Kafalah (Guarantee) for Shariah-compliant SMEs in the UK

Kafalah (guarantee) is assurance, its original meaning relates to joining and commitment.

Technically Muslim jurists differed about the definition of guarantee. The majority of Hanafis defined it as joining the debts or material assets. The second definition of theirs: joining the liability of the warrant or to the liability of the principal for a debt. 1

Guarantees are divided into categories. One of which is the Kafalah al dayn (guarantee of money). This will be the one we will be focusing on in this article.

Kafalah al dayn is a guarantee for the repayment of another party’s loan obligation. It means that when a debtor fails to meet his obligation to repay a loan, the guarantor assumes the financial obligation.2

The guarantor, therefore, is making a benevolent act by fulfilling the financial obligations of the debtor.

Supporting evidence for the use of (kafalah) guarantees is found in the sunnah such as in a hadith narrated by Bukhari where we find that the prophet (pbuh) refuse to lead the funeral prayer on a man who died owing two dinars, whereupon Abu Qatada (r) guaranteed the debt, and the prophet (pbuh) prayed for the soul of the dead man.

This kafalah system can be a powerful tool in helping more Muslims entrepreneurs setting up SMEs. As we know, the main issue of SMEs is mainly the difficulty of raising funds to finance their projects. By having a guarantor for part or the full amount, it will make it easier for them to obtain a shariah loan from a lender. This is especially important for those with a lower credit rating or those with a minimum deposit amount to obtain the loan.

Hence, an institution set up for the sole purpose of providing guarantees in a way in which is shariah-compliant would help to increase the development of Muslims’ owned SMEs. Similar institutions are operating in different part of the world. Currently the AECM (European Association of Mutual Guarantee Societies) has 48 member organisations operating in 29 European countries (23 EU countries plus Azerbaijan, Bosnia, and Herzegovina, Kosovo, Serbia, Russia, and Turkey).

In 2017, AECM member organisations had a total guarantee volume in the portfolio of over

  • EUR and issued a total volume of over 74.2 billion. EUR of new guarantees. 3

In the United States, the Small Business Administration (SBA) also provides a guarantee instrument for SMEs to encourage banks to lend to this sector. In 2016 – 69,264 guarantees were issued with a guaranteed value of $29.4 billion.4

In Korea, the main policy tool for supporting Korean SMEs has been Korea’s Credit Guarantee Agency (KODIT), which is one of the largest credit guarantee schemes (CGSs) in the world – guaranteeing a portfolio of around $44 billion. 5

In Malaysia, 645,136 SME’s represent 97.3% of the entire enterprise sector. Their Credit Guarantee Corporation was designed in the early 1970s. Since its establishment, it has provided 445,217 guarantees for a cumulative amount of $14.8 billion6.

In Saudi, a Kafalah program to guarantee loans, have been put in place to help achieve the Vision 2030 objective for SMEs to contribute 35% of the nation’s GDP. 7

In the UK, there is currently no such scheme available. This is due to the high capital requirement and some stringent regulation which act as obstacles. To change these regulations, the Mutual Guarantee Societies Bill was introduced in 2017 by a Labour MP. It made it through first reading and was subsequently withdrawn.8 The Cooperative UK is trying to revive the idea with the support of the Centre for the Study of Financial Innovation.9

Proposed Guarantee Scheme Model for British Muslims SMEs

First, we must address one question: can the guarantor profit from providing a guarantee? Muslim jurists of all the schools of jurisprudence agree to say that one cannot charge to act as a guarantor. However, to help shariah banks and financial institutions run their business effectively, AAOFI allowed them to charge a fee to cover the administration cost incurred.

Consequently, for investors looking to make money through a kafalah instrument, this will not be appealing. As it was said earlier, kafalah is first and foremost a benevolent act, it is imperative to preserve its spirit.

Such a program is more convenient for philanthropists wishing to serve the British Muslim community effectively. The most appropriate approach to implement the kafalah program is by establishing a waqf fund.

One of the key characteristics of a waqf is the sustainable nature of benefits that flow from it. A waqf cannot be viewed as an act with temporary benefits or short-term consequences. The long-term nature of the waqf calls for adequate protection and preservation of the fund.

  • As an example: a purpose-built waqf institution or an existing charity organisation collect the funds which are donated with the purpose of lending to those in
  • The fund ultimately will be loaned to Muslim SMEs facing difficulties in repaying a shariah-compliant loan. And this will also be provided that the business is shariah compliant.
  • The loan given to the SME must be backed by a lien in order to protect the waqf fund.
  • Once the SME repays the loan to the waqf institution, the fund will be loaned again to others in

From an Islamic jurisprudence perspective there are two issues concerning this model:

  • Making a cash waqf: Muslim jurists differ on their validity. Based on the fiqh principle of Imam Muhammad the Hanafis10, in general, believe that it is permissible. The Malikis11 and Ibn Taymiyyah12 are also in agreement for its permissibility. This is also the opinion of AAOFI published in their standard (3/6/2) on waqf.
  • Lending money donated as waqf: From the writing of Imam Malik and Ibn Taymiyah it is understood that they are in favour of such a mechanism. Abul Barakat (Ibn Taymiyah’s grandfather) also says it is permissible13. AAOFI standards 4/4 states: “it is not permissible to lend the waqf wealth unless there is clear permission from the waqf ..”

Based on the results of the mutual guarantee schemes around the world, there is good reason to believe that a shariah-compliant model of guarantee could bring a tremendous result in the development of Muslim SMEs in the UK. However, such a scheme must be carried out by a charitable institution. As the scheme itself is different from the mutual guarantee schemes, there might be a possibility for its establishment in the UK. This is since their operational structures differ from one another i.e. the former is based on charitable donations as opposed to the latter.

Authored by (Mufti) Billal Omarjee. Mufti Omarjee is a Certified Waqf Professional (CeWP), an alumni of the International Institute of Islamic Business and Finance. He may be reached at [email protected]



  1. Compendium for Islamic Financial Terms Arabic- English 2010 International Shariah Research Academy for Islamic Finance (ISRA)
  2. Islamic Financial System: Principles and Operations. (2016). International Shariah Research Academy for Islamic Finance (ISRA)
  3. https://aecm.eu/about/mission/
  4. https://blogs.worldbank.org/psd/do-credit-guarantee-schemes-encourage-banks-lend-smes
  5. Ibid
  6. Ibid
  7. https://www.arabnews.com/node/1463441/saudi-arabia
  8. https://services.parliament.uk/bills/2016-17/mutualguaranteesocieties.html
  9. http://www.csfi.org/20191113-mutual-guarantee-societies

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  1. Some scholars permit guarantee against fee, if the fee is not recovered in case of default, thus no increase in that scenario.

    Another thought would be down the line of a cooperative. Where SME contribute a certain amount and/or obligating themselves to a guarantee to a pool, which then issues the guarantee to the bank. The credit worth of such a guarantee would need to be explored considering the regulatory constraints.

    Last not least: Would it be acceptable that one entrepreneur pays a guarantee fee in favour of another one and thus going around voluntarily? The guarantee in favour of entrepreneur 1 if paid by entrepreneur 2 would thus be turned to a charitable act again.

  2. The problem is “what’s a “Shariah-compliant” SME?
    SME which generates waste and emissions in a Halal chain of businesses adhering to Shariah screening criteria like DJIMI would be considered Shariah compliant!
    I think Shariah compliant must be Halal and adhering to Zero-waste and Zero-emissions ideals that will help in healing Mother Earth.
    The idea of benevolent guarantee is need of the hour!