Kafala and the Islamic bank guarantee

Understanding the three parties to kafala

The kafil is the guarantor, the makful anhu is the person whose obligation is guaranteed and the makful lahu is the beneficiary. A contractor bidding for a tender, for example, asks its Islamic bank to issue a bid bond in favour of the project owner.

Rooting kafala in Islamic law

Kafala is classified as a gratuitous contract, a tabarru’, based on Quranic and prophetic texts. Because the guarantor may end up paying the debt and recovering only the same amount, charging for the guarantee itself has long raised concerns about riba.

Applying IIFA Resolution 12 and AAOIFI Standard 5

The Fiqh Academy’s Resolution 12 (12/2), adopted in Jeddah in December 1985, forbids charging a fee for the guarantee itself but allows administrative charges not exceeding actual costs. AAOIFI Standard 5 on guarantees follows a similar approach.

Debating fees for Islamic guarantees

Malaysia’s framework accepts kafalah with a fee (ujrah), treating the bank’s commitment as a service, while many Gulf scholars still follow the Academy’s cost-based line. The UAE Higher Shari’ah Authority has issued parameters governing fees on guarantees and letters of credit.

Recognising kafala in commercial law

Courts usually treat an Islamic bank guarantee like any demand guarantee or surety. Many guarantees are issued subject to the ICC Uniform Rules for Demand Guarantees, URDG 758, and must meet local requirements for public tenders and customs bonds.

Banks issuing guarantees on kafala terms

Maybank Islamic and UOB Malaysia offer Bank Guarantee-i for trade and contracting clients, and SME Bank Malaysia offers kafalah bank guarantees to small businesses. Islamic banks in the Gulf, Pakistan and Africa issue similar letters of guarantee.

Supervisors overseeing Islamic guarantees

Bank Negara Malaysia has issued requirements for kafalah under the Islamic Financial Services Act 2013. In the UAE the Central Bank and its Higher Shari’ah Authority set the fee parameters, and AAOIFI standards bind banks in Bahrain and Pakistan.

Knowing the limits of kafala

Kafala does not provide funding by itself. If the guarantee is called and the client cannot reimburse, the bank recovers only the amount paid, without interest, so banks require cash margins, collateral or a credit limit before issuing.

Requesting a guarantee step by step

Obtaining a kafala guarantee follows the same practical logic as a conventional bank guarantee, with an added Shariah check on the underlying transaction, the beneficiary’s wording and the fee structure agreed with the client before issuance.

1. Identify the guarantee type required, such as bid bond, performance bond, advance payment or financial guarantee.
2. Apply to the bank with the underlying contract or tender documents and the beneficiary’s required wording.
3. Obtain approval of a guarantee limit, with margin, collateral or counter-guarantee as required.
4. Agree the fee structure, which must comply with the bank’s Shariah board rulings.
5. Sign the kafalah agreement and counter-indemnity; the bank issues the guarantee to the beneficiary.
6. Request release once the obligation is fulfilled, or reimburse the bank if the guarantee is called.

Costs and documents to prepare

Fees depend on the bank’s Shariah position: some charge only administrative costs, others charge an ujrah commission. The table lists usual items without figures, since pricing depends on the client’s credit risk, the tenor, the guarantee type and the cash margin provided.

Mistakes that delay or block a guarantee

Most delays in issuing kafala guarantees come from documentation gaps or from the underlying transaction itself. Banks regularly refuse or postpone issuance, sometimes close to a tender deadline, when one of the following problems appears in the file.

• Guaranteeing a contract involving prohibited activities, which the Shariah board will reject.
• Submitting beneficiary wording with interest clauses or open-ended expiry dates.
• Insufficient margin or collateral for the credit limit requested.
• Expecting interest-free reimbursement terms to mean unlimited time to repay a called guarantee.
• Forgetting to request release, so fees continue until the guarantee expires.

Comparing kafala with hawala

In kafala the guarantor joins the debtor, so the creditor can claim from either. In hawala the debt is transferred from the original debtor to a new one, and the original debtor is released once the transfer is accepted.

Can an Islamic bank charge for a guarantee?

Under Resolution 12 it can recover actual administrative costs but not price the guarantee itself. Malaysian practice allows an ujrah fee. Clients should ask the bank which ruling applies, because it affects the total cost of the facility.

What happens if the guarantee is called?

The bank pays the beneficiary and then claims the same amount from its client under the counter-indemnity. It cannot add interest. Many banks convert the amount into an Islamic financing facility, such as murabaha, if the client needs time.

Are standby letters of credit possible?

Yes. Islamic banks issue standby letters of credit-i based on kafalah, typically under ISP98 or UCP 600 rules. They serve the same function as demand guarantees in international trade, commodity supply contracts and project finance.

Can a non-Muslim company use a kafala guarantee?

Yes. Islamic banks issue kafala guarantees to any customer whose underlying transaction is permissible. Multinational contractors in the Gulf and Malaysia regularly use them when tenders are run by government entities, Islamic institutions or state-owned companies.

How long does a kafala guarantee last?

The validity is set in the guarantee text, usually matching the tender period, the construction phase or the warranty period. Banks prefer a fixed expiry date, and extensions require a new request, fresh approval and often an additional fee.