Qard Hassan
A Qard Hassan is a beautiful loan. In the Quranic sense for instance charity, with its reward in the hereafter. In the common sense of the Islamic finance discussion an interest-free loan, see also Qard and Salaf. The Shariah Advisory Council, Central Bank of Malaysia, has resolved "that the word ‘hasan’ should be taken out after the word ‘qardh’, implying that qardh is an obligation for borrowers to repay their loan to lenders."
Contents
Applications
Any increase associated with a money loan and money lent would fall under the definition of Riba as outline above – therefore money lending needs to be non-profit only.
Friends and Families
The application for interest free loans is relevant especially among larger families, which may put in place a private “box” called Sanduq among them where needy family members could draw out an interest free credit. Wealthy member may draw out a finance facility against profit/loss sharing explained later on.
Justification for Deposit Taking
The instrument of Qard Hassan, however, is not used widely to provide finance by Islamic banks rather it is used to accept deposits. Such a deposit loan is Islamically permissible and could be used to be invested in other projects of the bank, while a pure deposit (Amanah/Wadiah) is not be able to be used in the same way. Again predominantly in Malaysia there needs to be mentioned the exception whereby a Wadiah deposit receives a gift instead of a compensation to the sole discretion of the bank in the end of the year.
The Qard Hassan is generally considered to be permissible as a form for deposits and companions of the prophet such as Zubair bin Awam accepted deposits not as an Amanah or Wadiah but only on such a guaranteed loan basis without payment of Riba. The investment income remained with them as profit which made Zubair bin Awam, a kind of a first banker. Even Abu Hanifah, the great scholar and founder of the Hanafi school should have taken such deposit loans.
ROSCA - Rotating Credit and Saving Associations
Another potential application for the Qard Hassan technique, is the savings/lending model. The loan depositor receives instead of interest saving points for the size and duration of the funds provided. After achieving a sufficient number of those points, he should be edible for taking out a loan himself. The administration of such a model could be subject to fees which are not bound by time and size of the credit. This briefly outline model, proposed e.g. by Mahmud Ahmad and in similar way by Abdul Gafoor, would comply most likely with Shariah although it is not being certified or applied in the Islamic Finance sector yet. Another positive factor to be seen is the effect of a stress test for the borrower – having savings over a period time is a good way to know the own repayment capacity. Further a credit history is no longer an absolute must. It is a called in the conventional sector a rotating savings and credit association (ROSCA), and reported to be practised in the informal sector even in UK and Australia but not on a professional basis.
The model is applied, however professionally, with non-Muslim banks (JAK Medlem, Nordspar) from the Alternative Finance scene in Sweden and Denmark, and by Strohalm Foundation from The Netherlands in South-America. The Swedish bank JAK Medlem was founded 1965 as an association for people with selfhelp goals which are distrusting the interest-based banking sector. People should represent the factors of production – land, labour and capital; or Jord, Arbete, and Kapital in Swedish. Since 1997, JAK has been a licensed co-operative bank, in which member’s deposits finance all loans. A member gets 100,000 saving points for the deposit of 100,000 Swedish krona during one month. Likewise he consumes 100,000 saving points if he borrows 100,000 Swedish krona for one month. Transfer of saving points between members is possible as well. The costs, like office, administration, development and staff is covered by three kinds of income. The major one is the loan fee, leading to a comparative rate of 2.5 % of interest, a yearly membership fee and some income from the liquidity fund. In 1991 the number of members were 19,000, in 2004 the figure grew steadily to 26,000. The total savings of JAK Medlem were 75,000,000 Swedish krona (ca. € 8mn) and loans reached 67,000,000 Swedish krona.
The JAK model would definetely appeal to retail banking as it is easy to communicate and explain. Qard Hassan is highly valued in Shariah, with discussion among Jurists whether Qard Hasaan or straight Charity is more rewarding – the argument in favour of Qard Hassan is the potential to do repeatedly good; - however it is not the only way in Shariah to finance activities.
Not the dominant practice
The dominant field nowadays is the area of Asset Finance, which led to a number of discussions as the preferred technique would be according to the literature of Islamic Economists the modes of Profit-/Loss Sharing as standard mean of financing.
Arguments, or better explanations are given with the main reason named as agency problem. The investor in a Profit-/Loss Sharing would have less knowledge of the investment project and so finance would be asked for weak projects rather than for all. Fraud could also be a major threat to profit oriented investments. As the entrepreneur would benefit from hiding profits otherwise to be shared. On the other hand there are negative agency issues also in giving out conventional loans as well, which are managed by so-called covenants - basically debtors aim to maximise leverage in order to increase return on equity as seen lately in the world financial crisis.
The majority of Islamic Jurists, the Shariah scholars, do not have such a strong priority for Profit-/Loss Sharing or interest-free loans, as they regard also rental contracts, installment purchases or project finance as likewise permissible. Only certain legal tricks are widely asked to be restricted to a limited number of cases of necessity; these are named Tawarruq and Bay Al Inah – structures which are offering cash money against returns.
