Kafalah or guarantee is a concept that is widely used in Islamic banking. A Letters of guarantee is a written commitment from the bank to pay the value of the Letters of guarantee to the payee upon the latter’s first request regardless of any claims on the part of the client during the term of validity of the Letters of guarantee.
Kafalah is a unilateral contract of guarantee where one party agrees to stand in the place of a debtor before his or her creditors.
TYPES OF GUARANTEES
- Bid Bond Guarantees
- Performance Guarantees
- Advance Payment Guarantees
- Financial Guarantee
- Retention Bank Guarantee.
PROCESS FLOW LETTER OF GUARANTEE
- Customer’s account with the bank is mandatory for Issuance of bank guarantee.
- Customer has to request for issuance of BG along with supporting document (Shartnama for biding and contract offer letter for performance and advance payment guarantee)
- Investment officer/Financing Officer will receive all company documents. (President and vice president’s Tazkira, updated license, Authorization letter in favor of person who is authorized to sign BG documents)
- Investment officer will check the requirement and discusses transaction details with the customer.
- After BG is recommended by Investment manager, and reviewed by Sharia Advisor for shariah compliance purposes.
- BG is then printed in specified format (as per beneficiary format or bank’s standard format) in line with Line of proposal conditions (if any).
- The BG beneficiary may confirm the BG issued by FMFB-A through mail or by letter.