AL-KAFALAH IN LETTER OF GUARANTEE

Kafalah is a contract in which one party promises to deliver subject matter to another. According to the Shariah Advisory
Council of Bank Negara Malaysia, kalafah is a guaranteed contract on a certain asset, usufruct, and/or services delivered
to the parties concerned by a guarantor. Shipping guarantee, bank guarantee, advance payment guarantee, performance
guarantee, and tender guarantee are the five categories of al-kafalah application in letters of guarantee.

Shipping guarantee is a guarantee given by a person (the Bank) to the owner of goods who has placed or deposited his
goods with a third party under the concept of Al-Kafalah or Al-Dhamanah, whereby any subsequent claim by the owner
for his goods must be met by the guarantor and the third party. The Bank's shipping guarantee facility allows importers to
clear goods at the port without presenting an original Bill of Lading. It should only be issued for documents drawn under
the Bank’s LC or for customers with approved shipping guarantee collections facilities.

Another form of Al-Kafalah in letter of guarantee (‫ (خطاب الضامن‬is bank guarantee, which is an irrevocable written
obligation issued by the Islamic bank whereby the Islamic banks agreed to pay a sum of money to a third party (Beneficiary)
when the customer (applicants) fail to fulfill its obligations (default) to any third party through the principle of Kafalah
(ISRA, 2012). According to SME BANK, in their product disclosure sheet (Kafalah BG-i) it stated that if the applicant fail to
make payment due to the Bank after the Bank advanced the claimed amount to the beneficiary, they may charge Ta’widh
(compensation) upon the customer in three situation; firstly, before maturity, after maturity and lastly, the post judgment
where the court may impose a late payment charge on judgement debt.

The next form of Al-Kafalah in letter of guarantee is advance payment guarantees. The primary goal of an advance
payment guarantees is to ensure that an advance payment is used in accordance with the terms of the buyer-seller
contract. To cover this advance payment, a letter of guarantee is usually required. If the seller fails to meet his obligations,
the advance payment must be refunded under an advance payment guarantee. As a result, the guaranteed aids in the
prevention of default. The coverage of advance payment guarantees are collateral and cash margins.

A performance guarantee is an agreement between a client and a contractor that assures the customer that the
contractor will fulfil the contractor's obligations according to the contract. As an example, the Bank guarantees to its
customer that the contractor will complete the task as agreed. The bank will reimburse the damage up to the guaranteed
amount if the contractor fails to complete his tasks according to the contract. This guarantee might include a condition
that covers the client's losses if the contractor fails to deliver.

Tender guarantee is a protectors to the party that have announced the competition (the beneficiary of the guarantee)
from the risk that the participants breaches bidding documentation requirements. As the purpose of this guarantee is to
safeguard procuring entities against unqualified bidder’s submitting a bid. The guarantee acts as security against the risk
of the bidder falling to accept or execute the terms of the contract awarded to them. Its grant a compensation to the
beneficiary of the guarantee in the event that the tenderer takes his bid back or after winning the tenderer fails to enter
into the contract.

In Islamic banking, guarantee has been commonly accepted. However, the practice was rather accepted in the form of
classical Islamic guarantee which is al-kafalah, this is to make of the arrangement consistent with the basic philosophy of
Islamic banks. As such, it is observed however that not all provisions concerning the guarantee are found in the classical
Islamic legal texts. The shariah board need to explain the law and devise a new law or fatwa to pertaining the issue. The
fatwa should be treated as having the great value, it is not regarded as binding on the court, and the value can be only
accepted as persuasive. Thus, the shariah board is pertinent to ensure that the legal mechanism is strengthened through
fatwa which involves a great deal of juristic efforts.