Kafalah

Kafalah (Arabic: كفالة, literally 'guarantee' or 'surety') is an Islamic suretyship contract in which a guarantor (Kafil) undertakes responsibility for a debt, obligation, or liability of a third party (principal debtor) to a creditor (Makful Lah). It is the Islamic equivalent of a conventional guarantee or surety bond. Shariah permits charging a fee for Kafalah under certain conditions, making it commercially viable for Islamic banks to issue guarantees, letters of credit, and performance bonds. Key applications include: trade finance (documentary letters of credit), project finance (performance bonds), government procurement, and bid bonds. Kafalah must be for a valid underlying obligation — guaranteeing a Riba-based debt is impermissible. Governed by AAOIFI Shariah Standard No. 5. Also spelled 'Kifalah' in some jurisdictions, particularly the GCC.