Islamic ruling on acting as guarantor for a person taking a loan from the bank?

First of all Ribaa is emphatically forbidden in Islam. Allaah has condemned the one who does that and has declared war on him, and spoken of his bad end on the Day of Resurrection. Allaah says (interpretation of the meaning): 

“Those who eat Ribaa will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaytaan (Satan) leading him to insanity. That is because they say: ‘Trading is only like Ribaa,’ whereas Allaah has permitted trading and forbidden Ribaa. So whosoever receives an admonition from his Lord and stops eating Ribaa, shall not be punished for the past; his case is for Allaah (to judge); but whoever returns (to Ribaa), such are the dwellers of the Fire — they will abide therein.

Allaah will destroy Ribaa and will give increase for Sadaqaat (deeds of charity, alms). And Allaah likes not the disbelievers, sinners” [al-Baqarah 2:275, 276] 

“O you who believe! Fear Allaah and give up what remains (due to you) from Ribaa (from now onward) if you are (really) believers.

And if you do not do it, then take a notice of war from Allaah and His Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums)” [al-Baraqah 2:278, 279] 

The Prophet (peace and blessings of Allaah be upon him) cursed the one who consumes Ribaa, the one who pays it, the one who writes it down and the two who witness it, and he said, “They are all the same.” Narrated by Muslim, 1598, from the hadeeth of Jaabir (may Allaah be pleased with him). 

The Prophet (peace and blessings of Allaah be upon him) said: “A dirham of riba consumed knowingly by a man is worse before Allaah than committing zina thirty-six times.” Narrated by Ahmad and al-Tabaraani, classed as saheeh by al-Albaani in Saheeh al-Jaami’, no. 3375. 

And there are other texts which point to the enormity and abhorrent nature of this crime.  

The Islamic financial system does not approve of any transaction that includes riba, rather the sharee’ah forbids certain transactions so as to prevent the means that lead to riba. 

Secondly: The banks that exist nowadays are all riba based banks, with a few rare exceptions. Just because a bank is located in a Muslim country does not mean that it is an Islamic bank. Most of these banks are connected to Jewish and Crusader banks overseas. It is most regrettable that in the Muslim lands which are home to more than a billion Muslims there is no Islamic bank that is free from riba, apart from a few institutions. 

So the decision makers among the Muslims have to pay due attention to this matter and establish an independent Islamic banking system. There are scholars and people who are able to work in this field, and there is a great deal of capital, praise be to Allaah. 

Thirdly: The true Islamic financial system is a system that is free of riba, because it is a system that is derived from the Book of Allaah and the Sunnah of His Messenger (peace and blessings of Allaah be upon him).

If a loan is riba-based (as is the case with most banks), meaning that the bank will take interest from him, then it is not permissible for you to act as a guarantor for the borrower, because by doing so you are helping the borrower and the bank to engage in riba (usury, interest), which is forbidden by Allaah and His Messenger, and which the Muslims are unanimously agreed is haraam. 

The scholars of the Standing Committee were asked about the ruling on sponsoring a person who wants to borrow from a riba-based bank. They replied: 

If the situation is as described, and the bank will charge interest on the loan, it is not permissible for the manager, the accountant or the treasurer to cooperate with them in that, because Allaah says (interpretation of the meaning): “Help you one another in Al‑Birr and At‑Taqwa (virtue, righteousness and piety); but do not help one another in sin and transgression. And fear Allaah. Verily, Allaah is Severe in punishment” [al-Maa’idah 5:2] 

And it was proven that the Prophet (peace and blessings of Allaah be upon him) cursed the one who consumes riba, The Prophet (peace and blessings of Allaah be upon him) cursed the one who consumes Ribaa, the one who pays it, the one who writes it down and the two who witness it, and he said, “They are all the same.” Narrated by Muslim, 1598, from the hadeeth of Jaabir (may Allaah be pleased with him). 

Fataawa al-Lajnah al-Daa’imah, 13/410