THE CONCEPT OF AL-QARD UL-HASAN

Name : Ghazana Binti Said Atan

1.0 Introduction

The word “qard” is derived from Arabic “qirad” which means to cut. It is called qard

as it cuts certain part of the lender’s property by giving loan to the borrower. Hasan is

also an Arabic word which originates from “ihsan”, which means kindness. Hasan is

an act which benefits persons other than those from whom the act proceeds without

any obligation. Perhaps the word hasan, understood in the context of ihsan, is meant

to imply that the transaction is possible only when a person is fully aware that he or

she is making a loan to someone in need without expecting anything in return from

him, but only in order to please Allah s.w.t.

Therefore, the term “al-qard ul-hasan” means beneficial loan or benevolent loan or

gratuitous loan. Chapra has defined al-qard ul-hasan as a loan which is returned at the

end of the agreed period without any interest or share in the profit or loss of the

business.

The difference between al-qard ul-hasan and sadaqah (charity), is that al-qard ul-

hasan has to be repaid, although the borrower specifies the time of repayment, while

sadaqah is pure charity. It is reported from the Prophet s.a.w. that the reward by Allah

s.w.t. for sadaqah is ten times and that of al-qard ul-hasan is eighteen times, thus

underlining the importance of al-qard ul-hasan.

2.0 Objectives of Al-Qard Ul-Hasan

Prepared by Ghazana Said Atan Page 2 of 13

 Islam emphasizes on brotherhood among the Muslims and since al-qard ul-hasan

being a gratuitous loan can help the fellow Muslims who need money, we can deduce

the objectives of al-qard ul-hasan as the following :

• To help the needy fellow people

• To establish better relationship among the poor and the rich people

• To mobilize wealth among people in the society

• To perform a good deed that is encouraged and appreciated by Allah s.w.t.

and Prophet Muhammad s.a.w.

• To strengthen the national economy

• To facilitate the poor to create new job market and business ventures by using

their merits, skills and expertise

• To establish a caring society

• To eradicate unemployment problem from the society

• To remove social and economical discrimination in the society

3.0 Rules regarding Al-Qard Ul-Hasan

Al-qard ul-hasan, being a contract (aqd) between two parties requires the same

principles that apply for other Islamic transactions, which are as follows :

• Both parties should be legally capable to enter into the qard contract

Prepared by Ghazana Said Atan Page 3 of 13

 To enter into a contract, parties must be baligh, aqil and rashid (major with

sound mind). The Quran (Surah Al Nisa 4:6) states :

‫ح فَإ ِ ۡن َءان َ ۡسُتم‬ َ ّ ‫ذا ب َل َُغوا ْ ٱلن‬

َ ‫كا‬ َ ِ ‫ٰٓى إ‬ َ ‫م ٰى‬
ّ ‫حت‬ َ ‫وَٱ ۡبت َُلوا ْ ٱ ۡلي َت َ ٰـ‬

‫دا فَٱ ۡدفَعُوٓا ْ إ ِل َيِۡۡہ ۡم أ َ ۡموَٲل َهُ ۡ‌ۖم وََل ت َ ۡأك ُُلوهَا ٓ إ ِ ۡسَرا ً۬فا‬
ً ۬ ‫م ُر ۡش‬
َ
‫ن‬
َ ‫كا‬ َ َ‫ۡ‌ۖف و‬
َ ‫من‬ ِ ‫ن غَن ِ ّ۬يا فَ ۡلي َ ۡست َ ۡع‬
‫ف‬ َ ‫كا‬ َ َ‫داًرا أن ي َ ۡكب َُرو ‌ْۚاۡ و‬
َ ‫من‬ َ ِ ‫وَب‬
َ َ
ُ ‫ذا د َفَ ۡعت ُ ۡمإ ِل َيِۡۡہ ۡم أ ۡموَٲل َهُ ۡمفَأشِۡۡہ‬
ْ ‫دوا‬ ۡ ِۚ‌ ‫م ۡع ُرو‬
َ ِ ‫ف فَإ‬ َ ‫فَ ۡلي َ ۡأك ُ ۡل ب ِٱ ۡل‬

‫سي ً۬با‬ َ ِ‫عَل َيِۡۡہ ۡ‌ۚم وَك ََف ٰى ب ِٱلل ّه‬

ِ ‫ح‬

“Prove orphans till they reach the marriageable age; then, if ye find them of

sound judgment, deliver over unto them their fortune; and devour it not by

squandering and in haste lest they should grow up Whoso (of the guardians)

is rich, let him abstain generously (from taking of the property of orphans); and

whoso is poor let him take thereof in reason (for his guardianship). And when

ye deliver up their fortune unto orphans, have (the transaction) witnessed in t

heir presence. Allah sufficeth as a Reckoner.”

This verse specifies that the age of marriage and the sound judgement is the

age of majority, which means that a major person is capable to enter into any

transaction validly.

In a hadith, the Prophet (s.a.w) said, “The pen is raised for three groups (of

people) that is, they will not be responsible for their actions : the insane until

they become sane, those who are sleeping until they are awaken, and the

youth until they reach puberty.” [Ahmad, Abu Daud and al-Tirmidhi].

Prepared by Ghazana Said Atan Page 4 of 13

 The above hadith makes it clear that a person, who has not attained the age of

puberty, may not be a responsible party to a qard transaction.

• Ijab (offer) and qabul (acceptance) of the qard must be clearly made before

entering into the loan contract

In the loan agreement, there should be clear expression, collation and

conjunction of the ijab and qabul between the parties so as to prevent dispute

in future.

• The date of payment must be specified

The date of payment of the loan should be mentioned in the loan agreement. If

no such date is specified, the transaction may lead to ambiguity and dispute

among the lender and the borrower.

When Prophet (s.a.w) migrated to Madinah, he was informed that contracts of

salam were made without specifying the amount or date, in which he says,

“ Whoever enters into a contract of salam should specify the date of delivery

and the amount of the subject matter.”

• The contract should be in writing

Allah s.w.t says in Surah Al Baqarah (2:282) :

َ َ ‫ي ٰٓـأ‬
ّ ۬ ‫س‬
‫مى‬ َ ‫م‬ ٍ ۬ ‫ج‬
ّ ‫ل‬ َ ‫ٰٓى أ‬ ‫داَينُتم ب ِد َ ۡ ٍي‬
َ ‫ن إ ِل‬ َ ِ ‫من ُوٓا ْ إ‬
َ َ ‫ذا ت‬ َ ‫ن َءا‬
َ ‫ذي‬
ِ ّ ‫ل‬ ‫ٱ‬ ‫ها‬
َ ّ ‫ي‬ َ

‫ب َأن‬ َ ‫ل وََل ي َ ۡأ‬

َ ‫ب‬
ٌ ِ ‫كات‬ ۡ ۚ‌ِ ‫ب ب ِٱ ۡلعَ ۡد‬
ُ ۢ ِ ‫ۡ وَ ۡلي َ ۡكُتب ب ّ ۡين َك ُ ۡم َڪات‬
‫ُبو ‌ُۚه‬
ۡ َ
ِ ‫ذى عَل َ ۡي‬
‫ه‬ ِ ّ ‫ل ٱل‬
ِ ِ ‫ل‬ ‫م‬ۡ ُ ‫ي‬‫ل‬ ۡ َ ‫و‬ ‫ب‬ ۡ ُ ‫ت‬‫ڪ‬ َ ‫ۡ ف ۡلي‬
‫ه ٱلل ّ ‌ُۚه‬
ُ ‫م‬ َ ‫ب َڪ‬
َ ّ ‫ما عَل‬ َ ُ ‫ي َ ۡكت‬
Prepared by Ghazana Said Atan Page 5 of 13
 ‫ن‬ َ ‫ش ۡي ۬ـ ًٔ ‌ۚا فَِإن‬
َ ‫كا‬ ُ ‫م ۡن‬
َ ‫ه‬ ِ ‫ۡس‬ ‫خ‬ ُ ۡ َ ّ ‫هَلَربي‬
َ ‫هب‬ َ‫ق ٱلۥل ّو‬
ِ ّ ‫حقّ وَ ۡلي َت‬
َ ‫ٱ ۡل‬

‫طيعُ َأن‬ َ
ِ َ ‫ضِعيًفا أ ۡو َل ي َ ۡست‬
َ
َ ‫سِفيًها أ ۡو‬ َ ‫ذى عَل َ ۡيهِ ٱ ۡل‬
َ ّ‫حق‬ ِ ّ ‫ٱل‬

‫من‬ ِ ‫ش ِہيد َ ۡي‬

ِ ‫ن‬ ُ ‫س َشِۡۡہ‬
َ ْ ‫دوا‬ ‫ل وَٱ ۡ ت‬
ۡ ِۚ‌ ‫هد‬
ُ ۡ ّ ‫ل ۡلوَعَل ِي‬
‫ل هُوَ فَ ۡلي ُ ۡمل ِ ۥ ۡ ب ِٱ‬
ّ ‫م‬
ِ ُ‫ي‬
َ
‫من‬
ّ ‫م‬ ِ ‫ل وَٱ ۡمَرأَتا‬
ِ ‫ن‬ ٌ ۬ ‫ج‬ ِ ‫جل ۡي‬
ُ ‫ن فََر‬ ُ َ ‫جال ِ ُڪ ۡ‌ۖم فَِإن ل ّ ۡم ي‬
َ ُ ‫كوَنا َر‬ َ ‫ّر‬
َ
َ ُ‫ما فَت ُذ َ ّڪَر إ ِ ۡحد َ ٰٮه‬
‫ما‬ َ ُ‫ل إ ِ ۡحد َ ٰٮه‬
ّ ‫ض‬ َ ‫ش َہ‬
ِ َ ‫داءِ أن ت‬ ّ ‫ن لٱ‬
َ ‫م‬ َ ‫ض ۡو‬
ِ ‫ن‬ َ ‫ت َ ۡر‬

‫موٓا ْ َأن‬ ُ
ُ ٔ ‫عو ‌ْۚاۡ وََل ت َ ۡسـ‬
ُ ُ ‫ما د‬ َ ‫ش َہ‬
َ ِ ‫داءُ إ‬
َ ‫ذا‬ ّ ‫ب لٱ‬
َ ‫ٱ ۡلأ ۡخَر ٰ‌ۚى وََل ي َ ۡأ‬
َ َ ‫صِغيًرا أ َ ۡو َ ِڪ‬
َ ‫عند‬ َ ‫جل ِ ِۦ‌ۚه ۡذ َٲل ِك ُ ۡم أ ۡق‬
ُ ‫س‬
ِ ‫ط‬ َ ‫ٰٓى أ‬ َ ‫بيًرا إ ِل‬ َ ُ‫ت َ ۡكت ُُبوه‬

‫ن‬ ُ َ ‫ٰٓى أ َّل ت َ ۡرَتاب ُوٓ ‌ْۖاۡ إ ِّل ٓ َأن ت‬

َ ‫كو‬ ‫ش َہ ٰـد َةِ وَأ َ ۡن َد‬ َ
ُ َ‫ٱلل ّهِ وَأ ۡقو‬
ّ ‫م ِلل‬

‫ح أ َّل‬ ُ ‫س عَل َ ۡيك ُ ۡم‬

ٌ ‫جَنا‬ َ ‫ديُرون ََها ب َ ۡين َ ُڪ ۡم فَل َ ۡي‬
ِ ُ ‫ضَر ۬ةً ت‬ َ ً‫ج ٰـَرة‬
ِ ‫حا‬ َ ِ‫ت‬

ۡ‫شِهي ٌ۬‌ۚد‬ ٌ ۬ ِ ‫كات‬

َ ‫ب وََل‬ َ ِ ‫َ ۡكت ُُبوهَ ‌ۗا وَأ َ ۡشهِد ُوٓا ْ إ‬
َ ُ ‫ذا ت ََباي َ ۡعت ُ ۡ‌ۚم وََل ي‬
َ ‫ضا ّٓر‬

ُ ‫م ُڪ‬
‫م‬ ‫ه ۢقُ ب ِ ُڪ ۡ‌ۗم وَٱت ُّقوا ْ ٱلل ّ َ‌ۖه‬
ُ ّ ‫ۡ وَي ُعَل‬ ِ ‫وَِإن ت َ ۡفعَۥلوفُا ُفَإ‬
ُ ّ ‫سون‬ ْ ُ

ٌ ۬ ‫ش ۡىٍء عَِلي‬
‫م‬ ّ ‫ه ب ِ ُڪ‬
َ ‫ل‬ ُ ّ ‫ۡ وَٱلل‬
‫ٱلل ّ ُ‌ۗه‬

“O ye who believe! When ye contract a debt for a fixed term, record it in

writing. Let a scribe record it in writing between you in (terms of) equity. No

scribe should refuse to write as Allah hath taught him, so let him write, and let

him who incurreth the debt dictate, and let him observe his duty to Allah his

Lord, and diminish naught thereof. But if he who oweth the debt is of low

understanding, or weak, or unable himself to dictate, then let the guardian of

his interests dictate in (terms of) equity. And call to witness, from among your

Prepared by Ghazana Said Atan Page 6 of 13

 men, two witnesses. And if two men be not (at hand) then a man and two

women, of such as ye approve as witnesses, so that if one of the two erreth

(through forgetfulness) the one of them will remind. And the witnesses must

not refuse when they are summoned. Be not averse to writing down (the

contract) whether it be small or great, with (record of) the term thereof. That

is more equitable in the sight of Allah and more sure for testimony, and the

best way of avoiding doubt between you; save only in the case when it is

actual merchandise which ye transfer among yourselves from hand to hand.

In that case it is no sin for you if ye write it not. And have witnesses when ye

sell one to another, and let no harm be done to scribe or witness. If ye do

(harm to them) lo! it is a sin in you. Observe your duty to Allah. Allah is

teaching you. And Allah is knower of all things.”

Here, the Muslim jurists have differing opinions. The majority of the jurists

opined that it is not obligatory but strongly recommended to put the contract in

writing. This is because they feel that if the parties decided not to put the

contract on paper, there is no longer an obligation upon them to write it down.

However, minority jurists are of the opinion that it is obligatory upon the

parties to put the contract in writing, in accordance with the verse above.

• Existence of two witnesses

The Quran verse above (Al Baqarah 2:282) also stresses on the need to have

two male witnesses, and if two men are not available, then one man and two

women must stand as witness. It is essential that the loan agreement comply

with the Quranic injunction to avoid future dispute.

Prepared by Ghazana Said Atan Page 7 of 13

4.0 Characteristics of Al-Qard Ul-Hasan fund

An al-qard ul-hasan fund has the following characteristics :

• It is flexible with respect to collateral.

• Documentary procedures are usually very simple

• Loans are usually small in size, approval procedures rapid and disbursement

quick

• There are no interest charges involved

• The fund has easy access to capital contributors and borrowers because of its

local base

• The fund managers, who are drawn from capital contributors, are fully

accountable

5.0 Examples of usage of Al-Qard Ul-Hasan in the world

5.1 United Arab Emirates

Dubai Islamic Bank offers al-qard ul-hasan (an interest free loan) to assist

customers overcomes their financial problems so as to save them from

undesirable circumstances and exploitation.

The fund aims at promoting a healthy Islamic social structure by facilitating

social needs like marriage, education and situations beyond the control of the

applicant like prolonged delay in salaries or wages. The facility promotes the

concept of takaful (mutual benevolence) amongst Muslims.

Prepared by Ghazana Said Atan Page 8 of 13

 This facility is made available through varied financial assistance (through

donations or interest free loan) from the bank or other benefactors including

individuals, financial corporations, business organizations and even the

government.

The facility granted shall be repaid in one calendar year with repayment

starting within one month from the date of receiving the al-qard ul-hasan.

5.2 Islamic Republic of Iran

The al-qard ul-hasan funds provides small consumer and producer loans and,

in some cases, engage in profit sharing activities with small producers and

firms, thus supplementing the fund’s capital. These funds are usually

associated with local mosques or other religious organizations and sometimes

with guilds or professional associations. The capital is contributed by the more

well-to-do who are at liberty to withdraw their funds at any time. These funds

operate with reasonably low administrative costs since most are managed on a

voluntary basis by the people within the group.

6.0 Critical issues in Al-Qard Ul-Hasan

6.1 Misinterpretation of the al-qard ul-hasan concept

Al-qard ul-hasan is a benevolent loan, therefore, it is interpreted to mean that

the borrower cannot be forced to make repayment under this principle. In the

event the borrower is unable to repay the capital amount, the lender must

accept this transaction as a charitable act. The borrower can however decide to

Prepared by Ghazana Said Atan Page 9 of 13

 reward the lender for his timely assistance, and can decide (at his sole

discretion) on the quantum of the reward as well.

Therefore, in view of its non-commercial nature, Islamic banks seldom

participate in this form of venture. Although banks are seen as social

institutions in Islam, they nevertheless need to maintain their business sense

for they too have their shareholders and depositors who must be kept satisfied

in terms of returns and economic feasibilities.

6.2 Administrative cost/management fee for loan granted

Many parties have introduced Islamic financing products in the name of al-

qard ul-hasan, however, their implementation seem to contravene its

benevolent objective, which is meant for welfare service. It now has profit

taking purpose behind the label of administrative cost/management fee so as to

make it lawful in the eyes of the public.

According to Shariah standard of AAOIFI (Accounting and Auditing

Organization for Islamic Financial Institutions), all kinds of benefit or

additions (from the borrowed amount) agreed to by both borrower and lender,

or it is made conditional in the contract upfront, or it is charged upon the late

payment, in the type of money, things or any benefit, are strictly prohibited

which is considered as riba. It is further stated that the charging of service cost

is allowable, provided that it is the actual cost.

The Resolution of International Fiqh (3rd assembly in year 1986) has stipulated

that the charge in excess of the actual cost is strictly prohibited and the

formula used to calculate the cost must be appropriate, exact and accurate.

Prepared by Ghazana Said Atan Page 10 of 13

 Indirect costs such as employment expenditure, office rental and expenses, and

other liabilities, are not inclusive in the actual cost of financing.

Therefore, the service and administrative cost in the amount of percentages of

1 percent or 2 percent from the principal amount in not acceptable, as the

International Shariah Advisors of AAOIFI has clearly decided that it is not

permitted to link the charge to the amount given. The rational for this view is

to avoid the percentage from being tied up to the cost amount according to

financing amount and leads to the service charge becoming a changeable

amount. By right, the charge should be the same amount irrespective of the

amounts disbursed to borrower. It is concluded that the service charge based

on percentage is actually riba hiding behind the label of service/administrative

cost under al-qard ul-hasan.

6.3 Inflation

Although Islam urges justice to the borrower, it does not approve of injustice to the

lender. Inflation undoubtedly does injustice to the interest-free lender by

eroding the real value of al-qard ul-hasan.

Socio-economic justice requires the indexation of income and monetary assets by the

use of not one universal index but of several indices based on different

expenditure patterns. Indexation of al-qard ul-hasan has so far been rejected

by the fuqaha because they generally consider it similar to riba in its essence.

Their opposition to indexation of interest-free loans is also defensible on

economic grounds because even though it is proposed with the innocent

objective of doing justice to the interest-free lender, it has the potential of

initiating gross injustice to the borrower.

Prepared by Ghazana Said Atan Page 11 of 13

7.0 Conclusion

Al-qard ul-hasan is for the benefit of the individuals and the society at large. To

safeguard the interest of depositors/investors, these types of loans, as a matter of policy,

do not constitute a significant source of financing by Islamic banks. Mirakhor observes,

“perhaps the most challenging issue facing the implementation of an Islamic financial

system is the development of risk-bearing instruments that can provide the investors

with a sufficient degree of liquidity, security and profitability to encourage their

holding.’

It is important to appreciate that the requisites for total implementation and success of

Islamic banking in a country, include reshaping he society, restructuring of the

economic system and reframing of the laws according to the dictates of Islam.

As highlighted in part 6 above, the issues surrounding al-qard ul-hasan need to be

addressed and acted on before a pure al-qard ul-hasan principle can be adopted and

used for new product development and innovation.

Lastly, everyone especially the Muslims, need to change their priorities and at least as

much emphasis should be laid on improving the ethics, honesty and values of the

society as is being done for expansion of interest-free banking.

Prepared by Ghazana Said Atan Page 12 of 13

Bibliography

Al Qard ul Hassan. Retrieved on November 13, 2008 from

http://www.dib.ae/en/communityservice_qurad.htm

Arasan, V. K. Rise of Islamic Banking – Problems and Prospects. Retrieved on November

13, 2008 from http://www.unisi.it/ricerca/dip/dir_eco/wolpert/papers/arasan.doc

Chapra, M. U. Money and Banking in an Islamic Economy. Retrieved on November 13, 2008
from http://www.iiibf.org/elibrary/muchapra

Mohammad Delwar, H. Al Qard al-Hasan : A Practical Approach. Retrieved on November

13, 2008 from http://www.wponline.org

Qard hasan microfinance. Retrieved on November 13, 2008 from http://www.newhorizon-

islamicbanking.com/index.cfm?section=academicarticles&action

Siddiqui, S. H. Islamic Banking : True Modes of Financing. Retrieved on November 13, 2008
from www.nzibo.com/IB2/truemodes.pdf

The Sharia way of borrowing and lending money. Retrieved on November 13, 2008 from
http://www.qardhassan.com

Zaharuddin, A. R. Critical issues in Qardul Hassan. Retrieved on November 13, 2008 from
http://www.share.com.my/index.asp?fuseaction=learning.main

Prepared by Ghazana Said Atan Page 13 of 13