Letters of Credit

10-4-2001 | IslamWeb

Question:

Nowadays the businessmen take a letter of credit from a bank for export and import. The bank gives them security and charges some amount.
Will it be a Riba/interest or commission? Is it permissible or not? Please guide with reference and give the solution for traders.

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Answer:

All perfect praise be to Allah, The Lord of the Worlds. I testify that there is none worthy of worship except Allah, and that Muhammad is His slave and Messenger.

 

The process mentioned in your question is nothing but a guarantee. The guarantee as described by the Muslim jurists is an obligation of the person who is liable to give charity to pay the dues of others if they do not pay.

The LC (Letter of credit), which is issued by a bank to its clients, is only an authentication. So, charging money for issuing that letter is not permissible. Issuing this letter is a kind of favor and kindness; thus, charging on a favor or a kind act is not permissible in the Sharee’ah.

Moreover, sometimes charging in return for a guarantee becomes Riba (interest and/or usury) when the guaranteed person does not settle his due, because a bank pays on behalf of his guaranteed client and then takes back from him by force.

In other words, this procedure is the same as if the bank has lent him the money in advance and charged extra money against the guarantee letter.

No doubt, this is not only a pure Riba which is forbidden, but it is also a way to consuming people's money without right.

Allah knows best.