Review of Bank Guarantees and Letters of Credit in International Trade Payments from the Perspective of Islamic Jurisprudence and Iranian Law

Abstract

One of the major risks in international trade involves concerns about the potential non-payment of the transaction price by the buyer to the seller, and simultaneously, the non-compliance of the goods sent by the seller with the agreed-upon contract. The function of bank guarantees and letters of credit is to resolve such issues in international trade. Accordingly, the purpose of the present article is to examine letters of credit and bank guarantees in international trade payments from the perspective of Islamic jurisprudence (fiqh) and Iranian law. This article is descriptive-analytical. The materials and data are qualitative, and the method of data collection is through note-taking. From a jurisprudential and legal standpoint, bank guarantees do not fully align with the recognized contracts in Islamic jurisprudence and Iranian law. In fact, contracts, especially the contract of guarantee (ḍamān), are not entirely suitable frameworks for various types of bank guarantees, as they do not fully encompass the conditions and obligations of the parties involved in bank guarantees. As for letters of credit, it should be noted that the legal nature of a letter of credit is a newly established legal entity that cannot be analyzed within previous legal frameworks. International bank guarantees differ from letters of credit due to their distinct purposes: in letters of credit, the function is payment, while in guarantees, the function is assurance, and the operational cycle differs accordingly. The bank's obligation in letters of credit is conditional upon the presentation of documents, whereas in guarantees, it is generally unconditional.