Qardh-Hasan is a form of interest-free loan that is extended by a lender to a borrower on the basis of benevolence. It means the lender does not expect any form of return from the borrower.
It is a gratuitous loan extended to those in need, for a specified period of time. At the end of that period, the face value of the loan is to be paid off. In other words, shari’ah prohibits the stipulation of an excess for the lender, as it amounts to riba, whether the excess is expressed in terms of quality, quantity or whether it is a tangible item or a benefit.
However, it is permitted that the repayment of Qardh (loan) is made with an excess whether tangible item, benefit or service, provided that such an excess is neither expressly stipulated nor implicitly pre-arranged through collusion. These are zero-return loans that the Qur’an encourages Muslims to make to the needy.
Legitimacy of Qardh-Hasan
Allah ﷻ says in Quran verse 16 and 17 of chapter 64 that if we loan to Allah, a beautiful loan, He will double it and grant us Forgiveness. There are many other verses in the Quran that supports Qardh.
Qardh-Hasan was practiced by companions of the Prophet ﷺ such as Zubair bin Awam who used to accept deposits not as an Amanah or Wadiah but only on Qardh-hasan basis. He would only take back his money and let the companions remain with the profit earned.
Application in the present banking sector
Qardh-Hasan arrangement between Islamic banks and borrowers state that the borrower pays back only the amount borrowed, although the borrower can pay back extra money as appreciation.
Any increase associated with a money loan and money lent would fall under the definition of Riba as outlined in our earlier articles, therefore money lending needs to be return free.
From a Shari’ah point of view, the main ingredient of a Qardh-Hasan contract is a loan that is not contaminated by Riba. The relationship between lender and borrower is one of creditor and debtor, and the principal of the money loaned out remains the responsibility of the borrower. The lender cannot demand his dues before the end of the contract period.
The instrument of Qardh-Hasan however, is not used widely to provide finance by Islamic banks rather it is used to accept deposits. Such a deposit from a Shari’ah perspective is permissible and is used for investment projects by the bank.
In this case, the Bank becomes the Borrower while the customer becomes the lender. Banks are however allowed to charge customers a service fee as account maintenance costs to cover the administrative expenses of handling the loan.
All persons real or legal, depositing their extra funds over and above their immediate needs, and for the sake of pleasing Allah ﷻ into an Islamic bank in the form of Qardh-Hasan in both Current/Savings accounts will clearly see that the bank utilizes them for the immediate needs of the firms to which the bank has initially provides loans.
Critisms of Qardh-hasan
Demand deposits pay no return and Qardh-Hasan loans are forbidden to pay any return or stipulated benefit to the lenders (customers) hence this one makes a Qardh-Hasan mode as a popular Shari’ah compliant tool to collect deposits from customers both Corporate, retail and individuals.
Qardh-hasan is preferred by Islamic banks because they don’t pay any return to their customers simply because the customer deposits constitute “loans” and the Islamic bank a “borrower” who guarantees full return of the “lenders” deposits.
Critics argue that whereas Qardh-Hasan loans are intended to be act of charity to the needy who are allowed lenient repayment modes. The irony however is that the Islamic banks which are multi-billion dollar profit making institutions, and their depositor/lenders typically expect to be able to withdraw their deposits on demand rather than be asked to be lenient with the Islamic Bank and get no return at the end of the contract time.
Because they are competing with for the deposit conventional banks which pay return in form of interest to the customer, Islamic Banks are forced to introduce Hibah/Gift in form of prizes, exemptions, end of year cocktail parties etc. some scholars attacked the Hibah/Gift model as an introduction of Riba from the back door.
Lastly, the aspect of recovering the exact cost incurred in the process of qard-hasan remains controversial with some scholars saying that none of the cost incurred either by the lender or the borrower should be recovered by either party.