CONTRACT OF KAFÄ€LAH (GUARANTEE) IN ISLAMIC FINANCE: EXTENDING THE FRONTIERS OF ISLAMIC LAW

Abstract

In the traditional application of kafÄlah (guarantee) agreement
under the Islamic law, the kÄfil (guarantor) is not expected to make
profit from offering to guarantee. However, in the contemporary
Islamic financing, a huge volume of national and transnational
transactions are built around kafÄlah in form of bank guarantee,
standby letter of credit and shipping guarantee. The Islamic
financial institutions have thus redesigned the traditional concept
to take advantage of the robust return, like their conventional
counterparts, accruable from kafÄlah transactions. This raises
fundamental question of possible infraction of the Shariah or
contrivance of legal device (hiyal) to permit the impermissible.
This paper therefore, conducts a study of the traditional concept
of kafÄlah with a view to examining the possible contrivance
in and/or infraction of Shariah in the process of its redesign
and application. The goal is to screen the product for Shariah
compliance and the methodology adopted is qualitative. It
concludes that rather being a contrivance of Islamic traditional
precept the practice is an ingenious extension of the frontiers of
Islamic law to the contemporary needs.