Date : 04-03-2020

Question :

Could you clarify the Sharia basis on which Islamic banks charge a percentage, as commission, from the value of the letters of credit issued upon request of client to import goods and raw materials. The bank issues the letters of credit (LC) in favor of the exporter and covers their value based on the agreed conditions, including the bill of lading that proves cargo shipment, then requests client to pay the value of the LC?

The Answer :

Praise be to Allah, The Lord of the Worlds.


A letter of credit is a promise issued by a bank upon request of client stating that they will pay bonds to lenders if the borrowers are unable to pay them. Nowadays, this tool of payment and confidence between contractors is very common in international trade.


However, the execution of this letter varies depending on the bank and the contracts. Conventional banks charge money for issuing this letter, and this is forbidden usury (Riba) according to Sharia. 


In Islamic banks, the LC depends on the monetary cap provided by the client. Thus, it is Wakalah when fully covered by client, Wakalah and Kafalah (Guarantee) when partially covered by client, and Murabaha when not covered at all by client.


Sharia'a standards for Islamic financial institutions permit charging a fee on letters of credit in case of Wakalah and taking actual expenses in the form of lump-sum in some situations. Standard (14) states, "The financial institution is allowed to take the value of the actual costs related to the execution of the LC and to take a fee, a lump-sum or a percentage, in return for carrying out the needed services."


However, it isn`t permissible for an Islamic bank to charge money for issuing the letter of credit or guarantee because issuing them is a kind of favor and kindness. Thus, charging on a favor or a kind act isn`t permissible in Sharia. "Muslim jurists are agreed that it isn`t permissible to charge money for issuing a letter of guarantee." This was confirmed by Resolution No. (2/12) of the International Islamic Fiqh Assembly, which states:" Issuing the letter of guarantee is a kind of favor and kindness. Thus, jurists ruled that charging on a favor or a kind act isn`t permissible in Sharia because it yields benefit to the lender and this is forbidden in Sharia" And Allah The Almighty knows best.