The primary-source ruling that a bank guarantee (letter of guarantee / kafālah) may recover its actual cost but may NOT be sold for a fee
The primary-source ruling that a bank guarantee (letter of guarantee / kafālah) may recover its actual cost but may NOT be sold for a fee — because a guarantor who pays out becomes a lender, and a fee on that would be riba. International Islamic Fiqh Academy (OIC), Resolution No. 12 (12/2), titled ‘The Letter of Guarantee’ in both English editions, adopted at the 2nd session (Jeddah, Saudi Arabia, 10–16 Rabīʿ al-Awwal 1406H / 22–28 December 1985). The load-bearing holding, verbatim (official edition): ‘The guarantee (kafālah) is a benevolent contract motivated by grace and mercy. The jurists have decided against taking a fee for issuing guarantees; the reason is that, in the event of a guarantor’s payment of the guaranteed sum, it will akin to a loan-generated profit to the lender, which is forbidden in Shariah.’ It then Resolves: ‘It is not permissible to charge a fee for the issuance of the letter of guarantee … whether it is with or without a coverage’ — BUT ‘The administrative expenses for issuing a letter of guarantee of both kinds are permissible by Shariah, provided that they do not exceed the actual costs for the services of the same kind.’ This is the same cost-only line the Academy drew for loan service fees in Resolution No. 13, applied to guarantees: recover the real handling cost, never charge for the credit itself.
What this source says
THE GUARANTEE YOU CANNOT SELL. Alongside the mortgage, a riba-free household or small business keeps running into a second bank product: the letter of guarantee (bank guarantee). A landlord asks for a rental-bond guarantee instead of cash; a supplier wants a performance guarantee; a tender requires a bid bond. The bank issues the guarantee and, conventionally, charges a percentage fee for it. Resolution No. 12 (12/2), from the OIC Fiqh Academy’s 2nd session in Jeddah (10–16 Rabīʿ al-Awwal 1406H / 22–28 December 1985), is the primary-source ruling on exactly that fee — and its answer is precise: you may recover the real cost of issuing the guarantee, but you may not sell the guarantee itself.
TWO KINDS OF GUARANTEE (the preamble’s First point). The Academy first separates the cases: ‘Any letter of guarantee, whether initial or final, is either with or without a covering.’ If it is UNCOVERED, ‘the guarantor is considered to have jointly pledged along with the third party, both in performance and financial terms. This type of pledge is, in fact, what is referred to as “guarantee or collateral” in Islamic Fiqh.’ That is classical kafālah / ḍamān — standing surety for someone else’s liability. If it is COVERED (the applicant has deposited funds behind it), ‘the relationship between the applicant of the guarantee and its issuer is that of an agency; and an agency may exist with or without a fee, tied with the bond of surety in favor of the beneficiary in whose benefit the guarantee is issued.’ So a COVERED guarantee contains an agency (wakālah) element, and agency work CAN be paid — a distinction that matters for the cost ruling below.
WHY THE GUARANTEE ITSELF CANNOT CARRY A FEE (the preamble’s Second point — the load-bearing reasoning). ‘The guarantee (kafālah) is a benevolent contract motivated by grace and mercy. The jurists have decided against taking a fee for issuing guarantees; the reason is that, in the event of a guarantor’s payment of the guaranteed sum, it will akin to a loan-generated profit to the lender, which is forbidden in Shariah.’ Read the mechanism, because it is the whole point. A guarantee is a promise to pay the beneficiary if the principal defaults. IF the guarantor actually pays, it does not make a gift — it holds a debt against the principal it can recover. In other words, a paid-out guarantor has become a LENDER. And Islamic law’s bedrock rule is that a loan may not draw a benefit to the lender (every loan that draws a profit is riba). So a fee taken up front for the guarantee is, in substance, a pre-agreed profit on a loan the guarantor may end up making — which is why it is barred. Kafālah is classed as tabarruʿ, a benevolent act, precisely so that no such profit rides on it.
THE RESOLVES — THE OPERATIVE RULE. ‘First: It is not permissible to charge a fee for the issuance of the letter of guarantee (in which, customarily, the amount and the period of guarantee are considered) whether it is with or without a coverage.’ Note the parenthesis: the forbidden thing is a fee scaled to the AMOUNT guaranteed and the PERIOD — i.e. a percentage-per-annum commission, which is exactly how conventional bank guarantee fees are priced. That pricing is what makes it look and behave like interest. ‘Second: The administrative expenses for issuing a letter of guarantee of both kinds are permissible by Shariah, provided that they do not exceed the actual costs for the services of the same kind. In the case where a partial or total coverage is presented, it is permissible to take into account – when an estimate of the expenses has been determined – the possible effort that might be required to provide the coverage.’ So the bank may charge a real, cost-based ISSUANCE fee — the paperwork, the checks, the administration, and (for a covered guarantee) the genuine effort of arranging the cover — as long as that charge tracks actual cost and is not a disguised percentage of the guaranteed sum.
THE PAIR WITH RESOLUTION 13. This is the same line the Academy drew one resolution later, in Resolution No. 13 (1/3), for LOAN service fees: ‘It is permissible to charge a fee for loan-related services … within the limit of the actual expenses,’ and ‘any fee in addition to the actual service-related expenses is prohibited because it is considered as riba.’ Res 12 and Res 13 are the two halves of one principle: whether the instrument is a loan or a guarantee, you may recover the real cost of servicing it, but the moment the charge exceeds actual cost — the moment it becomes a price for the CREDIT rather than the CLERICAL WORK — it is riba. That single test (‘is this fee tracking my cost, or is it a percentage of the money?’) is the practical takeaway for anyone reading a bank’s guarantee schedule.
HOW TO USE IT WHEN YOU LOOK AT A REAL GUARANTEE. (a) Is the fee quoted as a percentage of the guaranteed amount, per year (e.g. ‘1.5% p.a. of the facility’)? That is the amount-and-period commission Res 12’s Resolves First forbids. (b) Is the fee a flat, cost-based issuance charge for the administration — and, for a covered guarantee, the effort of arranging the cover? That is what Resolves Second permits, provided it does not exceed the real cost of like services. (c) A covered guarantee’s agency (wakālah) element can lawfully be paid as agency work; the uncovered pure-suretyship element cannot be sold at all. (d) This resolution rules on the FEE for issuing the guarantee; it does not, by itself, resolve every downstream structure banks build on guarantees (standby letters of credit used as financing, guarantee-plus-tawarruq packages, etc.) — those need their own analysis, and this corpus flags organised tawarruq as contested under Resolution No. 179.
GENUINE DIFFERENCES BETWEEN THE TWO EDITIONS (disclosed, not smoothed). The two translations agree completely on the substance while differing in wording throughout. Preamble First: ‘with or without a covering … both in performance and financial terms’ (official) versus ‘with or without cover … both the performance and financially’ (IRTI); ‘an agency may exist with or without a fee, tied with the bond of surety’ (official) versus ‘with or without fee, tied-in with the link of surety’ (IRTI). Preamble Second reasoning: ‘it will akin to a loan-generated profit to the lender, which is forbidden in Shariah’ (official — note the official edition’s own grammatical slip, ‘it will akin to’, reproduced here unaltered) versus ‘it will resemble a loan generated profit to the lender and that is forbidden in Shari’a’ (IRTI). Resolves First: ‘It is not permissible to charge a fee for the issuance of the letter of guarantee’ (official) versus ‘It is not permitted to charge a fee for issuing a letter of guarantee’ (IRTI). Resolves Second: ‘provided that they do not exceed the actual costs for the services of the same kind’ (official) versus ‘provided they do not exceed actual expenses for services of the same kind’ (IRTI). Closing invocation: ‘Indeed, Allāh is All-Knowing.’ (official) versus ‘Verily, Allah is AII-Knowing’ (IRTI — the ‘AII’ is a scan/OCR artefact for ‘All’, flagged not silently corrected). ONE GENUINE DATING DIVERGENCE, reported rather than reconciled: the official edition dates the 2nd session ‘10–16 Rabīʿ al-Awwal 1406H (22–28 December 1985)’ while the IRTI edition’s Resolution 12 heading reads ‘10 to 16 Rabiul Thani 1406 H (22-28 December 1985)’ — the two editions disagree on the Hijri month (Rabīʿ al-Awwal vs Rabīʿ al-Thānī) but agree on the Gregorian 22–28 December 1985; this entry uses ‘Rabīʿ al-Awwal’ to match the official edition and the corpus’s own Resolution No. 9 and Resolution No. 10 entries (the same 2nd session), and flags the IRTI variant here rather than silently choosing one. (The identical divergence appears on every resolution of this session.)
AN HONEST NOTE ON WHAT IS AND IS NOT HERE. The ‘guarantee (kafālah)’ identification is the resolution’s OWN wording (both editions gloss the term in the text), so it is not merely this site’s framing; the further labels ‘agency = wakālah’, ‘suretyship = ḍamān’, and ‘tabarruʿ / benevolent contract’ are standard fiqh terminology drawn out from the ruling’s own language. The resolution’s operative text cites no Qur’an verse and no hadith number — it states the ‘loan-drawn benefit is riba’ rule as the jurists’ settled reasoning, without a numbered report — so this entry assigns it none. It records no madhab tally and no vote count, so none is reported. It names no bank, product, figure or fee rate. The worked examples and the pairing with Resolution No. 13 are the corpus’s own commentary, drawn from the two rulings’ shared logic, not additional clauses of Resolution No. 12.
Wording inside quotation marks is quoted from the source. The rest is this notebook’s summary of it — read the original before relying on it.
Provenance
- Compiled from
- Compiled from TWO genuinely different English translations of the SAME primary resolution, cross-read 2026-07-12, every load-bearing quote machine-verified verbatim against both source PDFs (line-wrap, hyphenation and diacritic aware, whitespace-normalised, 19/19 OK): [1] the INTERNATIONAL ISLAMIC FIQH ACADEMY (OIC) OFFICIAL ENGLISH EDITION, ‘Resolutions and Recommendations of the International Islamic Fiqh Academy’ (official edition, October 2021), printing it as ‘Resolution No. 12 (12/2) / The Letter of Guarantee’; and [2] the IRTI/IDB PRINTED EDITION, ‘Resolutions and Recommendations of the Council of the Islamic Fiqh Academy 1985-2000’ (Islamic Research and Training Institute, Islamic Development Bank, Jeddah), printing it as ‘RESOLUTION N° 12 (12/2) CONCERNING THE LETTER OF GUARANTEE’. Both editions carry the same 2nd session (Jeddah, 22–28 December 1985) and the same holding: (preamble First) a letter of guarantee is either uncovered — where the guarantor stands surety (ḍamān/kafālah), or covered — where the applicant-issuer relationship is an agency (wakālah) that may be fee-bearing; (preamble Second) the guarantee itself (kafālah) is a benevolent contract, and charging for it is barred because a guarantor who pays and then recovers the sum has effectively lent, so a fee would be a loan-drawn benefit, i.e. riba; (Resolves First) no fee may be charged for issuing the guarantee, covered or not; (Resolves Second) actual administrative expenses only are permissible, not exceeding the real cost of like services, with the effort of arranging any cover allowed into that cost estimate.
- Source
- PRIMARY RULING (full title, session/city/date, the two-part preamble First/Second and the two Resolves clauses in full — the with/without-cover distinction, the agency element in a covered guarantee, the benevolent-contract/loan-drawn-benefit rationale, the prohibition of a fee scaled to amount and period, and the permission for actual-cost administrative expenses — plus the closing invocation) from [1] the INTERNATIONAL ISLAMIC FIQH ACADEMY (OIC) OFFICIAL ENGLISH EDITION, ‘Resolutions and Recommendations of the International Islamic Fiqh Academy’ (official edition, October 2021), printing it as ‘Resolution No. 12 (12/2) / The Letter of Guarantee’ (2nd session, Jeddah, Saudi Arabia, 10–16 Rabīʿ al-Awwal 1406H / 22–28 December 1985) — extracted verbatim from the published PDF (https://iifa-aifi.org/wp-content/uploads/2021/12/Resolutions-Recommendations-of-the-IIFA-Official-Edition-Oct-2021.pdf), read 2026-07-12. CONFIRMING SECOND, GENUINELY DIFFERENT TRANSLATION from [2] the IRTI/IDB PRINTED EDITION, ‘Resolutions and Recommendations of the Council of the Islamic Fiqh Academy 1985-2000’ (Islamic Research and Training Institute, Islamic Development Bank, Jeddah), printing it as ‘RESOLUTION N° 12 (12/2) CONCERNING THE LETTER OF GUARANTEE’, same 2nd session, same holding — extracted verbatim from the published PDF (https://zulkiflihasan.wordpress.com/wp-content/uploads/2009/12/majma-fiqh.pdf), read 2026-07-12. THE TWO EDITIONS ARE GENUINELY DIFFERENT RENDERINGS that converge on the same ruling; genuine wording differences reported rather than smoothed: preamble First (‘with or without a covering … both in performance and financial terms’ vs ‘with or without cover … both the performance and financially’; ‘tied with the bond of surety’ vs ‘tied-in with the link of surety’); preamble Second (‘it will akin to a loan-generated profit to the lender, which is forbidden in Shariah’ — the official edition’s own grammatical slip ‘it will akin to’ reproduced unaltered — vs ‘it will resemble a loan generated profit to the lender and that is forbidden in Shari’a’); Resolves First (‘It is not permissible to charge a fee for the issuance of the letter of guarantee’ vs ‘It is not permitted to charge a fee for issuing a letter of guarantee’); Resolves Second (‘provided that they do not exceed the actual costs for the services of the same kind’ vs ‘provided they do not exceed actual expenses for services of the same kind’); closing invocation (‘Indeed, Allāh is All-Knowing.’ vs ‘Verily, Allah is AII-Knowing’ — the IRTI ‘AII’ is a scan/OCR artefact for ‘All’, flagged not corrected). ONE GENUINE DATING DIVERGENCE, disclosed not reconciled: official ‘10–16 Rabīʿ al-Awwal 1406H (22–28 December 1985)’ vs IRTI ‘10 to 16 Rabiul Thani 1406 H (22-28 December 1985)’ — the editions disagree on the Hijri month while agreeing on the Gregorian dates; this entry uses ‘Rabīʿ al-Awwal’ (official edition + the corpus’s own same-session Resolution 9 and Resolution 10 entries). Every verbatim quote used above was machine-checked against both source PDFs (line-wrap, hyphenation and diacritic aware, 19/19 OK). Trust: high (two independent verbatim primary editions of the same OIC resolution).
- School / basis
- Comparative / transactional-law with a PRIMARY OIC collective-ijtihad ruling. Resolution No. 12 (12/2), 2nd session (Jeddah, 10–16 Rabīʿ al-Awwal 1406H / 22–28 December 1985), settles the fee question on a letter of guarantee in two operative clauses after a two-part preamble: (preamble First) a letter of guarantee is either UNCOVERED — classical suretyship/kafālah where ‘the guarantor is considered to have jointly pledged along with the third party’ = ‘guarantee or collateral in Islamic Fiqh’ — or COVERED, where ‘the relationship between the applicant of the guarantee and its issuer is that of an agency; and an agency may exist with or without a fee’; (preamble Second) ‘The guarantee (kafālah) is a benevolent contract motivated by grace and mercy … a fee … will akin to a loan-generated profit to the lender, which is forbidden in Shariah’ — the rationale being that a guarantor who pays out becomes a lender, so a fee on the guarantee is a loan-drawn benefit = riba; (Resolves First) ‘It is not permissible to charge a fee for the issuance of the letter of guarantee … whether it is with or without a coverage’ (the forbidden fee being one scaled to ‘the amount and the period of guarantee’, i.e. a percentage-per-annum commission); (Resolves Second) ‘The administrative expenses … are permissible by Shariah, provided that they do not exceed the actual costs for the services of the same kind’ — real cost recovery only, including the effort of arranging any cover. This is the SAME cost-only boundary the Academy set for loan service fees in Resolution No. 13 (1/3), applied to guarantees. Res 12’s operative text cites no Qur’an verse, no hadith number, no madhab count and no vote, so none is reported here. The kafālah↔guarantee gloss is the resolution’s own; agency↔wakālah and suretyship↔ḍamān are standard fiqh terms drawn from its language.
- Captured
- 2026-07-12
- Added
- 2026-07-12
- Trust
- Primary or near-primary source with a stable public URL.
Compiler’s note
Added 2026-07-12 (auto-run). The OIC primary-source ruling on the LETTER OF GUARANTEE (bank guarantee / kafālah) — a second bank product a riba-free household or small business keeps meeting (rental-bond guarantees, performance guarantees, bid bonds), and one the corpus previously reached only SECONDHAND: the existing kafalah-guarantee article (trust: medium) quotes the 1985 resolution via a bank fatwa page (Maybank) and does not cite Res 12 as a primary source. This gives that content its authoritative, dual-edition, trust-high primary-source home — the same upgrade Res 9 gave the generic takāful article. GEM 1 (the rationale, verbatim official): ‘The guarantee (kafālah) is a benevolent contract motivated by grace and mercy. The jurists have decided against taking a fee for issuing guarantees; the reason is that, in the event of a guarantor’s payment of the guaranteed sum, it will akin to a loan-generated profit to the lender, which is forbidden in Shariah’ — a guarantor who pays out becomes a lender, so a fee on the guarantee is a loan-drawn benefit = riba. GEM 2 (Resolves First): no fee for issuing the guarantee ‘whether it is with or without a coverage’, the forbidden fee being one keyed to ‘the amount and the period’ (i.e. the percentage-per-annum commission conventional banks actually charge). GEM 3 (Resolves Second): ‘The administrative expenses … are permissible by Shariah, provided that they do not exceed the actual costs for the services of the same kind’ — real cost recovery only, plus the effort of arranging any cover. WHY IT EARNS its place: it is the exact PAIR to Res 13 (already in corpus) — loan service fees AND guarantee fees are both capped at actual cost, the moment a charge becomes a price for the credit rather than the clerical work it is riba; the single test (‘tracking my cost, or a percentage of the money?’) is directly usable against a bank’s guarantee schedule. GOLD-STANDARD pairing: two genuinely different English translations cross-read — the Academy’s OWN OFFICIAL ENGLISH EDITION (Oct 2021 PDF) + the IRTI/IDB printed edition (1985-2000), both pdftotext-verbatim, both carrying the resolution in full. Genuine divergences reported: cover/covering wording; ‘bond of surety’ vs ‘link of surety’; ‘akin to’ (official’s own grammatical slip, kept) vs ‘resemble’; ‘not permissible … issuance’ vs ‘not permitted … issuing’; ‘actual costs for the services’ vs ‘actual expenses for services’; ‘Indeed, Allāh is All-Knowing.’ vs ‘Verily, Allah is AII-Knowing’ (IRTI OCR ‘AII’ flagged); and ONE genuine DATING divergence (official ‘Rabīʿ al-Awwal’ vs IRTI ‘Rabiul Thani’ for the same 2nd session, Gregorian dates identical) — used Rabīʿ al-Awwal to match the official edition and the corpus’s same-session Res 9/Res 10 entries, flagged not smoothed. All 19 load-bearing quotes machine-verified against both source PDFs (19/19 OK, whitespace/hyphenation/diacritic aware). HONESTY built in: kafālah↔guarantee is the resolution’s OWN gloss (not just site framing); agency↔wakālah and suretyship↔ḍamān are standard fiqh terms drawn from its language; the Res 13 pairing and worked examples are the corpus’s own commentary, NOT clauses of Res 12; downstream structures (standby-LC financing, guarantee-plus-tawarruq) flagged as needing separate analysis (see Res 179). DROPPED per no-fab: Qur’an verse / hadith number (Res 12’s operative text cites none, incl. the ‘loan that draws a benefit is riba’ rule); madhab tally; vote count; any bank/product/figure/fee-rate. Articles 90->91. Clean `rm -rf .next && npm run build` green; `npm run lint` = 0/0. NEXT candidate (substantive, finance-relevant, in both editions, not yet covered): Res 76 (7/8) Problems of Islamic Banks, or Res 89 (6/9) Currency Issues; AVOID procedural placeholders (Res 22/45/78/87 are deferrals and were rejected in prior runs).
Topics
islamic-financeislamic-contract-lawletter-of-guaranteebank-guaranteekafalahguaranteesuretysuretyshipdamaancollateralagencywakalahtabarrubenevolent-contractloan-drawn-benefitguarantee-feecommissionadministrative-expensesactual-costcost-only-feeribaperformance-guaranteebid-bondrental-bond-guaranteestandby-letter-of-creditoicinternational-islamic-fiqh-academyiifaresolution-12res-1212-22nd-sessionjeddah1985primary-sourcecollective-ijtihad
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