Charging fee for kafalah and its contemporary application : a critical analysis from islamic perspective

Abstract

Over the last decade Islamic banking has been growing rapidly as they are able to provide practical alternative products to the conventional one. Both Islamic and conventional banks issue a Letter of Guarantee (LG) to facilitate different projects that are in dire need of capitals. In fact, the conventional banks issue LG based on interest unlike Islamic Banks. However, some Islamic banks do charge fee for LG based on kafalah mechanism which may be regarded as a back door to riba. The main purpose of this research is to provide critical analysis on the legality of charging fees for LG from Islamic perspective and to furnish viable alternatives to kafalah principle. This study sets about the conceptual framework of kafalah (guarantee) and its historical background briefly. Moreover, the concept of LG in conventional bank is analyzed and its practical manifestation in the Islamic bank is critically evaluated. In addition, the research suggests the model of guarantee products in Islamic banking that represent musharakah, mudarabah and wakalah as replicates of the kafalah model by taking cognizance of the views expressed by scholars of the past and the present regarding fee for such products in general and to LG in particular. Furthermore, it highlights the obstacles in the application of alternative models and explores the feasible solution to overcome these obstacles as well.