Letters of credit

Lord of the Worlds.

Firstly: Letters of credit may be of different types, initial or final.
Either type of letter of credit may or may not be covered by the balance in the
businessman’s account. If it is not covered, then the the issuer bears joint
liability with the applicant with regard to current and future obligations. This is
essentially what is known in Islamic fiqh as damaan (liability) or kafaalah
(sponsorship or surety).

If the letter of credit is covered, then the relationship between the
one who is requesting it and the provider (the bank) is that of an agency. Acting as an
agent is valid whether or not a fee is paid, so long as the agent relationship serves the
interest of the one for whom it is done (in this case the third party from whom the good
are being purchased).

Kafaalah (sponsorship) is a voluntary agreement whose purpose is
goodwill. The fuqaha’ have stated that it is not permissible to accept a fee in
return for it, because in that case when the sponsor (kafeel) receives a sum of money when
the credit is paid, it becomes like a loan which brought some benefit to the lender, which
is not allowed in Islam [because it is like riba or interest – Translator].

On this basis, the following is clear:

Firstly: that it is not permissible to charge a fee for issuing a
letter of credit – which usually takes into account the amount of money and length of
time involved – whether the credit is covered or not.

Secondly: charging administration fees for preparing either type of
letter of credit is permissible, so long as the amount charged does not exceed what is
usual, whether the letter of credit is wholly or partly covered. In evaluating the
administration fee for issuing a letter of credit, it should be taken into account what is
actually involved in doing so. And Allaah knows best.