Step by Step Guide to create an Islamic Finance Contract including Transaction steps and diagrams, issues and risks along with the certificates for Shariah and Legal Reviews. Follow the update on #TRGuidanceNotes The guidance notes are available on http://www.zawya.com/shariah-legal/listing/legaldocuments/

1. Sharia Compliant
Guarantee Contract
Authors:
Huma Sodher
Legal Review by Shariah Review by Produced by

2. 2
Guarantee Contract
Contents
About this Product Guidance Note and Documentation ............................................................................................................3
About Thomson Reuters...............................................................................................................................................................4
About Zawya Islamic....................................................................................................................................................................5
About Freshfields Bruckhaus Deringer........................................................................................................................................6
About Shariyah Review Bureau....................................................................................................................................................7
Freshfields Bruckhaus Deringer certificate..................................................................................................................................8
Shariyah Review Bureau certificate..............................................................................................................................................9
Introduction................................................................................................................................................................................ 10
Transaction Steps and Diagrams................................................................................................................................................ 11
Key differences between the Shari’a compliant and conventional guarantees......................................................................... 12
Key Islamic provisions in the principal documents.....................................................................................................................13
Shari’a issues and risks................................................................................................................................................................13
Regional practices in the GCC and south east asia regions.......................................................................................................13
Legal and commercial considerations....................................................................................................................................... 14
Appendices................................................................................................................................................................................. 15
Master agreement for Sharia Compliant Guarantee contact.....................................................................................................17

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Guarantee Contract
About this Product Guidance Note and Documentation
Bank guarantees have become an essential facility for modern-day businesses. This guidance note and
accompanying example document explain in detail with diagrams illustrating sharia-compliant bank
guarantees structured using the kafalah contract.
The guidance breaks down in detail the steps involved in this transaction between the bank, its clients,
and the relationship between them and counterparties involved, including the correspondent bank and
the beneficiary.
The main differences between sharia-compliant bank guarantees and conventional bank guarantees
are also explained here, as are specific sharia issues and risks. There are differences in opinion between
GCC and Southeast Asian sharia scholars with regards to charging a fee for the issuance of a guarantee.
Regional differences and their practice are also detailed in this guidance note in addition to an in-depth
focus on legal and commercial considerations.
Product Guidance notes and documents available
Sharia compliant asset & housing finance: Ijara and forward Ijarah based contract
Sharia compliant asset finance: Murabaha based
Sharia compliant deposit products: Saving and current accounts
Sharia compliant trade finance: L/C facilities
Sharia compliant credit cards: Fee or tawarruq based
Sharia compliant guarantee contract
Sharia complaint overdraft facility
Treasury Placement: Wakala based
FX-spot and forward contract: Wa’d based
Working capital finance: Mudaraba Based
Investment Sukuk – Sukuk al Wakala, Sukuk al Musharaka and Sukuk al Mudaraba structures
Islamic syndicated financing: Mudaraba based
Islamic Project finance: Istisna plus forward Ijara based
Islamic Project finance: Musharaka and diminishing Musharaka based

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Guarantee Contract
About Thomson Reuters
Thomson Reuters is an integrated knowledge services provider that assists the Islamic Finance industry
through providing solutions that enhance transparency, clarity and accessibility of Islamic Finance to
the global audience of businesses and professionals. We are proud to have been at the heart of Islamic
banking since the first commercial Islamic bank was launched in 1975.
Our knowledge solutions help you gain clarity and transparency in the rapidly emerging Islamic finance industry by providing you with data
services, research products and consulting services.
DATA SERVICES
Thomson Reuters Eikon and Zawya products provide access to a full spectrum of all relevant Islamic asset classes and content sets to give
us¬ers the best of class research capabilities.
RESEARCH
Built on the back of the world’s most extensive data capabilities, Thomson Reuters leverages its global network to provide primary source
in¬telligence on markets, industries and institutions relevant to Islamic finance.
CONSULTING
Thomson Reuters can provide bespoke service harnessing our global knowledge network com¬bined with our deep expertise
in Islamic finance.
ISLAMIC FINANCE GATEWAY COMMUNITY
Islamic Finance Gateway (IFG) Community is the one dedicated knowledge Gateway for profes¬sionals from across different countries to
converge and interact on industry issues that matter in order to generate actionable outcomes to shape and speed up the industry’s growth.

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Guarantee Contract
About Zawya Islamic
Our comprehensive platform provides the transparency and clarity of information you need to
conduct business more effectively. We also provide you with tools you can use to better shape
investment decisions.
Our intelligence includes all Islamic finance and Shariah-compliant asset classes, databases, research, news and market data, and is
supported by other data that serves as a benchmark against conventional fundamentals.
Zawya Islamic addresses the needs of any investment manager or consultant – Islamic or otherwise – by giving you access to the full
spectrum of legal, Shariah and market information.
We are powered by data from Thomson Reuters and also partner with other global Shariah and Islamic finance market players, standard
setters and authorities. We have developed for your use a well-connected and networked platform that makes Shariah-compliant
investment and decision making easier. Zawya Islamic is all of the following on one single platform:
• Fatawa, standards, regulations, legal documentation and product guidance notes, intelligently connected with scholars and instruments;
• Deep fundamental data on global sukuk, Islamic funds, Islamic banks and financial institutions, and Shariah -compliant equities;
• Islamic finance news, research, indices, money market and benchmark rates; and
• The ICD Thomson Reuters Islamic Finance Development Indicator and the Islamic Finance Gateway Community.
www.zawya.com/Islamic-finance

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Guarantee Contract
About Freshfields Bruckhaus Deringer
Freshfields was founded in 1743 in the City of London, making it the oldest existing law firm in the world.
Today, we are host to over 2,500 lawyers located across 28 offices in 16 countries throughout the Middle
East, Europe, the Americas and Asia.
While we have offices in all the main financial and regulatory centres globally, over 30 per cent of our
work is in countries where we do not have an office. Therefore our lawyers are deeply experienced in
working outside their home markets. Moreover, the proportion of our work outside our “home markets” is
growing, and is likely to continue to do so, as businesses invest in those places which are growing faster
than the developed world. We are focused on being able to provide our advice where our clients need it,
not just where we happen to have an office.
Our market leading practice areas
Our firm is organised into nine international practice groups in line with our clients’ business needs – they include Finance (both Islamic
and conventional); Corporate; Antitrust, Competition and Trade; Dispute Resolution; Employment, Pensions and Benefits; Environment,
Planning and Regulatory; Intellectual Property and Information Technology; International Tax; and Real Estate (including Construction).
We are proud of the fact that all our practice groups and many of our lawyers are consistently recognised by the most renowned legal
research directories and market commentators to be among the market leaders in their respective areas of law.
What sets us apart from our competitors is that on every instruction on a profoundly consistent basis, we bring to bear the unique
benefits and advantages of our global coverage, comprehensive platform, true integration and client-centric mindset. We are
committed to excellence in the legal advice and support we provide to our clients for their entrepreneurial decisions – no matter the
geography, scope or mandate.

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Guarantee Contract
About Shariyah Review Bureau
Shariyah Review Bureau (SRB) is the Corporate World’s leading Shari’a Advisor with scholarly presence
in more than 12 countries from US, Europe, Africa, GCC and Asia. The breadth of geographical reach
crossing national boundaries makes it a unique Shari’a consultancy body that can meet clients true
international business requirements.
Licensed by the Central Bank of Bahrain it is a natural proxy to institutes seeking Shari’a Compliant Funds and Islamic windows and
transactions. Apart from clients in UK, Canada, France, Australia, Hong Kong, Switzerland and the GCC, it is the Shari’a Advisor for 21%
of the Co-operative Insurance Firms Listed on the stock-exchange market in the Kingdom of Saudi Arabia. SRB also serves 12% of the
Saudi Investment Companies licensed and regulated by the CMA and has a diverse set of experience in Islamic banking and non-banking
institutions, including securities firms, Shari’a compliant national banks, energy firms and information providers. It also has an extensive
experience in helping clients cover a wide spectrum of transactions ranging from Sukuk’s, Private Equity Funds, Equity projects, Trade
Finance transactions, Margin Trading, Real Estate Developments, Land Funds, ICT Deals, Money Market, Textile, Sports and Pharma Funds.
With almost a decade experience of Shari’a Advisory and Shari’a Audit, srb has sustained a record in innovation and impact for transactions
in Shari’a compliant Corporate debt, Sukuks and Islamic equity markets, initial public offerings screening & Investment Banking Practice.
To learn more visit www.shariyah.com

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Guarantee Contract
Freshfields Bruckhaus Deringer certificate

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Guarantee Contract
Shariyah Review Bureau certificate

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Guarantee Contract
1 Introduction
Bank guarantees are an inevitable business tool and requirement for modern-day businesses. They
facilitate expansion of the business operations in both indigenous and foreign markets. Bank guarantees
also assist in the negotiation of business contracts on favourable terms as they provide security for the
performance of contract obligations by the counterparty. Bank guarantees serve as a risk mitigation tool
for counterparty default risk as they provide legal remedy in the case of non-fulfilment of financial and
non-financial obligations.
Conventional banks have long offered various guarantee products to cater the requirements of its clientele in contrast to Islamic banks,
which are still endeavouring to explore the ways to structure the guarantee products in accordance with Shari’a precepts. The majority of
the scholars treat the contract of guarantee as a gratuitous or a non-commutative contract (‘tabarru’ or ‘aqd ghair mu’awada’) and do not
allow the charging of fee for the issuance of guarantee. Hence, charging of a fee for the issuance of a guarantee is a controversial issue.
On the contrary, conventional banks are not subject to any restrictions for charging the fee for the issuance of a guarantee.
A Shari’a compliant guarantee represents an irrevocable commitment of a bank to pay the beneficiary only upon failure of its client to
perform the specified obligations and upon presentation of a written demand for payment and other documents, if any, as stipulated in the
guarantee and in conformity with Shari’a law. In the event of enforcement of Shari’a compliant guarantee by the beneficiary, the amount
paid under the guarantee becomes a temporary short-term interest-free loan (qard) advanced by a bank to its client. The client repays the
temporary loan in accordance with the terms and conditions agreed with the bank for the guarantee facility.
A bank guarantee is an unfunded facility and does not involve any cash out flow at the time of issuance. The issuing bank may become
liable to pay out against the guarantee in the event of default of its client. Therefore, the banks generally require from their clients a counter
guarantee and/or place a margin under Wadiah Yad Damanah (an Islamic safekeeping contract with repayment guarantee) or qard (an
interest free loan) basis, as a prerequisite for the issuance of a Shari’a compliant guarantee.
Shari’a compliant guarantee products offered by banks are generally structured on the basis of guarantee (kafalah) contract. The common
types of Shari’a compliant guarantees issued by banks include performance guarantee, advance payment guarantee, shipping guarantee,
bid bond and standby letters of credit.

11. Guarantee Contract
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Legal Review by Shariah Review by Produced by