settle the debt, by providing assurance to seal the deal and therefore fulfill the payment in the applicant’s place. Bank Guarantee in Arabic is well known as Kafalah or ad-Daman which means Guarantee. This product of bank guarantee recently become a good topic to discuss because it is very important for business, especially in International trading with the main issue of charging fee and the requirement of Collateral (closely similar to rahn) in applying the Letter of Bank Guarantee. This requirement of collateral is mainly to get trust from their client and by this collateral also, the three party (Customer, Bank and beneficiary) will get benefit each of them from the transaction of bank guarantee. The status of Bank Guarantee is permissible as the explained above. The way to apply bank guarantee is: Customer just need to contact the nearest bank and bring a basic information with him (personal identity). Bank will evaluate your finance track record to know the economy risk of the client. Furthermore, the bank will 14 ask for collateral (This can be in the form of a pledge agreement for assets, such as stocks, bonds or cash accounts) with sufficient amount based on the full amount of bank guarantee. Lastly, you will get the bank guarantee to the beneficiary of your choices. The Maqasid shariah from this collateral in issuing bank guarantee is to secure the transaction and prevent riba. 15 References 1. Wikipedia, (2018) Guarantee, https://en.wikipedia.org/wiki/Guarantee , accessed on 11 May 2018 at 12.30pm 2. Kafala , https://islamicmarkets.com/education/kafalah. Accused on 2 June 2018 at 11.43 am. 3. Cambridge Dictionary, (2018) https://dictionary.cambridge.org/dictionary/english/guarantee , Cambridge University Press. Accessed on 11 May 2018 at 12pm. 4. Merriam Webster, (1828) https://www.merriamwebster.com/dictionary/bank%20guarantee , accessed on 11 May 2018 at 12pm. 5. Cambridge Dictionary, (2018) https://dictionary.cambridge.org/dictionary/english/bank-guarantee , Cambridge University Press. Accessed on 11 May 2018 at 12pm. 6. Credit Suisse, (2010) Bank Guarantees: Your Protection against Non-Performance and Non-Payment. 7. Charu, Types of Bank Guarantee. https://www.scribd.com/doc/105183805/Types-ofBank-Guarantee#close_user_settings_menu , accessed on 11 May 2018 at 4pm. 8. Nordea, (2010) Bank Guarantees in International Trade, Nordea Trade Finance. 9. Sanjay Bulaki Borad, (2018) Bank Guarantee, https://efinancemanagement.com/sources-of-finance/bank-guarantee , accessed on 12 May 2018 at 8pm. 10. Dictionary.com, (2018) http://www.dictionary.com/browse/collateral , accessed on 13 May 2018 at 9pm. 11. Cambridge Dictionary, (2018) https://dictionary.cambridge.org/dictionary/english/collateral#dataset-british , accessed on 13 May 2018 at 9pm. 12. LoveToKnow Corp., (2018) http://www.yourdictionary.com/collateral , accessed on 13 May 2018 at 9pm. 13. 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