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Our business is Civil Construction (Contracting business). I request the Ulema to help me on the following matters: Letters of Credit, Bonds/Guarantee, Security against advance received…

Answered as per Hanafi Fiqh by Askimam.org

Our business is Civil Construction (Contracting business). I request the Ulema to help me on the following matters:

  1. What is the ruling regarding Letters of Credit – generally opened while importing heavy machinery?
  2. Performance Bonds/Guarantee – The client requests a performance guarantee from our banker of about 10% of the contract value.
  3. Security against advance received –  Before commencing a contract, the client  advances  5%-15% of the  contract value  to us for  initiating the contract. In return, the client request  a  Guarantee from our banker  of the  same amount.  The  bank  keeps  25%  of the advance  as margin money.

2 & 3 are essential for a contract, without which  the contract does not materialise.

4. I look after the accounts dept of our company (family business). Now i’m entrusted to oversee the finance dept as well. But there are some dealings which are just not right viz. Machinery loan and mortgages etc. but the management has decided that they dont want to enter into interest based transactions. They themselves want to get rid of it. In this case can i work as Finance Manager and help them in getting rid of interest. This will take a year or two? Can guide me in how to reduce and eliminate Interest from our business

Answer

In the name of Allah, Most Gracious, Most Merciful

Assalaamu `alaykum waRahmatullahi Wabarakatuh

1. There are three different roles that a bank could play when one opens a Letter of Credit to import goods.  (a) Being an agent. (b) Standing as guarantee. (c) Offering a loan.

a)      Being an agent – the bank acts as an agent on behalf of the importer when dealing with the exporter. The bank makes sure that the Bill of Lading and other documents, sent by the exporter, are in accordance with the Letter of Credit, opened by the importer; and agrees to go ahead with the deal. The bank also transfers money on behalf of the importer to the bank of the exporter. It is permissible for the bank to charge a fee for all these services it has provided as an agent.

b)      Standing as Guarantee – in some cases, the bank stands as a guarantee on behalf of the importer who opens a Letter of Credit; i.e. it guarantees the exporter that payment will be made on time by the importer. It is not permissible for the bank to charge a fee for acting as a guarantor; but it is permissible to charge the customer for expenses incurred whilst acting as a guarantee.

c)      Offering a loan – at times, the bank pays upfront on behalf of the client who has opened a Letter of Credit. This payment is either previously agreed upon by both parties, i.e. the client requests the bank to make payment on his behalf and agrees to payback before a certain date; or the customer does not request the bank to pay upfront, but the bank makes payment upfront because the client is not able to make payment to the bank on time. The bank charges interest from the client in both these cases and it is definitely not permissible for one to acquire an interest baring loan from the bank.

We will not be able to confirm a ruling regarding the opening of a Letter of Credit unless details of the type of Letter of Credit are provided and your relationship with the bank is specified.

2. We understand that by providing a performance bond, your bank insures your client against any monetary loss that your client may face in case of a default on your behalf. This is not permissible according to Shari’ah, as it constitutes the component of gambling; i.e. you pay an amount to the bank to provide a Performance Bond to your client and the bank may or may not compensate your client.

3. We cannot comment on this query until the following points are clarified:

a)      What is the status of the sum advanced by the client for initiating the contract? Can he legally claim back the amount when you fail to carry on with the contract, or are you entitled to the money even if you don’t complete the contract?

b)      What is meant by the statement, “The Bank keeps 25% of the advance as margin money”?

4. It will be permissible for you to work as the Financing Manager of the Company as long as the major portion of the income of the Company is haram (unlawful), especially when your intention is to terminate all interest baring transactions.

Whilst your role as a Finance Manager to eliminate interest is commendable and rewarding, we will not be able to guide you on how to reduce and eliminate interest from your business when we do not know the actual nature of the interest baring transactions. However, in general, you could terminate all interest baring transactions and consult the Ulama in regards to all transactions that take place in the company. Moreover, you will have to give out in charity (sadaqah) all income that was derived through haram (unlawful) means. If you cannot determine the exact amount that was derived through haram means, then you should make sadaqah until you are satisfied that all haram money has been disposed of.

And Allah knows best

Wassalam

Ml. Abu Yahya,
Student Darul Iftaa

Checked and Approved by:

Mufti Ebrahim Desai
Darul Iftaa, Madrassah In’aamiyyah



IMPORTANT NOTICE : 

The Darul Iftaa, Madrasah Inaa’miyya Camperdown takes pleasure in inviting you to its 7th Shariah Compliant Business Campaign Programme. This seminar is designed to empower every Muslim with the Shariah Law of Finance and economics.

Sunday, 18th of May 2008 at the Darul Uloom Musjid-Camperdown. Programme begins at 10.00 am

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This answer was collected from Askimam.org, which is operated under the supervision of Mufti Ebrahim Desai from South Africa.

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