Islamic finance applications and islamic law analysis of guarantee letters

The need for financing is one of the fundamental elements of economic life. In modern banking, this need is met not only through cash loans but also through non-cash credit products such as letters of guarantee, letters of credit, and aval/acceptance transactions. Among these products, the letter of guarantee is an important financial instrument through which a bank undertakes, under certain conditions, a payment obligation in favor of its customer toward a third party. Letters of guarantee are used not only by conventional banks but also by participation banks; however, the juristic nature of this transaction and the ruling on the fees charged in return constitute a controversial issue from the perspective of Islamic law. This thesis examines the legal and juristic nature of bank letters of guarantee within the framework of Islamic law. It discusses the nature of the kafalah contract in classical Islamic jurisprudence, the debates on charging fees for kafalah, the functioning of letters of guarantee in modern banking, and the approaches of contemporary Islamic jurists to the issue. The study takes into account not only the type of contract under which the letter of guarantee should be classified, but also what the bank actually earns income in return for. In this context, it concludes that, since the obligation undertaken by the bank in a letter of guarantee has the nature of a credit/loan commitment, the commission charged in return bears similarity to interest, as it involves deriving benefit from a commitment to lend.