QARD AL HASANA – TOWARDS RATIONALISATION
Who is he that will loan to God a beautiful loan (qard al hasana) which God will double unto his credit and multiply many times’? It is God that giveth (you) want or plenty, and to Him shall be your return. (Qur’an 2:245)
Over the past quarter of a century, Islamic banking and financial institutions (IBFIs) have developed several Sharia-approved methods of deploying the funds which they mobilise from, and on behalf of, their customers. In particular, the Murabaha (cost-plus sale) and various forms of Ijara (lease) instruments have come to occupy prominent places in the financing portfolios of IBFIs. Tremendous steps have been taken to rationalise the procedures for deployment of these financing instruments across a broad spectrum of economic activity. So, for example, the Murabaha instrument may be used for commodities financing or for capital goods acquisition in commercial enterprises, or for the purchase of the family home, car or other household items. Ijara has proven to be useful for the raising of investment funds especially for quickly expanding businesses or for small and medium enterprises with insufficient assets and capital to meet the normal collateral requirements of loan financing.
Of the several modes of Islamic financing, one, Qard Al Hasana, is unique in that no tangible profits accrue to the IBFI through its deployment. Qard Al Hasana, literally ‘beautiful loan,’ is a terminology derived from the Qur’an where it occurs in six different verses. In Islamic banking it refers to interest-free loans. There is a general misconception among many writers, who associate Qard Al Hasana variously with the institution of Zakat (wealth purification) or Sadaqat (charity), or with Waqf (p1. Auqaf) (welfare and humanitarian projects). The removal of this misconception can pave the way for the rationalisation of Qard Al Hasana as a powerful financial instrument in the hands of IBFIs. Although Qard Al Hasana shares some characteristics with these other mentioned instruments, it is on further examination a quite distinct apparatus, both in its role and function. It would be appropriate shortly to examine the nature of Zakat, charity and Waqf.
Zakat is a divinely imposed obligation, enjoining all Muslims who are sahib-e-nisab (owning a certain minimum threshold of unencumbered wealth for a period of one year) to pay, and the Islamic government to arrange for the proper assessment, collection and utilisation of, a fixed tax of 2.5% on that accumulated wealth. It is a form of commodity taxation for the redistribution of wealth among the less fortunate in society, according to specific guidelines. Th e Islamic government may delegate its duty to assess and collect zakatable funds as it sees fit and may, in certain instances, require IBFIs to perform these functions. In the absence of an Islamic government or where an Islamic government abdicates its responsibility, non-governmental organisations, including IBFIs, may volunteer to fulfil the government’s duties in respect of Zakat. One of the purposes for which Zakat may be used is debt relief An IBFI may actually be an indirect beneficiary of the distribution of zakat, if, for example, the IBFI’s customer, who is experiencing difficulty meeting his obligations, is given a Zakat grant to repay a loan to the IBFI.
Waqf means the relinquishment, for an indeterminate period, of one’s private ownership of something capable of public use and benefit. Once a person endows a Waqf property, it ceases to be his property altogether and neither the donor nor anybody else can make a gift of it to any person or sell it, except in very particular circumstances. One of these circumstances is where the person making the endowment lays down the condition that the Waqf may be sold if it is advisable to do so. There are various other conditions associated with Waqf These are not appropriate to our discussion except that they clearly demonstrate that the Waqf has nothing to do with Qard Al Hasana as much as these both have nothing to do with Zakat. Sadaqah is the giving of something to a deserving other with the sole intention of seeking the pleasure of God. Sadaqah given with this proper intention may atone for sins and prolong one’s life among other virtues. Sadaqah is a broad term that encompasses Zakat, Waqf and Qard Al Hasana, as well as smiling, removing of inconveniences from public pathways, and the sum total of charitable actions and giving.
Qard Al Hasana, on the other hand, does not carry with it the connotations of alms or charity, nor the connotation of purification of wealth along the lines of Zakat. Chronologically speaking, in the development of the Islamic system, Qard Al Hasana preceded the institutionalisation of Zakat.
The 2.5% Zakat tax was formalised in the 2nd year after the hijrah or flight of Muhammad (PBUH) to Medina from Mecca. The primary Qard Al Hasana verse of the Qur’an, (2:245) was revealed almost as soon as the Prophet entered Medina and established the relationship of brotherhood between the Ansaar (helpers) of Medina and the Emigrants (Muhajireen) of Mecca.
Qard Al Hasana is a business transaction that establishes a relationship of lender and borrower. It was, together with Mudarabah and musharakah (types of equity financing), and Muzara’a and Musa’qat (types of shares cropping agreements) an integral aspect of the non-Riba-based system of economic transactions approved and encouraged by the Prophet himself It is an essential part of the fiscal policy of early Medina-styled Islamic economies. These were the primary vehicles used by the Prophet for creating employment, alleviating poverty and increasing productivity in the newly created Islamic state.
It should be noted that the Muslim population of Medina was by no means well off at the time of the Hijra, a fact substantiated by the Qur’an which says of the inhabitants that ‘poverty was their lot’. Qur’an, (59:9) D.S. Margoliouth, writing in Mohammed and the Rise of Islam comments:
“Though we hear the names of one or two wealthy Yathribites, the bulk of them appear to have been poor. In Yathrib in the Prophet’s time there was only one wedding garment; ornaments had to be borrowed from the Jews. This poverty was probably aggravated by Jewish money-lending.”
Qard Al Hasana was among the forms of financing encouraged by the Prophet for channelling savings into investment and productive activities. It was the primary source of financing introduced by the prophet after entering Medina and is the only form of financing transaction praised in the Qur’an, which, as we have seen, has promised a doubling and arithmetically multiplied certain and secured return from these loans. It does not appear to have been looked upon by the Prophet and his companions as a form of charity, and the borrowers were not looked upon as people who were seeking alms from the rich. Rather the participants in Qard Al Hasana transactions must have viewed themselves as key participants in the realisation of the early fiscal policies of the Islamic state, and whether as lenders or borrowers they were involved in the establishment of the primary economic structures necessary for the survival of the Islamic state. It should be noted that these beautiful loans in early Muslim society were primarily used for productive economic purposes, such as setting up qualified but temporarily economically improvished people in trade and agriculture and temporarily relieving people of economic difficulties so that they could turn their attention to more productive work.
Islamic banks have taken quite successful steps to update and rationalise the identified instruments of non-Riba financing other than Qard .M Hasana. It is suggested that the association of qard al hasana with charity, almsgiving and humanitarian and welfare purposes and its not being utilized as an effective, efficient and viable mode of Islamic financing has impeded the modern-day rationalisation of this instrument. Qard Al Hasana, when shorn of its welfare, alms-giving and humanitarian associations, can actually be shown to be an aspect of the IBFI’s portfolio that, as promised by God, effectively and eventually provides a double and multiple return on relatively small outlays. The marketing and research and development departments of IBFIs would do well to examine the positive role of qard al hasana in increasing the market share of IBFIs along the lines later suggested in this article. An increase in market share does translate into doubling and multiplying the returns on investment.
Riba-based banks are increasingly becoming aware of the potency of Qard Al Hasana and at least two of the major banks in the UK, NatWest and Midland, have instituted Qard Al Hasana schemes for certain categories of students. No doubt one motivation for these banks adopting qard al hasana schemes is their recognition of repeatedly published market research that shows that there is a strong tendency of customers to remain faithful to the bank originally chosen, ‘even with the critical young set and upper class’ who usually adopt ‘a more rational attitude’ towards their banking arrangements. IBFIs are policy-constrained to adopt Qard Al Hasana as a mode of financing. There is no doubt that there is no profit component directly linked to a Qard Al Hasana, since no interest and no commissions above the amount actually expended to administer the loan are chargeable. There is no question, however, that Qard Al Hasana may be linked to a variety of other modes of financing, adding value to the profit potential of these modes.
In the first place, the legal structures for the mobilisation of deposits that may be utilised for Qard Al Hasana have to be set in place. As with many other areas of Islamic banking law, there is no set convention for the mobilisation of Qard Al Hasana funds. Rationalisation of the procedure for accepting funds is the first step in the overall Qard Al Hasana rationalisation process. IBFIs accept two types of deposits, namely, joint investment deposits and trust or transaction deposits. Generally, joint investment type deposits are thought to constitute part of the IBFIs’ cash resources to be utilised in financing operations other than Qard Al Hasana. Trust or savings (ie. transaction) deposits are demand deposits.
Some IBFIs such as the Jordan Islamic Bank, open specialised trust accounts for acceptance of deposits by benefactors who do not object to their savings being used for Qard Al Hasana purposes. Other IBFIs do not seem to have a clear policy for the mobilisation of funds for Qard Al Hasana, although it is clear that the charter of the IBFI or the enabling legislation may provide for a certain percentage of trust deposits to be used for Qard Al Hasana purposes. Such a clause in a charter or enabling legislation is not violative of the principles upon which savings deposits are accepted because it will have been communicated to the depositors, who will have deposited on agreement that part of the deposits will be used for Qard Al Hasana purposes.
There is very little likelihood that the savings deposits will be threatened by allocating a certain percentage to Qard Al Hasana, because it is a well-known principle of banking that all depositors are unlikely to demand back their deposited sums at the same time. The whole operation of Ribabased banking is based on this axiom. Additional measures, such as government insurance of the deposits, the right of the IBFI to borrow from the Central Bank acting as a lender of last resort, and the banks own guarantee to replace any shortfall out of retained earnings, should provide enough assurance and satisfaction to potential transaction account depositors.
The rationalisation of the procedure for mobilisation of deposits for use in Qard Al Hasana financing transactions sets the stage for IBFIs to rationalise the policy of utilising these funds in a manner consistent with the general deposit mobilisation position of the bank. Qard Al Hasana then becomes not a matter of allocating some funds for almsgiving or humanitarian or welfare purposes, but an important aspect of the portfolio performance of the IBFI, tied as it is to its deposit mobilisation efforts. The IBFI can then structure a numerous amount of standard and customer-specific deals incorporating a Qard Al Hasana element and with short”, medium-and-long-term objectives in mind.
The following are examples of the type of standard Qard Al Hasana instruments that an IBFI may implement:
1). Qard Al Hasana may be utilised as an additional funding facility for clients with whom the bank has entered into Musharakah and Mudarabah arrangements. In other words, of the total financing package offered the client a certain proportion of the bank’s funds may be for capital formation or revolving credit on a profit-and-loss-sharing basis and a further amount may be in the form of Qard Al Hasana to meet the extraordinary needs of the client.
2). As conventional banking institutions are increasingly doing, Qard Al Hasana may be extended to university undergraduates and graduates for financing their studies. The Qard Al Hasana could be structured in the form of an account with the IBFI where the student has the option to go into overdraft up to a certain amount. As these students graduate and go into full employment, the natural tendency would be for them to maintain their accounts with the institution that helped them to realise their educational goals in life. The IBFI would then be in a better position than it otherwise would have been to sell a number of its other products and services to the now solvent customer The return on Qard Al Hasana in this case can be a customer for life.
3). Qard Al Hasana could also be granted to marrying or recently married couples who are often in need of money for their weddings, honeymoons and for purchasing household goods. Again, in this area, there can be all sorts of other propositions tied to the incentive of the Qard Al Hasana loan. Qard Al Hasana could be one component of a total newly-married-couple financing package, where the Qard Al Hasana component is tied to expenses for the marriage and honeymoon and a murabaha component tied to the purchase of household articles. Another possibility is where the Qard Al Hasana is tied to the purchase of household furniture and its repayment suspended for a few years, while the profit-making component of the financing package is tied to an Islamic mortgage.
4) Qard Al Hasana could also be extended to the recently employed for the purpose of easing his transition into the workforce. As part of setting up the Qard Al Hasana, the recipient could be mandated to set up an investment account with a very small monthly instalment or with a one-time investment of 10 per cent of the amount of the loan that they intend to borrow. In this way, the Islamic bank will have already committed the Qard Al Hasana recipient to be a customer of the bank, the only task left being to keep the customer acquainted with how their money is growing and how they may benefit by adding to their investment account or by taking advantage of other products and services of the IBFI.
5). Another recipient of Qard Al Hasana can be micro-enterprises. Sometimes people may want to establish small shops, craft workshops or other micro-enterprises. IBFIs may well find that the administrative costs of overseeing a Mudarabah investment in these types of enterprises may be expensive. The IBFI can lend the money for the stock-in-trade or for payment of rent and take a debenture over the stock in trade. The micro-enterprise will be required to open a current account with the IBFI which may, in the course of normal review of the its accounts, maintain some measure of control over the micro-enterprise. It is estimated that some 70 to 90 per cent of new small businesses will fail within three years. One main reason for small businesses failing is the inability of these businesses to access capital in the Riba-based economic system. Islamic banks can revolutionise the small business sector through Qard Al Hasana and introduce other schemes tied to the Qard Al Hasana to provide further impediments to the failure of small businesses. IBFIs may require the management of micro-enterprises involved in the Qard A1 Hasana scheme to attend mandatory financial and business training workshops and seminars. The Islamic banks can also provide employment to qualified volunteer and non-volunteer experienced business personnel by establishing these schemes, which may be self-funding by having the small businesses pay the business advisors for the services rendered or by soliciting government assistance. Of course, this is the basis for true partnership profit-and-loss banking between the Islamic bank and the public. Form these training schemes and business advisory sessions, those businesses with real potential can be identified and Mudarabah, Musharakah and Murabaha and Ijara agreements can be entered into with such customers.
Qard Al Hasana is not just giving money away. It is a mutual co-operation agreement between the IBFI, the customer and Allah, where the IBFI helps the customer and becomes a catalyst for the long-term economic development of the customer The Islamic bank can, in many instances, establish itself as the first financial adviser of the Qard AI Hasana recipient business or individual. Allah promises that Qard Al Hasana is a loan to Him the reward of which will come from Him. It has been shown above that often reward comes from Him in this world through customer loyalty and through the increasing utilization of the bank’s other profit-making products and services over several years.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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