The Documentary Letter of Credit Practiced in Banks
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Fatwa No. ( 21566 )
Q: I submit to your eminence a request for a fatwa regarding the ruling on the documentary letter of credit practiced in banks. The documentary letter of credit is a contract between the Saudi bank and the Saudi merchant (the importer), whereby the bank informs the foreign bank of the Saudi merchant's desire and confirmation of the purchase transaction from the foreign merchant (the supplier). The Saudi bank acts as a guarantor for the Saudi merchant in exchange for a reservation of a portion of the credit value (25%, 50%, or 100%). The bank charges a percentage of the credit value (0.25% to 1%) in addition to certain fees such as communication costs. Payment is then made by the Saudi merchant at any agreed-upon time, without the bank taking any interest. However, if the Saudi merchant delays, the Saudi bank is forced to pay the amount due on behalf of the merchant. It is known that the letter of credit, with its conditions, guarantees the rights of both parties (such as the delivery period and the application of specifications, etc.). Some foreign companies (suppliers) impose opening a credit in their favor or transferring the full amount, in which case the rights of the Saudi merchant (importer) are not preserved.
If the full or partial amount is transferred to the (supplier). The question: Is it permissible for me to open a credit on the condition that I pay at the specified time without being exposed to interest? Please issue a ruling, may you be rewarded. May Allah reward you with good.
A: The documentary letter of credit is, in its essence, a guarantee. The contract of guarantee is originally permissible as long as it is not accompanied by what is not permissible in the Shari'ah. The reality of the documentary letter of credit is that it is not free from contradiction with the Shari'ah, such as riba (usury or interest), or taking a commission for the guarantee, or containing a defective contract such as insurance or the seller selling what he does not possess, and the like. Therefore, it is not permissible to deal with the documentary letter of credit unless it is free from the circumstances that contradict the pure Shari'ah. And success is from Allah, and may Allah send prayers and blessings upon our Prophet Muhammad, his family, and his Companions.
Q: I submit to your eminence a request for a fatwa regarding the ruling on the documentary letter of credit practiced in banks. The documentary letter of credit is a contract between the Saudi bank and the Saudi merchant (the importer), whereby the bank informs the foreign bank of the Saudi merchant's desire and confirmation of the purchase transaction from the foreign merchant (the supplier). The Saudi bank acts as a guarantor for the Saudi merchant in exchange for a reservation of a portion of the credit value (25%, 50%, or 100%). The bank charges a percentage of the credit value (0.25% to 1%) in addition to certain fees such as communication costs. Payment is then made by the Saudi merchant at any agreed-upon time, without the bank taking any interest. However, if the Saudi merchant delays, the Saudi bank is forced to pay the amount due on behalf of the merchant. It is known that the letter of credit, with its conditions, guarantees the rights of both parties (such as the delivery period and the application of specifications, etc.). Some foreign companies (suppliers) impose opening a credit in their favor or transferring the full amount, in which case the rights of the Saudi merchant (importer) are not preserved.
If the full or partial amount is transferred to the (supplier). The question: Is it permissible for me to open a credit on the condition that I pay at the specified time without being exposed to interest? Please issue a ruling, may you be rewarded. May Allah reward you with good.
A: The documentary letter of credit is, in its essence, a guarantee. The contract of guarantee is originally permissible as long as it is not accompanied by what is not permissible in the Shari'ah. The reality of the documentary letter of credit is that it is not free from contradiction with the Shari'ah, such as riba (usury or interest), or taking a commission for the guarantee, or containing a defective contract such as insurance or the seller selling what he does not possess, and the like. Therefore, it is not permissible to deal with the documentary letter of credit unless it is free from the circumstances that contradict the pure Shari'ah. And success is from Allah, and may Allah send prayers and blessings upon our Prophet Muhammad, his family, and his Companions.
Source
www.alifta.gov.sa
The Arabic text is copied verbatim from the original source, without any edits.