Qard al-Hasana, Wadiah/Amanah  and Bank Deposits: Applications and Misapplications of Some Concepts in Islamic Banking




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Qard al-Hasana, Wadiah/Amanah and Bank Deposits:
Applications and Misapplications of Some Concepts in Islamic Banking



Dr. Mohammad Omar Farooq

October 2006
[Draft in progress: Feedback welcome]
A shorter version of this paper was presented at
Harvard Islamic Finance Forum, April 19-20, 2008


This essay on qard is being presented in the context of an online discussion on IBFnet, one of the largest online forums focused on Islamic finance and banking. In message #5566, Hifzur Rab1 wrote: "Following abolition of Riba most of the consumption needs of that period and including some investment needs was satisfied by Qard Hasana, and Riba based financing was replaced by profit/loss sharing mainly Mudarabah." In reply [#5573], I posed a question whether the expression qard al-hasana occurs in the hadith. In reply [#5601], Mark Robbani2 wrote: "Since Riba is forbidden, any mention of 'Qard' in hadith automatically implies a Riba-free loan (i.e. Qard-al-Hasana)."

Are qard and qard al-hasana synonymous? Is qard al-hasana for non-charitable purpose as well? The issue has become even more relevant and pressing as concepts such as qard al-hasana, wadiah, amanah, etc. are being used to define and structure aspects of banking, such as demand deposits (or even deposits in general). Is there any justification and evidence (dalil) for treating demand deposits in Islamic Financial Institutions (IFIs) as qard al-hasana to the banks? Is there any Islamic evidence that qard al-hasana is payable on demand by the lender? More importantly, is there any basis for subjecting qard to the blanket prohibition of riba and categorizing as well as defining qard or qard al-hasana as “riba-free” or “interest-free” loan?


A closer look at these issues indicates that some conventionally held views are not quite borne by the two primary sources of Islam: the Qur’an and the sunnah (hadith). The purpose of this essay is to explore the pertinent material about qard and qard al-hasana to identify some of the possible misinterpretations and misunderstandings. Even though the primary focus of this essay is qard al-hasana and qard, two other concepts, wadiah and amanah, will also be briefly discussed, as some IFIs define deposits in terms of wadiah or amanah.


For those who believe that the final words about qard or qard al-hasana have already been said from the Islamic perspective, this essay might not interest them. However, for those Muslims with an open mind and commitment to do due diligence in learning about and understanding issues of importance – instead of deferring all such matters to our venerable scholars, especially of the past – what is presented here might be worth-reading.


A note against sweeping generalization

The comment - “Since Riba is forbidden, any mention of 'Qard' in hadith automatically implies a Riba-free loan (i.e. Qard-al-Hasana)” - is an illustration of sweeping generalization. We should not use the word riba in such a sweeping way, especially as part of a blanket riba-interest equation. Not all riba (in the sense of “excess”) is prohibited in the Qur'an. While asserting, "... nobody can correctly deny that interest on loans is the forbidden Riba an-Nasi'ah", as quite capably and convincingly articulated by Mahmud El Gamal,3 “Not all interest is the prohibited Riba, ... [and] Not all Riba is interest.”4


The Qur'an forbids al-Riba in a special sense from the Islamic perspective. The Qur'an is categorical and unambiguous in its declaration of prohibition of riba. However, as it is known and widely acknowledged, the Qur'an does not define what is that al-Riba. For that we turn to hadith. "The Qur'an does not explicitly define riba as one type of transaction or another. ... The efforts of the fuqaha or judicial scholars ... and the examples of the hadith allow us to determine a clear idea of what is riba."5 However, as I presented on IBFnet before, even with all the hadith about riba together, the definition is not clear and that's why in applying the categorical prohibition the jurists and scholars have reached widely varied and often incongruous positions.6


Also, since even some of the sahabas, such as Ibn Abbas, believed that riba applied only to nasia' (deferment), implying that those sahabas didn't regard riba al-fadl as impermissible, any such sweeping claim that riba is haram is misleading, and it leads to confusion among the Muslim mass.


The issue of Qard and Qard al-Hasana

 

In the context of the specific online exchange, this sweeping mentality spilled over then to qard, which to Mark Robbani, has to be riba-free (meaning, interest free), because riba is prohibited. Of course, his is not an isolated view. Rather, that is the traditional or prevalent view. However, the simplest of the problems with such assertion is that if Allah means qard when he is using qard al-hasana, why is this redundant expression al-hasana? Why doesn't Allah use plain and simple qard? Isn't Allah's communication on such matters of ahkam or laws supposed to be clear and unambiguous [muhkamat, 3/ale Imran/7; trans. "of established meaning”, A. Yusuf Ali, "clear revelations", Pickthall; "decisive", Shakir]?

 

Indeed, if qard is qard al-hasana or vice versa, then Allah simply used the latter expression without any special or useful meaning. In other words, we won’t lose anything, if we eliminate the added qualifier or simply disregard it. Is that what we should conclude about Allah's communication?


But before delving into a detailed analysis, let us first try to acknowledge the traditional understanding of qard, which is also frequently used synonymously with qard al-hasana. Presented below are some of the rules and applications that are stated by various IFIs and other relevant sources, presumably, in accordance with the approval of their shariah-advisors or advisory boards. Of course, beyond stating these rules, rarely such sites provide any proof or dalil. Also, on most such issues at the detailed level, we should expect wide variations of opinions among Muslims, most such details about Islamic finance and banking are merely human interpretations.


a. Qard al-Hasana is for the needy

Qard al-Hasana (beneficence loans). These are zero-return loans that the Quran exhorts Muslims to make available to those who need them. Financial organizations that provide these loans are permitted to charge the borrower a service charge to cover administrative costs of handling the loan so long as the charge is not related to the amount or the time period of the loan, and represents solely the cost of administering the loan. ...

The banking system also has been used as an instrument of income redistribution through provision of Qard al-Hasana (beneficent) loans for the needy, financing the building of low-income housing, and provision of financing for small scale agrobusinesses and industrial cooperatives, often without stringent collateral requirements.”7


Qard (interest-free loan): a charitable act and not a business transaction.”8


“The condemnation and prohibition of riba in Quran is almost always accompanied by urging the believers to give. That includes both charitable grants (sadaqa) and qard hasan, lending with no obligation for the borrower more than returning the principal This fits in with Islam’s over-all vision of life as a cooperative venture aiming at passing the test for which the Creator launched the enterprise of life and death (67:2).”9


Qard al-Hasana is: “An interest-free loan given mainly for welfare purposes. The borrower is only required to pay back the amount borrowed.”10


b. Borrower can pay an extra if not stipulated by contract.

“A loan contract between two parties for social welfare or for short-term bridging finance. Repayment is for the same amount as the amount borrowed. The borrower can pay more than the amount borrowed so long as it is not stated by contract.

Most Islamic banks provide interest-free loans to customers who are in need. The Islamic view of loans (qard) is that there is a moral duty to give them to borrowers free of charge, as a person seeks a loan only if he is in need of it. Some Islamic banks give interest-free loans only to the holders of investment accounts with them; some extend them to all bank clients; some restrict them to needy students and other economically weaker sections of society; and some provide interest-free loans to small producers, farmers and entrepreneurs who cannot get finance from other sources.“11

c. Current accounts of IFIs are treated as qard al-Hasana or qard (alternatively, as wadiah/amanah)

Qard al-Hasana: “Deposits whose repayment in full on demand is guaranteed by bank.”12

“The deposits in the current account are treated as if they are loans from the clients to the bank and therefore, bear no yield to the account holders.”13

“An Islamic bank is a deposit-taking banking institution whose scope of activities includes all currently known banking activities, excluding borrowing and lending on the basis of interest. On the liabilities side, it mobilizes funds on the basis of a mudarabah or wakalah (agent) contract. It can also accept demand deposits which are treated as interest-free loans from the clients to the bank, and which are guaranteed.”14

[In Iran] “The qard al-hasanah deposits comprise current as well as savings account while differ in their operational rules. The holders of current and savings accounts are guaranteed the safety of their principal amounts and are not entitled to any contractual return.. However, banks are permitted to provide incentives to depositors through: (i) grant of prizes in cash of kind, (ii) reductions in or exemptions from service charges or agents’ fees payable to banks, and (iii) according priority in the use of banking finances.”15

Before delving into the significance of differences in usage of the respective terms, “it is important to note that,” as Volker Nienhaus observes, “often the same words are used by different banks and have different meanings. These differences must be taken into account ....”16

Just like in most other cases, there is difference of opinion in this regard as well. Those who regard the demand deposit as amanah or wadiya (trust) often insist on 100 percent reserve requirement. Those who regard demand deposit as qard al-hasana differ.

“It has been suggested that Islamic banks should draw a sharp distinction between money deposited as demand deposits and money deposited in mudarabah accounts. Demand deposits should be backed by 100 per-cent reserve as they are of the nature of an amanah (safe keeping). This view is not shared by others who regard demand deposits as qard alhasanah deposits whose repayment in full on demand is guaranteed by the bank but these can be used by the bank in its financing operations.”17


Mohammad Obaidullah, from his perspective, explains why the amanah approach to deposits is not acceptable, and it should be the treated as loans.


“Deposits in common parlance are backed by the motive of safekeeping. Islamic law also deals with the notion of deposits in the framework of amanah. However, bank deposits cannot be put into this category, since a bank invites and seeks deposits for its own interests. The banks' intention while accepting currencies as deposits is not the safekeeping but the utilization thereof, and, on demand, to return it in full. The general consensus, therefore, is that where the deposit is a sum of money or something, which is perishable through use, shall be deemed to be a loan if the depository is permitted to utilize it. And if it is clear that a bank deposit is a loan, it means that any increase paid by the bank over the sum deposited constitutes riba.”18


According to Obaidullah, deposits cannot be treated as amanah, but it can be treated as wadiah or qard.


“Islamic deposits may be modeled after the classical contracts of al-wadiah and qard. These contracts do not allow any excess over and above the principal either as a stipulation in the contract or even as a unilateral gift by the bank that is not customary.”19


Amanah is frequently defined by IFIs as following: “Something which is given by a person to another to keep for some reason such as safe custody. The keeper is under an obligation to return the goods in the same condition in which he received them. The keeper may also use the goods with the prior permission of the owner.”20 However, there is a good reason, why amanah may not be applied to demand deposit. As Mohammad Hashim Kamali, a renowned scholar of Islamic jurisprudence, points out that according to Islamic understanding of amanah: “... a trustee is not liable for the loss of the property in his custody unless he is at fault or negligent.”21


However, one should not be surprised that “unilateral gift” has become customary to ensure customers’ commitment.


“If Islamic banks routinely announce a return as a ‘gift’ for the account holder or offer other advantages in the form of services for attracting deposits, this would clearly permit entry of riba through the back door. Unfortunately, many Islamic banks seem to be doing precisely the same as part of their marketing strategy to attract deposits.”22


Readers must be reminded that just because amanah is treated differently from wadiah or qard by some does not mean that the same understanding is shared by others. In many cases, amanah or wadiah are regarded interchangeably.


“A life insurance policy is similar to a contract of al-wadiah (deposit) whereby two parties in a financial transaction engage in an agreement that one party deposits money as an amanah (trust) to the other party to be kept for the purpose of safety.”23


Amanah = refers to deposits in trust; Wadiah = safekeeping24


Then, there are others in the Islamic finance industry who even distinguish between different types of wadiah, where wadiah and amanah are mixed up. This is especially applicable in IFIs in Malaysia.

“Safe custody. Originally safe custody is Wadiah Yad Amanah, i.e. trustee custody where according to the Shariah the trustee custodian has the duty to safeguard the property held in trust. Wadiah Yad Amanah changes to Wadiah Yad Dhamanah (guaranteed custody) when the trustee custodian violates the conditions to safeguard the property. He then has to guarantee the property.”25

“Some banks model these deposits on wadiah-wad-dhamanah or guaranteed deposits. Under this mechanism, the deposits are held as amana or in trust and utilized by the bank at its own risk. The depositor does not share in the risk or return in any form. Any profit or loss resulting from the investment of these funds accrues entirely to the bank. Another feature of such deposits is the absence of any condition with regard to deposits and withdrawals. The term ‘wadiah account’ or ‘trust account’ is used for such deposits.”26


As many of these notions are not discussed in public domain with corroboration or basis, I contacted some of my personal sources to obtain further information. One such contact is Shah Abdul Hannan, former Chairman, Islami Bank Bangladesh Limited (IBBL). He obtained the following clarification27 from Maulana Shamsud Doha, a Shariah expert of the bank.

“One method of accepting deposit by some Islamic Banks is al-wadiah. It is an alternative to ‘current account’. Under wadiah method, any funds deposited in the current account must be made available by the bank for withdrawal on demand. In this case, there is no business (investment) contract between the bank and the depositor. The depositor grants the permission to use the fund with the condition  that the fund is withdrawable on demand by the depositor.... Al-Wadiah is an Islamic method of entrusting funds or valuables with someone as a deposit or trust. It is also used as a synonym of amanah. In Arabic, the root of al-wadiah is wadiah, the dictionary meaning of which is ‘entrusting’, to leave something in the custody of something. The object left in custody is also known wadiah.

In Shariah term, the main relevant feature in this context is returning the trust on demand. Thus, wadiah is amanah available on demand.”

What I was most interested in is to find out if there is any explicit textual proof (dalil) for such concepts to apply to modern banking concepts. The clarification mentioned a hadith as following:

“The concept of wadiah has been taken from hadith of the Prophet. Amr b. Shu’aib reported his father to have said on the authority of his grandfather that the Messenger of Allah said, “He who is entrusted with some trust is not responsible for that (in case of its loss or wastage).” [Sunan Ibn Majah, Kitab as-Sadaqah, Bab al-wadiah, #2401; “man udiya wadiatan, fala dhamanah alaihi”]

Two notable points. First, this hadith is da’if. It is written in Ibn Majah: "The isnad of this (hadith) is daif, because of du'f of Muthanna and that of the transmitter's reporting on his authority." [hadha isnaduhu daif, li du'fil muthanna wa ar-rawi 'anhu.] Second, according to this hadith, a trustee is not responsible for the trust. Another word, the trustee keeps the trust on a good faith or best effort basis. However, Islamic banks treat wadiah as a guaranteed deposit. So, what is the basis for such guarantee? The clarification continues:

“Notably, since Islamic banks accept wadiah or amanah with the permission to utilize the funds, the provision of dhamanah or guarantee has been added. That is fair. Without the consent obtained by the Bank to use the fund, there is no need to accord dhamanah or guarantee to the depositors.


It is relevant to note, wadiah in arabic is used interchangeably with amanah. In the Qur'anic there is clear guidance about amanah, ‘And if one of you deposits a thing on trust with another, let the trustee (faithfully) discharge His trust, and let him fear his Lord.’ [2:283]”


Notably, the clarification does not cite any textual proof (dalil) for that guarantee. Rather, it suggests that it is “fair.” The Qur’anic verse cited about amanah does not state or imply any guarantee based on any legal injunction. Of course, Islam takes trust very seriously and the Qur’an reminds us of the consequence from Allah for breach of trust. However, if the hadith is used as a textual evidence for wadiah, it is important to note that any law “requiring” the banks to guarantee the deposits would be contrary to the hadith. The implication of the hadith, even if the hadith is daif, is understandable. The context of the hadith is not where the trustee seek out or solicit amanah or trusts from others. Rather, based the trustworthiness and integrity, people seek such service as a sort of personal favor. Thus, motivated to help others, a trustee may accept such trusts. However, it is not possible for the trustee to guarantee, except that the he is expected to make an honest and caring effort to take care of the trust. Barring any negligence or deliberate waste, such trustee can’t be expected to offer any guarantee. The case of banks or similar financial institutions is different, as they are in business of finance and the existence of a bank means an open invitation or solicitation of such deposits. Thus, the trustee cannot be imposed or required to offer any such guarantee. As part of any modern national banking system, legally requiring banks to offer such guarantee would be inconsistent with this hadith. This hadith does not make any distinction whether the trustee accepts the trust with or without the consent of the depositor to use the fund as the trustee wants.


It seems that wadiah account is more popular with the IFIs than qard al-hasana account.


“The qard hasan model is less popular than the wadiah model among bankers for the simple reason that marketing considerations demand providing additional benefits to the depositor. Under qard hasan framework, benefits to a lender (the depositor in this case) are rightly frowned upon as being against the spirit of this mechanism.”28


It should be noted that qard al-hasana approach is used also in Islamic insurance. Tabarru-based Takaful (insurance) is a non-profit model, where neither the promoters nor the policyholders receive any return.


“The first financial structure or model of takaful assumes a non-profit nature of takaful business. Originally used in Sudan, this is also called the tabarru model of takaful. Under this model, there are no returns for the promoters, and for the policyholders. The initial contribution to organize the venture may come from the promoters as qard-hasan. Participants make donation or tabarru to the takaful fund, which is used to extend financial assistance to any member in the manner defined in the agreement. Temporary shortfalls are also met through qard hasan loans from promoters. In this arrangement policyholders are the managers of the fund and the ones with ultimate control.”29


However, Islamic insurance, another heavily promoted segment of Islamic finance industry, has briskly moved toward profit-orientation. Based on mudaraba and wakala, these models:


“... view takaful as a profit-oriented commercial venture. However, at the same time, a clear demarcation is maintained between policyholders’ fund and the shareholders’ fund in all these models. Profits flow and expenses are charged to the two funds representing two parties – the policyholders and the takaful operator (or shareholders of the takaful company) according to set principles.”30


Notably, even in these profit-oriented models, there is room for qard al-hasana.


“ ... the involvement of the takaful operator as mudarib or wakil is not merely restricted to operating or managing the takaful funds. It has the following additional responsibilities even though the same is not mandated by Shariah. For instance, the operator has the financial obligation to ascertain that all initial or start-up costs, which usually are substantial at the beginning, under modern operating conditions, are met. Further, in the event of a deficit of the takaful fund (defined in general as claims exceeding contributions), the operator has the additional responsibility to manage the same through qard-hasan (benevolent loan) on a voluntary basis.”31


d. Qard must be paid back on demand by the creditor.

“A Qard is a loan, free of profit. We use this arrangement for our Current Accounts. In essence, it means that your Current Account is a loan to the bank, which is used by the bank for investment and other purposes. Obviously it has to be paid back to you, in full, on demand.”32

“Qard al-hasana: “Deposits whose repayment in full on demand is guaranteed by the bank.”33

It should be noted that current account (or demand) deposits are payable on demand is understandable. That’s the standard practice of modern banking system. Thus, both the bank and anyone who deposits to a bank as demand deposit understand that such deposit is a liability of the bank. However, neither the banks nor the depositors view demand deposits as “loans” by the depositors to the banks.

Demand deposit: “A deposit that can be withdrawn at any time, and which has no fixed maturity date.”34

Demand deposit: “A deposit payable on demand, or a time deposit with a maturity period or required notice period of less than 14 days, on which the depository institution does not reserve the right to require at least 14 days written notice of intended withdrawal. Commonly takes the form of a checking account.”35

Demand deposit. “Money placed in or credited to a commercial bank account which the depositor is legally entitled to withdraw on demand without prior notice. In practice, most withdrawals are in the form of checks which merely transfer sums within the banking system.”36

Definition and understanding of demand deposit are quite uniform around the world, and nowhere any idea of “loan” is attached to demand deposit.37 Thus, how can demand deposits be defined in terms of qard al-hasana? Or, how can the definition of qard al-hasana in general have “payable on demand” feature, without any qualifier or exception? Do the depositors of IFIs know and understand that they are giving “loans” to their respective banks? Of course, there are also significantly varied positions regarding the condition of “payable on demand”, as reflected in the provisions in Pakistan.

“Loan financing took the form either of qard al-hasan loans given on compassionate grounds free of any interest or service charge (repayable if an when the borrower is able to repay) or of loans with a service charge not exceeding the proportionate cost of the operation.”38

Such flexibility in repayment is only the loan side of the bank, where a borrower (qard al-hasana term) in difficulty might be offered some reprieve. However, there might not be a lot of pious Muslims standing on one leg to offer deposits even to “Islamic” banks, if the depositors understand that their deposits are “loans” to these IFIs and, based on the concept of qard al-hasana, they may have to be flexible and generous for the sake of Allah, if IFIs have difficulty with these deposits.

e. Loans can be classified into salaf and qard. Salaf can’t be called back before it is due, while qard must be paid back on demand.

“Qard is, in fact, a particular kind of Salaf. Loans under Islamic law can be classified into Salaf and Qard, the former being loan for fixed time and the latter payable on demand. ... the creditor. In wider sense, it includes loans for specified periods, i.e. short, intermediate and long-term loans. Salaf is another name of Salam as well wherein price of the commodity is paid in advance while the commodity or the counter value is supplied in future; thus the contract creates a liability for the seller. Amount given as Salaf cannot be called back, unlike Qard, before it is due.”39

As indicated above, generally, salaf is regarded as a loan for a fixed period. However, a survey of the variations in the usage of the term is quite confusing.

“A Salaf (sometimes referred to as Salam) is a short-term agreement in which a financial institution makes full prepayments for future delivery of a specified quantity of goods on a specified date. A Salaf should be classified as a loan.”40

Thus, while making a distinction between qard al-hasana and salaf appears simple – the former regarded as a loan “payable on demand” and the latter for fixed period. However, when salaf is used in the sense of salam, it becomes merely a short-term loan, where advanced payment has been made for some future delivery. Now, consider the way State Bank of Pakistan defines salaf, where it can be for short, intermediate or long term.

“The word Salaf literally means a loan which draws forth no profit for the creditor. In wider sense, it includes loans for specified periods, i.e. short, intermediate and long-term loans. Salaf is another name of Salam as well wherein price of the commodity is paid in advance while the commodity or the counter value is supplied in future; thus the contract creates a liability for the seller. Amount given as Salaf cannot be called back, unlike Qard, before it is due.”41


In many cases, salaf is not described as loan at all. Instead, it is defined outright as a trade-related contract.


“Salaf: Advance cash purchases of products. … Another mode is called salaf which is the same as bai salam and is used for meeting working capital requirements through advance purchase of output.”42


Now consider the definition and rules pertaining to salam (or bai’ as-salam).


“Bai' Salam: Salam means a contract in which advance payment is made for goods to be delivered later. The seller undertakes to supply some specific goods to the buyer at a future date in exchange for being paid in advance a price fully paid at the time of contract. According to the normal rules of the Shari’a, no sale can be effected unless the goods are in existence at the time of the bargain, but Salam sale forms an exception given by the Prophet himself to the general rule provided the goods are defined and the date of delivery is fixed. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to potential disputes. The objects of this sale are goods and cannot be gold, silver or currencies because these are regarded as monetary values; exchange of which is covered under rules of Bai al Sarf, i.e. mutual exchange which must be hand to hand without delay. Barring this, Bai' Salam covers almost everything which is capable of being definitely described as to quantity, quality and workmanship.”43


Notably, loan is known and understood as “(a) money lent at interest; (b) something lent usually for the borrower's temporary use; (c) the grant of temporary use; (d) the temporary duty of a person transferred to another job for a limited time.”44


Banking.com defines loan as following: “Loan: A business contract by which a borrower and lender enter into an agreement. Loans are classified according to the lender or borrower involved, whether or not collateral is required, the time to maturity, conditions of repayment, and other variables.”45


Obviously, loan is not understood in terms of a trade or contracts involving commodities. Thus, loans being categorized into “payable on demand” (qard al-hasana) and salaf, and then also considering salaf as another name of salam (a forward transaction) is confusing indeed.


The fatwa of Shaikh al-Tantawi of al-Azhar can be better understood in this context. His position can explained as following:


Funds given to a bank cannot be considered a form of loans (qard), since he bank is not in need, and loans are only requested by those in need. Anasnarrated that the Prophet (P) said: “I saw on the night of ‘isra’ written on the door of paradise: charity is multiplied 10-fold, and loans 18-fold. I asked Gabriel, why is a loan better than charity? He said: one may ask for charity while having property, but the borrower only borrows out of need” (narrated by Ibn Mājah and Al-Bayhaqī). ... Thus, if the transaction is not a loan, the customer must be viewed as an investor who intentionally goes to the bank seeking profits.”46


f. Only one type of loan, Qard al-Hasana, is permissible, which must not accrue any direct or indirect benefit to the lender.

“According to Islamic principles, only one type of loan, Qard el Hasan (lit. good or benevolent loan) is allowable. Under the concept of Qard el Hassan, the lender may not charge interest or any premium above the actual loan amount. Some Muslim jurists state that this restriction includes directly or indirectly any benefits associated with the loan: ‘…this prohibition applies to any advantage or benefits that a lender might secure out of the qard (loan), such as riding the borrower’s mule, eating at his table, or even taking advantage of the shade of his wall.’”47

g. The lender can charge some service fee to cover the administrative and transaction costs.

“Qard al-hasana are loans with zero return that the Koran encourages Muslims to make to ‘those who need them.’ Banks are allowed to charge a service fee to cover the administrative and transactions costs of these loans so long as such costs are not related to the maturity or amount of the loan.”48

“The Iranian banks offer qard hasan (interest-free loans) at nominal service charges to the agricultural sector.”49

Qard is the loan of fungibles, such as money. A qard is repaid with goods of identical description, rather than with the very goods originally borrowed. Riba rules require that it be free of any form of compensation, even in kind or services. It is a praiseworthy act; indeed, the Prophet reportedly declared it more meritorious than outright charity, since a borrower is clearly in need. [Ibn Majah] Often, to emphasize that a qard is made gratuitously, Muslims (like the Qur’an itself) use the term ‘qard hasan,’ or ‘good loan.’ It is now well accepted that a bank or public lending institution may charge a borrower for actual administrative costs, including overhead, incurred in extending the loan but not including the opportunity costs of the money lent.”50

“An Islamic bank ... may make interest-free loans (qard hasan) either as a charitable activity or as a favor to customers, lawfully charging for the actual costs of its services in providing such loans, but not for the opportunity cost of the money.”51

h. The lender may require collateral.

“The fundamental principle of solidarity at the societal level finds its expression in a special category of financial products without remuneration, qard. Investors without adequate business experience who are considered high-risk may receive a moderate amount of financing on qard hasan terms, free of any profit-sharing margin, but usually repaid by installments and backed by collateral.” 52


Careful readers would readily recognize some major discrepancies in the abovementioned statements.


  1. If qard is for the needy and essentially it is charity (see footnote #6 above), then how current account deposit in the banking system can be justified as qard al-hasana from the depositors? What kind of need is that? And why current account deposit should be based on something that is essentially a charitable, gratuitous loan? Is qard al-hasana essentially linked with need, requiring charitable spending, or not?



  2. According to some sources (#e), NO excess should accrue to the lender. Period. However, according to others (#b), excess is okay (or even recommended) as long as it is not stipulated in the contract.



  3. According to some (#b, #e and #g), qard is for the needy. However, according to (#c, #d and #f), qard is “payable on demand” by the creditor. One can’t but wonder if qard (i.e., qard al-hasana as it is understood traditionally) is for the needy, how “payable on demand” is commensurate with the goal of qard al-hasana. Moreover, what is the proof (dalil) from the Qur’an and Sunnah (hadith) in this regard that qard al-hasana is payable on demand?


This issue of “payable on demand” is vital in the context of qard al-hasana because such loan is supposed to be charitable or benevolent loan to help the needy, not only the condition “payable on demand” is not helpful to the borrowers, but it favors the lenders, when such condition is extended to demand deposits in the banking context.


“An interesting side question is why qard loans without interest are lawful, when sales with delay of a ribawi good for an equal but delayed price in that same good (e.g., ten bushels of wheat now for ten bushels of wheat later) are not lawful. Presumably the latter result is because delay introduces an unreasonable inequality into the exchange. Why are loans different? A technical fiqh answer is that loans are always presently due, liable to being called at any time, a provision favoring the lender and reducing his market risk. As important is the Prophet’s description of qard as a charitable act, implying that the lender’s voluntary acceptance of the delay in the exchange is charity.”53


  1. Based on #d, there is a distinction between salaf and qard; but according to #e, only one type of loan is allowed.



These are questions that have not been satisfactorily addressed by those who regard qard al-hasana as only gratuitous loan. I hope to further update this essay after receiving feedback about the abovementioned aspects. But I will also return to these matters after surveying the issue from the Qur’an and hadith.


Let me first share two observations. 

 

  1. There is no verse in the Qur'an that refers to qard without qualifying it as qard al-hasana.



  2. Based on 9 collections of hadith [Bukhari, Muslim, Abu Dawud, Nasai, Ibn Majah, Tirmizi, Muwatta, Musnad Ahmad, and Darimi], there is no hadith where the expression qard al-hasana appears as in the Qur'an. In hadith, qard is referred to as qard, no additional expression of al-hasana.54

 

If someone has information contrary to the above two observations, I would very much like to know so that I can correct myself. Now, let us explore the term first in light of hadith and then in light of the Qur'an.

 
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