Letters of credit

Praise be to Allah.

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.