IRP 60/2013 Critical Appraisal of the Letter of Guarantee (Khitab al-Daman) in Malaysian Islamic Finance Practices  4795

 

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A letter of guarantee is an indemnity letter issued by a guarantor under the principle of kafalah?the term used in Malaysia for a guarantee—to guarantee the payment obligation should the guaranteed party fail to fulfil its contractual obligations. In other words, the issuer commits itself to pay a specified amount to the beneficiary in the event of non-performance of obligation by the guaranteed party. In order to understand the application of kafalah in guarantee facilities, the paper examines some selected structures of kafalah-based guarantee products that exist in the market with special reference to Malaysian practice. This research examines the application of kafalah in guarantee facilities offered by Islamic financial institutions; i.e., Islamic Bank Guarantee and Islamic Shipping Guarantee. The paper also studies the guarantee facility offered by the Credit Guarantee Corporation Malaysia Berhad, which aims to assist small and medium enterprises (SMEs) in Malaysia to obtain financing from financial institutions, particularly for those with insufficient collateral. It includes a guarantee facility offered by Cagamas (The National Mortgage Corporation) SRP Berhad under the Malaysian Government initiative of Skim Rumah Pertamaku @ SRP (My First Home Scheme) to enable young Malaysian citizens to own their first house without having to pay a 10% down payment. Under this scheme, the applicant can get 100% financing from the financial institution with the 10% being guaranteed by Cagamas SRP.


Despite the increasing demand for this product, the instrument’s underlying structure, which is kafalah bi al-ajr (a guarantee with a fee), is still debated among jurists. The main Shari'ah issue in guarantee facilities is the imposition of a fee on the client in exchange for the guarantee offered. The research shows that the majority of the classical texts consider charging a fee for a guarantee to be impermissible. On the other hand, some contemporary jurists hold that charging a fee for a credit guarantee is permissible. Realizing that there are several Shari'ah issues arising from the imposition of a fee for a guarantee, this research explores the ruling on kafalah bi al-ajr. The arguments of both supporters and opponents of a guarantee with a fee are examined in order to understand the basis of their views.  


The jurists who oppose charging a fee for a guarantee argue that, since a guarantee is characterized as a benevolent contract, it is not feasible to impose any charge for it. The objective of a guarantee is to assist those who are in need, based on generosity and benevolence, and it should not be used as a profitmaking instrument. They further argue that in the event that the guaranteed party (makful 'anhu) manages to fulfil his financial obligation to the financier, which results in the financier-cum-beneficiary (makful lahu) getting the full amount of the debt, there is no justification for the guarantor (kafil) taking a fee from the guaranteed party. As such, it can be considered as illegally taking the rights of others.  
 

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