Fatwa ID: 08200
Answered by: Mawlana Abdurrahman Mohammad
Question:
The process for my job as an agent for a business is as follows:
We request an irrevocable corporate purchase order (ICPO), know your customer (KYC) & Company profile.
My buyer then requires a CTS (Full corporate order) from my seller.
The buyer then sends us a Sales purchase agreement (SPA).
The seller then requests a Fund verification for small & mid-size buyers: Bank-to-Bank Fund verification to avoid deal failure. MT705 Pre-advise is required.
And a Fund verification for large scale buyers: Requires financial rating of at least BBB from S&P or Baa3 from Moody’s is required. This prerequisite ensures security for our company & investors.
A BL copy will be shared by seller prior to opening documentary letter of credit (DLC) Transferable or Non-Transferable standby letter of credit (SBLC) for payment guarantee.
People say a person paying for these SBLC/ DLC/ LCs is Riba. Even though I will request the buyer to obtain a SBLC/ LC or DLC from the bank, it’s not my intention for the buyer to engage in Riba or what not even though they will definitely have to pay for these letters.
Finally the payment will be given by buyer at the discharge port after SGS, against shipping documents, Q&Q.
If it’s a 12-month contract, they will either pay the whole amount at the discharge port for the entire 12 months, every time they discharge their products at the discharge port throughout the 12 months. Is this halal according to the Hanafi school?
I’m only doing what my seller has requested me to which includes requesting specific documents from my buyer.
Is this process and income halal for me as an agent?
In the name of Allah, the Most Gracious, the Most Merciful
Answer:
Introduction
Due to the intricate nature of this process and the terms of the letters and agreements, it is difficult to give a verdict as more information would be required to assess your situation. It would be better to consult personally with a scholar who is an expert in Islamic finance and explain your situation and review the letter terms. However, here are some basic guidelines.
The items sold should be Islamically permissible. It would be incorrect for you to be the middleman of a Harām transaction.
You should not promote Ribā or encourage businesses to take interest-based loans.
It is impermissible to charge for the act of sponsorship or guaranteeing payment, but administrative fees can be charged for processing the letter.
Standby Letter of Credit (SBLC)
According to corporatefinanceinstitute.com:
A standby letter of credit, abbreviated as SBLC, refers to a legal document where a bank guarantees the payment of a specific amount of money to a seller if the buyer defaults on the agreement.[1]
This arrangement in the Shariah is called Kafālah (sponsorship/guarantee/security). In a business transaction between the buyer and seller, a third party (the bank in your case) gets involved and guarantees that if the buyer fails to pay, the Kafeel (guarantor) will pay on the buyer’s behalf.
As for its definition, it was said that it is joining the responsibility [of someone] to the responsibility in the claim [agreement], and it was said in the debt, and the first is more correct, as stated in Al-Hidayah…
Normally, Kafālah is an act of goodwill and Ihsān, so it would be impermissible to charge for it. If someone does charge for it, that would be considered Ribā. When he pays on time, the money is not being exchanged for anything. When he defaults or pays late, the agreement becomes an interest-based loan.
(Chapter Six: Interpretation of Riba and its Rulings) In Islamic law, it refers to an excess of money that is not met by compensation in the exchange of wealth for wealth.[3]
However, the Kafeel could charge for charges incurred and administrative fees associated with the act of acting as a sponsor. This is permissible when the charges are not for the act of Kafālah or involve interest agreements. In that specific scenario, you being the middleman in processing this letter and charging a fee that is completely covered by the buyer would be permissible — only if the SBLC does not involve interest or charging for Kafālah.
If the buyer and seller take care of this themselves and you are not involved in retrieving or processing this letter, then this is permitted.
Documentary Letter of Credit (DLC)
According to uk.practicallaw.thomsonreuters.com:
Also known as a commercial letter of credit, commercial credit or documentary credit…
It is the most frequent form of payment in international trade.
This setup is mostly an example of Wakālah (agency).
It is a person appointing someone else in his place in a known action/transaction[5]
The bank acts as an agent and charges fees for reviewing documents or facilitating payment. If the bank guarantees payment (Kafālah) and charges for it, or charges interest, it becomes impermissible. If the letter charges only for administrative or processing fees, it would be permissible.
Letter of Credit
According to investopedia.com:
A letter of credit… is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount…
This also appears to be a Kafālah setup and could lead to an interest-based loan. Fees for the guarantee or backed-up credit (e.g., 0.75%) make it impermissible. If you are involved in requesting or processing this letter with these impermissible terms, your participation becomes impermissible.
Conclusion
Charging for Kafālah is impermissible, as it is an act of Ihsān.
Charging for administrative services — not tied to credit or guarantees — is allowed.
You should not request, process, or facilitate SBLCs or LCs that charge based on credit amount or involve interest.
You may act as an agent if you’re only facilitating trade and not processing impermissible letters.
Payment at the port is acceptable. However, pre-payment for future shipments must follow rules of Bay’ al-Salam, with proper specifications.
Only Allah (عَزَّ وَجَلَّ) knows best.
Written by: Mawlana Abdurrahman Mohammad
Checked and approved by: Mufti Mohammed Tosir Miah
Darul Ifta Birmingham
References:
[1] https://corporatefinanceinstitute.com/resources/commercial-lending/standby-letter-of-credit-sblc/#:~:text=An%20SBLC%20is%20frequently%20used,make%20the%20payment%20on%20time.
[2] أَمَّا تَعْرِيفُهَا فَقِيلَ هِيَ ضَمُّ الذِّمَّةِ إلَى الذِّمَّةِ فِي الْمُطَالَبَةِ وَقِيلَ فِي الدَّيْنِ، وَالْأَوَّلُ أَصَحُّ كَذَا فِي الْهِدَايَةِ، وَأَمَّا رُكْنُهَا فَالْإِيجَابُ، وَالْقَبُولُ عِنْدَ أَبِي حَنِيفَةَ وَمُحَمَّدٍ – رَحِمَهُمَا اللَّهُ تَعَالَى -، وَهُوَ قَوْلُ أَبِي يُوسُفَ – رَحِمَهُ اللَّهُ تَعَالَى – أَوَّلًا حَتَّى إنَّ الْكَفَالَةَ لَا تَتِمُّ بِالْكَفِيلِ وَحْدَهُ سَوَاءٌ كَفَلَ بِالْمَالِ أَوْ بِالنَّفْسِ مَا لَمْ يُوجَدْ قَبُولُ الْمَكْفُولِ لَهُ أَوْ قَبُولُ أَجْنَبِيٍّ عَنْهُ فِي مَجْلِسِ الْعَقْدِ أَوْ خِطَابِ الْمَكْفُولِ لَهُ أَوْ خِطَابِ أَجْنَبِيٍّ عَنْهُ
(Al-Fatāwā Al-Hindiyyah, vol 3, pg. 252, Al-Maṭba’ah Al-Kubrā Al-Amīriyyah)
[3] (الْفَصْلُ السَّادِسُ فِي تَفْسِيرِ الرِّبَا وَأَحْكَامِهِ) وَهُوَ فِي الشَّرْعِ عِبَارَةٌ عَنْ فَضْلِ مَالٍ لَا يُقَابِلُهُ عِوَضٌ فِي مُعَاوَضَةِ مَالٍ بِمَالٍ
(Al-Fatāwā Al-Hindiyyah, vol. 3, pg. 117, Al-Maṭba’ah Al-Kubrā Al-Amīriyyah)
[5] فَهُوَ إقَامَةُ الْإِنْسَانِ غَيْرَهُ مَقَامَ نَفْسِهِ فِي تَصَرُّفٍ مَعْلُومٍ
(Al-Fatāwā Al-Hindiyyah, vol 3, pg. 560, Al-Maṭba’ah Al-Kubrā Al-Amīriyyah)
[6] http://investopedia.com/terms/l/letterofcredit.asp
