Letters of credit as a standard banking practice

Q: I submit to Your Eminence a request for a Fatwa (legal opinion issued by a qualified Muslim scholar) on letters of credit as a standard banking practice. A letter of credit is a contract between a Saudi bank and a Saudi dealer (importer). The Saudi bank notifies a foreign bank that payment is available and they can ship the merchandise the Saudi dealer has ordered from a foreign dealer (exporter) with the full assurance of receiving payment. The Saudi bank, by doing so, approves a standard loan underwriting process with a deposit of 25%, 50% or 100% of the face value of the letter of credit, in return for receiving typically between 0.25% to 1% of the face value of the letter of credit plus fees such as mailing costs. Later on, the Saudi dealer is to repay on an agreed upon defined date as an interest-free loan. If the Saudi dealer defaults, the Saudi bank will have to pay to the foreign bank the due payment. Please, bear in mind that the letter of credit guarantees the rights of both parties (such as date of delivery and meeting qualifications... Etc). Moreover, some foreign dealers (exporters) stipulate opening a letter of credit in their interest or that the full amount be remitted, which does not safeguard the rights of the Saudi dealer (Part No. 11; Page No. 84) in case the full amount or part thereof is remitted to the exporter.The question is: Is it permissible for me to open a letter of credit bearing in mind that I am to pay on the set date and thus do not incur any interest? Give me Fatwa, may Allah reward you with the best.

A: The letter of credit stands for loan underwriting. In fact, the basic ruling on loan underwriting is that it is permissible, unless accompanied by something unlawful according to Shari`ah (Islamic law). As a matter of fact, a letter of credit is usually accompanied by an infringement to Shari`ah, such as usurious transactions, receiving a commission in return for underwriting, implication of an invalid contract such as an insurance contract and selling something that is not owned and the like. Accordingly, it is impermissible to deal in transactions based on a letter of credit unless it entails no infringement of the Purified Shar`.May Allah grant us success. May peace and blessings be upon our Prophet Muhammad, his family, and Companions.