Qard Hasan – A Benevolent Loan

Qard is any kind of loan given by one party to the other and which is due back to the lender within an agreed upon contract. Since Shari’ah prohibits interest, the lender is not expected to make a profit from the loan by collecting interest. A bank could issue Qard to an account holder which has investment accounts or other financial instruments with the bank and use his account as a security. Current accounts at Islamic banks, which do not pay any profit, are also considered a Qard by the customer to the bank.
Qard Hasan, which translates to a benevolent or a beautiful loan, is a special kind of Qard which a bank or an individual may grant someone in need without expecting any benefit back in return. Qard Hasan is a highly noble activity which is repeatedly recommended in Quran. Granting of Qard Hasan is equated with giving a loan to Allah SWT and the reward is expected to be manifold return (Quran 57:18). The order also appears next to two most important requirements of the faith which are prayers and charity (Quran 73: 20). Qard Hasan may be given by the bank as community support or as social welfare. The loan is issued to a needy person or institution and no interest or return is expected by the bank. Majority of Islamic scholars agree that the lender has the right to ask for return of his loan at any time. But since the loan is for community service and given to those in real need, the lender should be lenient in collection and give respite to the borrower in order achieve the true benefit of Qard Hasan.
Since banks use depositors’ money to lend out as Qard Hasan without making any profit, they have to be vigilant in their practice to assure that the borrowers are credit worthy and the money borrowed will be returned. Islamic banks may use different practices for issuing these loans. Some might restrict these to the bank’s customers only, while others may lend it to anyone in the community who is in need. The banks may also grant these loans to small businesses, farmers, or aspiring entrepreneurs, who may not otherwise have access to capital. Such lending activity might help to grow the local economy which will indirectly benefit the bank. The banks might use these loans as social service and lend to individuals, businesses, or even governments as a short-term interest-free lines of credit. This helps balance the economic opportunity between large and small players.
It cannot be overemphasized that the primary activity for a bank is to make profitable investments and earn positive return for their depositors and shareholders. The bank cannot remain profitable if their main activity is interest free public service Qard Hasan. They should allocate only a portion of their assets for this work of good will to the community. Their main thrust should be to drive the borrowers towards profit and loss arrangements based on Mudarabah and Musharakah. These are healthy economic activities which are essential for a functioning economic system.