Answer
Wa `alaykum As-Salamu wa Rahmatullahi wa Barakatuh
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
In this fatwa:
If you decide to resort to conventional bank’s letter of guarantee, you will not be in the wrong category that violates any basic principles of the Shari’ah because the matter is controversial.
In his response to your question, Prof. Dr. Monzer Kahf, Professor of Islamic Finance and Economics at Qatar Faculty of Islamic Studies, states:
There is a controversy among Shari’ah scholars on the bank letters of guarantees. Some apply the classical rule that a guarantee is a pure donation and must have a zero charge.
Consequently any charge on a guarantee is considered in the category of riba (in riba you give money as a loan and charge interest, whereas in a letter of guarantee you give only words, a pledge, and it is natural that any charge for these words is even worse than interest because you do not give money).
The second opinion views the letter of guarantee as a new contract necessitated by the contemporary and financial situation. It is not similar to the classical guarantees that are contributory based.
This second opinion considers it permissible for banks to charge customers for issuing letters of guarantee. Most Islamic banks follow the second opinion.
If you decide to follow this opinion and resort to conventional bank’s letter of guarantee, you will not be in the wrong category that violates any basic principles of the Shari’ah because the matter is controversial.
Almighty Allah knows best.
Editor’s note: This fatwa is from Ask the Scholar’s archive and was originally published at an earlier date.