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 alhasana 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
1
2
He has authored an e-book on Riba, which is available for download from his site.
Director, Institute of Islamic Finance, Essex, England.
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 alhasana, 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.
3
He is the Chair of Islamic Economics, Finance, and Management, Professor of Economics, and
Professor of Statistics, Rice University, Houston, TX. He also maintains the Islam and Economics Blog.
4 “An Economic Explication of the Prohibition of Riba in classical Islamic Jurisprudence,”
Proceedings of the Third Harvard University Forum on Islamic Finance, Cambridge: Center for Middle
Eastern Studies, Harvard University, 2000, pp. 31-44.
5 Abdulkader Thomas (ed.). Interest in Islamic Economics [Routledge, 2006], p. 127.
6 Mohammad Omar Farooq. "Riba, Interest and Six Hadiths: Do We Have a Definition or a
Conundrum?" [Unpublished essay, June 2006; posted at IBFnet, message #5401, July 20, 2006]
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.
Mohsin S. Khan and Abbas Mirakhor. “Islamic Banking: Experience in The Islamic Republic of Iran
and in Pakistan,” Economic Development and Cultural Change, January l990; available online. Abbas
Mirakhor, IMF Executive Director, and Mohsin Khan, Director of the IMF Institute, are the 2003 prize in
Islamic economics awarded by Islamic Development Bank (IDB). “Given in alternate years for achievement
in Islamic banking and Islamic economics, the award honors the individual or institution that has made the
most significant contribution to the field. The award recognizes Mirakhor and Khan’s seminal research,
starting in the mid-1980s when the two worked in the IMF’s Research Department, on the special challenges
posed by banking systems operating under Islamic principles, which proscribe the charging of interest.”
[IMF Survey, 32:6, September 8, 2003.]
8 Imran Ahsan Khan Nyazee, “Islamic Law of Persons Glossary”. Imran Ahsan Khan Nyazee is
Associate Professor in the Faculty of Shariah and Law, Islamabad. Apart from several major books in the
field of fiqh, especially pertaining to Islamic banking and finance, he has also translated into English Ibn
Rushd's well known book, Bidayat al-Mujtihid (The Distinguished Jurist's Primer) in two volumes. For more,
see Islamica.
9 Mohammad Nejatullah Siddiqi. Riba, Bank Interest, and The Rationale of Its Prohibition, Islamic
Development Bank, Visiting Scholars Research Series, 2004], p. 48. Former Professor of Economics,
Centre for Research in Islamic Economics, King Abdulaziz University, Jeddah, Saudi Arabia. For his
pioneering contribution to the field of Islamic economics, finance and banking, he was awarded King Faisal
International Prize for Islamic Studies, 1982. His contribution definitely is worthy of great recognition.
However, a prize offered by a monarchy that stands as an anathema to Islam does not necessarily add
much to the honor of its recipients. For my reflection on such prize from unislamic monarchy, see Maulana
Maududi and the King Faisal Prize, unpublished essay; posted at NABIC-L, #2929, March 16, 2004.
10 “A Glossary of Islamic Economic Terms.”
7
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
11 http://www.islamicfinancetraining.com/glossary.php. The Board of Advisors of this organization
includes, among others, Dr. Monzer Kahf, Dr. M. Nejatullah Siddiqi, Abdulkader Thomas, and so on.
12 Ziauddin Ahmad. “Islamic Banking: The State of the Art,” IDB Islamic Training and Research
Institute, 1994.
13 Mabid Ali Al-Jarhi and Munawar Iqbal. "Islamic Banking: Answers to Some Frequently Asked
Questions," IDB Occasional Paper #4, 2001, p. 17.
14 ibid., p. 23.
15 Iqbal and Molyneux, op. cit., p. 41.
16 Volker Nienhaus, “The Performance of Islamic Banks: Trends and Cases,” in Chibli Mallat (ed.),
Islamic Law and Finance [London: Graham & Trotman, pp. 129-170]; the quote is from p. 131.
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
17
Ziauddin Ahmad. op. cit., p. 17.
Mohammad Obaidullah, op. cit., p. 44.
19 ibid., p. 45
20 Ausaf Ahmad, “Contemporary Practices of Islamic Financing Techniques,” IDB Islamic Research
and Training Institute, Research Paper #20, 1993.
21 Mohammad Hashim Kamali. Principles of Islamic Jurisprudence [Islamic Texts Society, 3rd Ed.,
2003], p. 335.
22 ibid., p. 45.
23 IBFnet. “Further Grounds for Justifying an Islamic Model of Life Insurance Policy,” undated.
18
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”]
24
Islamic Finance Training. Glossary.
Islamic Banking and Finance Institute Malaysia. “Glossary”.
26 Mohammad Obaidullah, op. cit., p. 50.
27 The clarification was sent to me in Bangla by email on 11/14/2006. I translated it and had it reviewed
by Mr. Shah Abdul Hannan before quoting it here.
25
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
28
Mohammad Obaidullah, op.cit., p. 50.
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
29
ibid., p. 128.
ibid., p. 128
31 ibid., p. 139
32 Islamic Bank of Britain. “Glossary of Islamic Terms”. The Supervisory Board of the bank included
Sheikh Muhammad Taqi Usmani (retired from the Board in 2002), Sheikh Dr Abdul Sattar Abu Ghuddah
Sheikh Nizam Muhammad Seleh Yaqubi.
33 Ziauddin Ahmad. “Islamic Banking: The State of the Art,” IDB Prize Winners' Lecture Series - No. 2
IDB-Islamic Research and Training Institute, Jeddah, Saudi Arabia, 1994.
34 Canada Deposit Insurance Corporation. Glossary.
30
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 alhasana, 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.
35
Federal Reserve Bank, Cleveland, Glossary.
Ludwig Von Mises Institute, Mises Made Easier.
37 For further examples, see Trinidad and Tobago Deposit Insurance Corporation; TIAA-CREF,
Investment Glossary; United Nations ODC, Glossary; FAO Glossary of Terms for Agricultural Insurance and
Rural Finance.
38 Munawar Iqbal and Philip Molyneux. Thirty Years of Islamic Banking: History, Performance and
Prospects [Palgrave, 2005], p. 39.
39 State Bank of Pakistan, “Glossary of Islamic Banking,” in SBP Publication, ‘Islamic Banking and
Finance: Theory and Practice’ by Muhammad Ayub, Sr. J.D. IBD, SBP.
36
“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 traderelated 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,
IMF, “Islamic Banking,” Appendix to “Monetary and Financial Statistics Manual September 2000,
online document.
41 State Bank of Pakistan, op. cit., online.
42 Ziauddin Ahmad, op. cit., p. 6, p. 38.
43 Arab Finance House, “FAQ/Glossary,” online document.
44 Merriam-Webster Dictionary. Oxford Advance Learners Dictionary lists the following: “money that an
organization such as a bank lends and sb borrows” or “to lend sth to sb, especially money” or “to lend a
valuable object to a museum”, etc.
40
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
45
http://www.banking.com/terminology.asp#L
Mahmoud El Gamal quotes this in his presentation “The recent Azhar fatwa: Its logic, and historical
background” [2003]
47 Takaful.com. “Origins and Operations of Takaful System.” This view is based on fatwa of the Shariah
advisory board of al-Rajhi Bank, dated April 2001.
48 Rahul Dhumale and Amela Sapcani. “An Application of Islamic Banking Principles to Microfinance,”
UNDP Technical Note #23073, December 1999; available online.
49 Siddiqi, op. cit. p. 119.
46
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
50
Frank Vogel and Samuel Hayes, III. Islamic Law and Finance: Religion, Risk, and Return [London:
Brill, 2006], pp. 105-106.
51 ibid., p. 131, referring to Cf. decision 1, third session (1986), Fiqh Academy Journal (fatwa
specifically for the Islamic Developmen Bank).
52 Omar Imady and Hans Dieter Seibel. “Principles and Products of Islamic Finance,” University of
Cologne Development Research Center; available online, p. 2.
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
4. 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 alhasana 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 alhasana 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.
Qard in Hadith
As I have already shared the observation, I have not found the expression qard al-hasana in the
nine collections I have searched. Out of these, Muslim, Abu Dawud, Ibn Majah, Tirmidhi, and
Muwatta do not have any separate Book (Kitab) on qard. In some of these collections, some
minor and brief segments on qard are included in either the Book of Buyu (business transactions)
or Book of Sadaqah (alms/charity). However, the word qard hardly appears in any of these
segments. Bukhari has a specific Book (Kitab) on qard/loan. In Volume 3 of M. Muhsin Khan's
Arabic-English Bukhari, there is the Book of Loans, Payment of Loans, Freezing of Property and
Bankruptcy [Kitab fi al-istiqrad wa ada' ad-duyun ...]
First, here Bukhari uses qard and dayn interchangeably, even though in Islamic fiqh a distinction
has been made, so that (just as Mark Robbani argued) qard by definition would be without an
excess and that is in the sense of qard al-hasana. According to one Islamic Banking site, Dayn
means "Debt: A Dayn comes into existence as a result of any contract or credit transaction. It is in
incurred either by way of rent or sale or purchase or in any other way which leaves it as a debt to
another," while qard legally means "... to give anything having value in the ownership of the other
by way of virtue so that the latter could avail of the same for his benefit with the condition that
same or similar amount of that thing would be paid back on demand or at the settled time. It is a
loan which a person gives to another as a help, charity or advance for a certain time." 55 The
discrepancy in the above statement is obvious. On one hand, it is stating that qard “be paid back
on demand or at the settled time”. On the other hand, it also states that it is a loan as a help,
charity or advance “for a certain time.” If it is for a certain time, then it can’t be payable on
demand. We will explore such anomalies in further detail in this essay.
53
Frank Vogel and Samuel Hayes, III. op. cit., pp. 79-82.
A.J. Wensinck, Concordance et indices de la tradition musulmane, Leiden, 1936-69. This
meticulously comprehensive concordance is in Arabic.
55 http://www.islamicbankingcourses.com/html/glossary.html.
54
Obviously, Bukhari, though not a jurist, does not view the distinction between qard and dayn in a
similar way. He uses the two expressions interchangeably. Interestingly, in the entire Book of
Loan, only in a couple of places the word "qard" appears. That's also not in any hadith, but under
the chapter description from Bukhari himself and two juristic statements of Ibn Umar and Ata/Amr
bin Dinar. These are not hadiths.56 See Vol. 3, Book of Loan, Chapter 17, p. 346. Also, on p. 338,
there is a one-hadith chapter with the title "To buy camels on credit", where the Arabic expression
istiqrad is used. Thus, qard does not necessarily involve loaning of money, but it can also be
commodity loan. Essentially, it involves fungible, where “one instrument is identical to, and
therefore interchangeable with another.”57
It is important to note that even though there is a general understanding that loan in Islamic
context means “the loan of fungibles (qard) including money,”58 that any excess or profit on loans
“is banned without regard to whether the fungible subject-matter of the loan is also ribawi, i.e.,
weighable or measurable (for the Hanafis and Hanbalis) or is food (for the Shafi’is and Malikis.
Thus, a fungible textile measured by the yard is not ribawi for either group, and yet cannot be
loaned for consumption with excess.”59
The issue of categorization of fungibles in defining qard is relevant because it illustrates how the
task of defining the underlying notion of “ribawi” and deducing the details at the level of
application virtually falls apart in establishing any coherence.
“The Hanafis require that qard goods be fungibles, al-Fatawa al-hindiyya, 3:201; Kasanai,
7:395. A more common view is to allow qard in whatever can be adequately known by
description (mawsuf fi al-dhimma, capable of salam sale). Ibn Qudama, 4:355. The
Hanbalis define qard even more broadly, including loan of unique objects such as jewelry
against return of their value, and this is one Shafi’i view, ibid.; Ahmad b. ‘Abd Allah alQari (d. 1940), Majallat al-ahkam al-shar’iyyah, ed., ‘A. Abu Sulayman and M. ‘Ali
(Jiddah: Tihama Publications, 1981, art. 749). 60
Thus, the relevant question is why so much incoherence and disagreement at the level of applied
details, when it comes to the subject of riba and qard. The answer may lie in the fundamental
problem in the way traditionally riba or qard is defined and then attempts are made at applying it
at the level of details.
Returning to the discussion about hadith on qard in Bukhari, there is also a Book of Conditions
[kitab ash-shurut], which includes a one-hadith chapter "conditions of loan" [bab ash-shurut fi alqard]. This chapter includes one juristic statement of Ibn Umar and Ata. This is not a hadith
either. Under this chapter there is a hadith, but it does not relate to qard, nor it uses the term
qard, but to salaf (money exchange; bai' salaf), a different kind of loan.61 Of course, there are
those who make a distinction between qard and salaf, and there are those who don’t, an issue
dealt with later in this essay.
In response to my query on IBFnet, Mark Robbani quoted the following hadith (mentioning Ibn
Majah and Ibn Hisham, but without being sure about the exact reference):
56 Often under the Chapter title, Bukhari shares verses from the Qur’an that he deemed pertinent to the
chapter. He also frequently shares juristic positions of eminent sahabas under Chapter titles. However, such
opinions are basically on the authority of Bukhari himself. While each hadith is included with its isnad (chain)
of narration, those juristic opinions are included without any chain.
57 http://glossary.reuters.com/index.php/Fungible.
58 Frank Vogel and Samuel Hayes, op.cit., p. 71.
59 Vogel and Hayes, op.cit., p. 71.
60 Vogel and Hayes, op.cit., n#16, p. 71
61 Narrated Abu Huraira: Allah's Apostle mentioned a person who asked an Israeli man to lend him
one-thousand Dinars, and the Israeli lent him the sum for a certain fixed period. [Volume 3, Book 50, #892]
"In the night of the journey, I saw on the gate of heaven written, 'reward for sadakah is
ten times and reward for qard (or the loan without riba. i.e. qard-al-hasana) is eighteen
times'. So, I asked the angel, how is it possible? The angel replied, 'because the beggar
who asked had already had something but a loanee did not ask for the loan unless he
was in need.'”
It needs to be noted that the highlighted part in the parenthesis is Mr. Robbani’s own interpretive
insertion. Below is the exact text from Sunan Ibn Majah.
Anas b. Malik reported that Allah's Messenger (s) said, "At night during which I was made
to perform journey, I saw at the door of the Paradise written, 'A sadaqa is equivalent to
ten like that (in reward) while lending has eighteen times reward.' I said, 'O Gabriel, what
is the reason that lending is more excellent than Sadaqa?' He said, 'The beggar asks
while he possesses it (money) while the one who demands loan does not demand it but
because of his need.' [Trans. Muhammad Tufail Ansari, Kitab Bhaban, India, 2000, Vol.
#3, p. 438, #2431.]
This hadith does mention qard, but not qard al-hasana. Thus, it does not answer the question I
posed. I asked if there is any hadith that specifically mentions qard al-hasana, as it is mentioned
in the Qur’an. So, this hadith does not apply in answer to my question. The Arabic text reads
(without the interpretive insertion of Mr. Robbani): As-sadaqa bi ‘ashri amthaliha wa al-qard bi
thamaniyata ‘ashra.
Careful readers would also notice whether the content of the hadith makes any sense. Is it
always, generally or even frequently true that a beggar asks while he already possesses it
(another word, is not in any real need), while a loanee seeks loan only in situations of need?
Does it really make sense?
Well, apart from the issue of whether it makes sense or not, obviously, Robbani did not bother or
feel the need to check the status of this hadith before citing it in public, transferring the burden of
verification to others. Interestingly, it is clearly mentioned in Sunan Ibn Majah about this hadith:
“Its isnad contains in it Khalid b. Yazid Ahmad; ... Abu Dawud, Nasai', Abu Zar'a, Dara
Qutni etc. have declared him da'if.”
Therefore, this hadith, which is declared daif by Sunan Ibn Majah and also does not make any
sense, does not really contradict my observation that in the nine collections of hadith, including
sihah sitta, the expression “qard al-hasana” does not occur. The question then remains as to why
the Qur’an does not use the word qard except as qard al-hasana, while hadith (based on the 9
collections) does not use the expression qard al-hasana at all. Well, the clue for this answer might
lie in the Qur’an, which we explore next. However, before we proceed to the next part, let’s
identify another pertinent point. Not in a single of the few (actually, very few) hadiths that refer to
qard deals with any information pertaining to any extra or that such an extra is prohibited in case
of loan.
There are some juristic observations from the companions (sahabas) and successors (tabiun) in
Bukhari, Muwatta and elsewhere. But those are juristic opinions of the respective companions.
Here are some of those juristic observations.
Ibn Umar said concerning loans for a fixed time, "There is not objection to it, even if the
debtor gives more than he owes if the creditor gives more than he owes, if the creditor
has not stipulated it." [Bukhari, trans. by M. Muhsin Khan, Vol. 3, p. 346]
This is not a hadith. It is presented without any chain, except on the authority of Bukhari himself.
Also, in this statement, Ibn Umar does not provide any evidence from the Qur’an or the Prophet
for his juristic statement.
The following set of reports from Muwatta62 of Imam Malik from a chapter “On sale by Salaf which
is not proper.’
i. Yahya related to me from Malik that he had heard that Umar ibn al-Khattab said that
he disapproved of one man lending another food on the provision that he gave it back to
him in another city. He said, "Where is the transport?" [Book 31, Number 31.43.92]
ii. And Malik related to me that he had heard that a man came to Abdullah ibn Umar
and said, "Abu Abd ar-Rahman, I gave a man a loan and stipulated that he give me
better than what I lent him." Abdullah ibn Umar said, "That is usury." Abdullah said,
"Loans are of three types: A free loan which you lend by which you desire the pleasure of
Allah, and so you have the pleasure of Allah. A free loan which you lend by which you
desire the pleasure of your companion, so you have the pleasure of your companion, and
a free loan which you lend by which you take what is impure by what is pure, and that is
usury." He said, "What do you order me to do, Abu Abd ar-Rahman?" He said, "I think
that you should tear up the agreement. If he gives you the like of what you lent him,
accept it. If he gives you less than what you lent him, take it and you will be rewarded. If
he gives you better than what you lent him, of his own good will, that is his gratitude to
you and you have the wage of the period you gave him the loan." [Book 31, Number
31.43.93]
iii. Yahya related to me from Malik from Nafi that he heard Abdullah ibn Umar say, "If
someone lends something, let the only condition be that it is repaid." [Book 31, Number
31.43.94]
iv. Malik related to me that he had heard that Abdullah ibn Masud used to say, "If
someone makes a loan, they should not stipulate better than it. Even if it is a handful of
grass, it is usury." [Book 31, Number 31.43.95]
None of the abovementioned items from Muwatta reaches the Prophet. These are athar (a saying
from a companion of the Prophet), not hadith. None of these refers to either the Qur’an or any
statement or action of the Prophet as reference. Notably, in sharing such juristic observations, in
many cases the companions refer to specific verses in the Qur’an or Prophetic statements or
actions. But in regard to qard, there is no such reference, other than sharing their own juristic
observations only. Of course, if their independent juristic positions, without any reference to the
Qur’an or the Prophet, are taken as binding textual evidence, then it is a different matter.
Otherwise, Islamic laws and codes must be grounded in the primary sources: the Qur’an and the
Sunnah (hadith).
We will deal with this matter in further detail after we cover the survey of qard in the Qur’an.
Qard in the Qur’an
There are six places in the Qur’an where the word qard appears: 2.245, 5.12, 57.11, 57.18,
64.17, 73.20. In each of these places consistently two additional aspects are added: (a) it is not
just qard, but qard al-hasana; and (b) this qard is not to any human being, but to Allah. There is
no exception to these two aspects in the Qur’an. Because each of these verses comes in a
62
305.
Muwatta Imam Malik, Trans. by M. Rahimuddin, [Lahore, Pakistan: Sh. Muhammad Ashraf, 1985], p.
context, it is important that we study these verses not in isolation, but in relation to the verses
before and after, when relevant. These verses are covered in the general chronological order of
Makkan and Madani.63 The actual verses in which qard al-hasana is mentioned are shaded in
color.
So fear Allah as much as ye can; listen and obey and spend in charity [anfiqu khairan] for
the benefit of your own soul and those saved from the covetousness of their own souls,they are the ones that achieve prosperity. [64:al-Tagabun/16]
If ye loan to Allah, a beautiful loan, He will double it to your (credit), and He will grant you
Forgiveness: for Allah is most Ready to appreciate (service), Most Forbearing.
[tuqridullaha qard al-hasana] [64/al-Tagabun/17]
The above two verses are from al-Taghabun, a Makkan surah. Notice the transition from verse
16, which emphasizes charity, to verse 17, which is about qard al-hasana. It is quite clear that
here the mention of qard al-hasana is not as something new or different than the previous verse,
but merely a continuation in restating the same spending in the path of Allah in different words.
According to Abdullah Yusuf Ali,
"Our charity or Love is called a loan to God, which not only increases our credit account
manifold, but obtains for us the forgiveness of our sins, and the capacity for increased
service in the future."64
Thy Lord does know that you stand forth (to prayer) nigh two-thirds of the night, or half
the night, or a third of the night, and so does a party of those with you. But Allah does
appoint night and day in due measure He knows that you are unable to keep count
thereof. So He has turned to you (in mercy); read you, therefore, of the Qur'an as much
as may be easy for you. He knows that there may be (some) among you in ill-health;
others travelling through the land, seeking of Allah's bounty; yet others fighting in Allah's
Cause, read you, therefore, as much of the Qur'an as may be easy (for you); and
establish regular Prayer and give regular Charity [zakat]; and loan to Allah a
Beautiful Loan. And whatever good you send forth for your souls you shall find it in
Allah's Presence,- yea, better and greater, in Reward and seek ye the Grace of Allah, for
Allah is Oft-Forgiving, Most Merciful. [wa aqimus salat wa atuz zakat wa aqridullaha qard
al-hasana] [73/al-Muzzammil/20]
The above verse is from al-Muzzammil, another Makkan surah. This one is of especial
importance in the discussion about qard al-hasana, because here it is not merely an exhortation.
Rather, it is a command, side by side with the command to offer salat and pay zakat, two
obligatory pillars of Islam. We will return to this verse again later.
And what cause have ye why you should not spend in the cause of Allah [an-la TUNFIQU
fi sabilillah].- For to Allah belongs the heritage of the heavens and the earth. Not equal
among you are those who spent (freely) and fought, before the Victory, (with those who
did so later). Those are higher in rank than those who spent (freely) and fought
afterwards. But to all has Allah promised a goodly (reward). And Allah is well acquainted
with all that ye do. [57/al-hadid/10]
63 It is important to note while it is generally agreed about the categorization of surahs as Makkan and
Madani, there is no absolute agreement about the chronological order of the surahs or the verses in each
surah. Therefore, observations about the chronological order are merely an approximation.
64 n#5500, p. 1560.
Who is he that will Loan to Allah a beautiful loan? for ((Allah)) will increase it manifold to
his credit, and he will have (besides) a liberal Reward. [yuqridullah qard al-hasana] [57/alhadid/11]
For those who give in Charity, men and women [musaddiqin wa musaddiqat], and loan to
Allah a Beautiful Loan, it shall be increased manifold (to their credit), and they shall have
(besides) a liberal reward. [aqradullah qard al-hasana] [57/al-hadid/18]
The above three verses are from al-Hadid, a Madani surah. In this surah, qard al-hasana is
mentioned twice. Once again, notice the transition from verse 10 to verse 11, where qard alhasana is merely a restated general emphasis on offering whatever we have to Allah or in the
path of Allah. The same is true about verse 18. According to Muhammad Asad,
"In the present instance the meaning is apparently wider, applying to all that man may do
selflessly, for the sake of God alone."65
Allah said: "I am with you: if you (but) establish regular prayers, practise regular charity,
believe in my apostles, honour and assist them, and loan to Allah a beautiful loan, verily I
will wipe out from you your evils, and admit you to gardens with rivers flowing beneath;
but if any of you, after this, resists faith, he hath truly wandered from the path or
rectitude." aqradtumullah qard al-hasana [5/al-Maida/12]
The above verse is from al-Maidah, a Madani surah. Once again, in this verse salat (prayer) and
paying zakah are juxtaposed to believing in the messengers. Such belief should be reflected in
the honor we show and assistance we offer to their cause. Quite naturally, such assistance is
regarded by Allah as a loan (a beautiful loan). Maulana Abul Kalam Azad, in his well known
commentary, Tarjuman al-Qur’an, explains the following:
"When war was thus inevitable, the followers of the Prophet were enjoined not to close
their eyes to its necessity and not to spare any means to fight in the cause of God." 66
Sayyid Abul ‘Ala Maududi, in his Tafhimul Qur’an, explains:
"This expression signifies spending one's wealth for the sake of God. Since God has
permitted to return to man every penny that he spends in His way along with His reward,
which will be several-fold, the Qur'an characterizes this spending as a loan to God. This
spending is considered a loan provided it is a 'good loan', that is, provided the money
spent in the cause of God has been acquired by legitimate means and has been spent in
accordance with the laws of God and with sincerity and earnestness." 67
Quite clearly, such spending is general in nature and it is spent in the Path of Allah.
Then fight in the cause of Allah, and know that Allah Heareth and knoweth all things.
[2/al-Baqarah/244]
Who is he that will loan to Allah a beautiful loan, which Allah will double unto his credit
and multiply many times? It is Allah that giveth (you) Want or plenty, and to Him shall be
you. [yuqridullah qard al-hasana] [2/al-Baqarah/245]
65
Available online, see 57/al-Hadid/11. http://www.geocities.com/masad02/040
Azad, The Tarjuman al-Qur'an, (trans. by Syed Abdul Latif), New Delhi: Kitab Bhaban, Vol. 2, p. 113.
67 Maududi, Towards Understanding the Qur'an, Leicester, UK: The Islamic Foundation, 1196, Vol. II,
n#33, p. 142.]
66
The above verses are from al-Baqarah, Madani surah. These verses are very significant in
understanding the context of exhortation about qard al-hasana. It does not require much
explanation that qard al-Hasana is mentioned in verse 245 in the context of fighting in the path of
Allah. The struggle in its comprehensiveness requires commitment of our life and resources.
Whatever we offer to Allah is graciously recognized and treated as loan. Below are some of the
commentaries on the above verse.
Maududi: "Goodly loan' signifies whatever one gives to another person selflessly, and
from absolutely pure motives. God describes whatever man spends in this manner as a
loan made to none other than Him, and He undertakes to repay that loan and to repay it
several-fold. The stipulation, however, is that the loan be a 'goodly' one; that is, it should
not be tainted with selfish designs and should be given for the sake of God, to be spent
for purposes pleasing to Him."68
Abdullah Yusuf Ali: "Spending in the cause of God is called metaphorically 'a beautiful
loan". It is excellent in many ways: "it shows a beautiful spirit of self-denial; (2) in other
loans there may be a doubt as to the safety of your capital or any return thereon; here
you give to the Lord of All, in Whose hands are the keys of want or plenty: giving, you
may have manifold blessings, and withholding, you may even lose what you have. If we
remember that our goal is God, can we turn away from His cause?"69
Asad: "by sacrificing one's life in, or devoting it to, His cause..." 70
Irfan Ahmad Khan: “Thus ayah 2:245 is bringing us from jihad with our own selves (with
our bodies) to jihad with our wealth.
Please note that God is saying: ‘Give me a loan.’ If we spend in jihad, we are supporting
His Religion. Whatever we are spending for this cause, He treats as a loan, which He will
return multiplied in the Hereafter, when we meet Him.”71
The verses pertinent to qard al-hasana are quite clear about the following points.
1. Qard al-hasana in the Qur’an consistently refers to the symbolic transaction between
Allah and the believers, especially in terms of the latter’s offering of worldly resources in
the path of Allah.
2. Qard al-hasana in the Qur’an does not specify any detail whatsoever in regard to
conditions or limitations, including whether qard (used as a substitute for only qard alhasana) must be without excess. On the contrary, qard al-hasana, as a contract with
God, consistently specifies an excess, even in generous multiples, or at least doubled,
which of course does not mean anything concretely, because $1 qard al-hasana in this
world is not going to bring $2 hereafter. The return is not going to be in terms of
currencies or coins, assuming there is no trading in heaven! Therefore, if qard al-hasana
is taken in the context of the pertinent verses in the Qur’an, the presence of excess is
consistently declared and thus stipulated on the part of Allah. After all, “...who is more
faithful to his covenant than Allah?” [9/at-Taubah/111]
3. When the verses about qard al-hasana are taken by themselves, those have nothing to
do with qard in general as business transactions in this world. Indeed, the way the Qur’an
68
Maududi. Vol. I, n#267, p. 187.
Abdullah Yusuf Ali, n#275, p. 97.
70 Muhammad Asad, The Message of the Qur'an; online; http://www.geocities.com/masad02/002c.
71 Irfan Ahmad Khan, Reflections on the Qur’an [UK: Islamic Foundation, 2005], Vol. I, p. 614. It is a
new, acclaimed Qur’anic exegesis of which only the first volume has been published so far.
69
presents it, qard al-hasana involves “excess” above and beyond the qard (loan) and it is
“stipulated” in the sense that Allah treats this as a contract and he declares that no one is
more faithful to his covenant than Allah. Thus, even though the notion about
Omnipotence in one sense entails that nothing is binding on God, at another level, that
he is al-Haqq (the Truth) and al-‘adl (the Just) means that a promise or contract made by
God is binding on him. In that sense, it is a stipulation in the covenant between Allah and
his servants who offer him the “beautiful loan”. Indeed, it is a trade contract from the
perspective of Allah.
Allah has purchased of the believers their persons and their goods; for theirs (in
return) is the garden (of Paradise): they fight in His cause, and slay and are slain:
a promise binding on Him in truth, through the Law, the Gospel, and the Qur'an:
and who is more faithful to his covenant than Allah. then rejoice in the bargain
which ye\ou have concluded: that is the achievement supreme. [9/atTaubah/111]
4. The above observations about the pertinent verses in the Qur’an need to be also
supplemented by the pertinent hadith (as we have referred to nine collections). There is
nothing in hadith pertaining about qard that a qard must be understood as qard alhasana.
5. It also needs to be noted that neither the verses about riba in the Qur’an nor the ribarelated hadiths refer to qard (loan) or dayn (debt). Abdullah Saeed discusses the
following based on Muhammad Rashid Rida [d. 1935], an eminent scholar and the
disciple of Shaikh Muhammad Abduh.
"... [N]one of the authentic hadith attributed to the Prophet in relation to riba
appears to mention the terms, 'loan' (qard) or 'debt' (dayn). This absence of any
reference to loans or debts in riba-related hadith led a minority of jurists to
contend that what is actually prohibited as riba is certain form of sales, which are
referred to in the hadith literature."72
In light of the above observations, how in the world qard and qard al-hasana became
synonymous and while the Qur’an consistently mention qard al-hasana as promised excess for
the “loan to Allah”, qard became a charitable or benevolent loan, where neither there should be
any excess nor any such excess should be stipulated?
Problem with the Traditional Position about Qard as ribawi contract
Well, to appropriately answer the above question, two related factors need to be addressed. First,
the juristic treatment of qard (loan) is not based on qiyas (analogical reasoning) from the Qur’anic
verses about qard al-hasana, but actually from the analogy to sales transactions, where qard
(loan) of money is considered without any “counter-value”. Secondly, qard al-hasana, consistently
stated in the Qur’an as a loan to God, became subject to verses about riba, especially riba al-fadl,
about which even some leading sahaba disagreed.
“… despite their conflicting views on details concerning the conditions of sale and the
articles the exchange of which were susceptible to riba, all jurists emphasized the
necessity of the equality of the exchanged counter-values in contracts of sale, and
72 Abdullah Saeed. Islamic Banking and Interest: A Study of the Prohibition of Riba and its
Contemporary Interpretation [New York: E. J. Brill, 1996], quoting Rida, al-Riba wa al-Mu'amalat fil al-Islam,
Cairo: Maktabat al-Qahira, 1959, p. 11]
avoided the issue of loans (in which an advantage or an increase may be stipulated for
the lender) in the chapter on riba, proper [34]. This is because they did not find an
authoritative evidence or justification for any other classification in primary sources.
Besides, all classical jurists, despite their differences over the conditions and the level of
obligations, consider loans, either in the form of qard or ‘ariyah, as gratuitous transactions
for charitable purposes and donation. Such contracts were not transactions based on
riba, but were considered as such by analogy. In fact, some jurists, Sunni as well as
Shi’is, assert that the reason for the prohibition of riba in such contracts is to induce the
spread of qard al-hasana (gratuitous loan), and that the prohibition encourages the act of
charity (al-Tusi 1991, vol. 3, 276-81; Mutahari 1991, 254-6). Qard was defined as the
lending of a fungible commodity that could be weighed, measured and counted, and, as a
consequence, involved the transfer of the ownership of the property and required the
return of a similar commodity in time of maturity: it is a consumption loan. ‘Ariyah denoted
a temporary, but gratuitous, loan of non-fungibles that only transferred the usufruct of the
property. Being a charitable contract, a loan could not stipulate an "increase" to the
original property at maturity (Ibid.; Linant de Bellefonds 1973, vol. 9, 417-33). Therefore,
not being a sale contract, a voluntary "increase" at the end of the maturity of a loan was
permitted by the majority of jurists. For the same reason, many of the classical jurists,
except many Malikis and Hanbalis, permit the use of legal devices for the circumvention
of riba. In fact, the relationship between bay` and riba becomes obvious if we note that
most of these legal tricks divide a loan contract into two or more riba-free sale contracts
in order to circumvent the ban on riba. And more important, inasmuch as riba occurs in
sales, the majority of classical jurists classified the Qur'anic riba as riba al-nasi'ah.
Thus, it is only in modern times that Muslim scholars, and to a lesser extent,
contemporary jurists, have explicitly recognized riba in both sales and debts on equalfooting. In fact, the great majority of contemporary prominent jurists are still reluctant to
abandon the discussion of riba in sale, and present a detailed argument of the exchange
of the same articles that lead to riba, despite the irrelevance of many of these cases.”73
Thus, in traditional Islamic law, qard, unless it is qard al-hasana, is a ribawi (or riba-covered)
transaction from two angles: (a) through the qiyas (analogy) based on sales (bai’), and/or (b)
through the prohibition of riba, as per the verse: “But if ye turn back, ye shall have your capital
sums: Deal not unjustly, and ye shall not be dealt with unjustly.” [2/al-Baqara/279]
“The second type of loan recognized by Sharia is the qard, which ‘involves the loan of
fungible commodities: that is, goods which may be estimated or replaced according to
weight, measure or number. In this case the borrower undertakes to return the equivalent
or likes of that he has received without any premium on the property, which would, of
course, be construed as interest. The most likely object of a qard loan would be currency
or other standard means of exchange.
The present chapter is solely concerned with qard, and that raises a question which is a
natural extension of the riba problem dealt with above: ‘Does Sharia deem qard a ribawi
contract i.e., a contract under a conclusive presumption of riba?’ This question as
Sanhuri commented is surprising at first, for in the eyes of positive law a loan contract is
the first among ribawi transactions. That is not the case under Sharia, which regards a
loan contract as basically a gratuitous transaction, and that by itself negates the
existence of riba; nevertheless a loan contract does become a ribawi transaction by
analogy with sale, when it secures to the lender an interest or a premium.”74
73 Farhad Nomani, “The Interpretative Debate of the Classical Islamic Jurists on Riba (Usury),” ;
available online, p. 7.
74 Nabil A. Saleh. Unlawful Gain and Legitimate Profit in Islamic Law: Riba, Gharar and Islamic
Banking [Cambridge: Cambridge University Press, 1986], pp. 35-36, referring to Sanhuri, Masadir al-Haqq,
Vol. III, p. 237.
Qard with excess, profit or benefit (i.e., interest) should clearly be covered by the prohibition of
riba, or so it seems. But then what is the relevance of or need for qiyas based on sale? Well, the
problems with applying the prohibition of riba to qard are manifold.
a. As we have already demonstrated above that qard al-hasana or qard as consistently used in
the Qur’an has nothing to do with worldly business transaction, as it actually implies both excess
as well as promise of Allah (as a form of stipulation). Also, qard as it is used in hadith does not
establish any proof that interest on loan or excess/benefit/profit on currency exchanges is
impermissible.
This is a complicated topic in itself. Since I have written elaborately on these pertinent issues, I
will simply refer to the essays that specifically address the particular aspects.
b. Qur’anic prohibition of riba is known as riba al-jahiliyyah. This type of riba is identified or
defined in light of the following verse in the Qur’an:
“O ye who believe! Devour not riba, doubled and multiplied; but fear Allah that ye may
(really) prosper.” [3/Ale Imran/130]
“Doubled and multiplied” as an essential dimension of riba al-jahiliyya has been understood by
companions, such as son of Zayd b. Aslam75 (d.136/754) as follows:
Riba in the pre-Islamic period consisted of the doubling and redoubling [of money or
commodities], and in the age [of the cattle]. At maturity, the creditor would say to the
debtor, 'Will you pay me, or increase [the debt]? If the debtor had anything, he would pay.
Otherwise, the age of the cattle [to be repaid] would be increased ... If the debt was
money or a commodity, the debt would be doubled to be paid in one year, and even then,
if the debtor could not pay, it would be doubled again; one hundred in one year would
become two hundred. If that was not paid, the debt would increase to four hundred. Each
year the debt would be doubled.’76
That this is what riba al-jahiliyyah is has been rather consistently upheld by the classical
exegetes.77 According to Ibn Abbas, one of the major companions of the Prophet and earliest of
the Islamic. jurists, and few other companions (Usama ibn Zayd, 'Abdullah ibn Mas'ud, Urwa ibn
Zubayr, Zayd ibn Arqam) "considered that the only unlawful riba is riba al-jahiliyyah" [i.e., a form
of riba an-nasi'ah].78 The significance of this view, held by leading scholars such as Imam Ahmad
Ibn Hanbal, is that it takes into account not just the issue of excess [i.e., lenders are entitled only
to principle sum], but also the injustice/exploitation (zulm) element as in [2/al-Baqara/279].
Another word, the cause/rationale [illa] of prohibition of riba is not merely the excess over the
principle, but also the injustice/exploitation involved in such transactions. Combined with the fact
that riba al-jahiliyyah is defined and understood rather consistently by the classical exegetes, the
issue of excess, delinked from the rationale of injustice, fails to corroborate or validate the
traditional understanding of interest and its implication for qard. That’s why instead of directly
linking the issue of qard and any pertinent excess or benefit with riba, the traditionalist jurists
have had to resort to qiyas of sales contracts, where qard would be covered as a ribawi
transaction as part of riba al-fadl.
75
Ibn Hajar, Tahdhib, III, p. 395, referred to in Abdullah Saeed, p. 22.
Tabari, Jami, IV, p. 59, quoted in Abdullah Saeed, op. cit., p. 22.
77 To adequately appreciate this assertion, please read a well documented essay, Mohammad Omar
Farooq. Stipulation of Excess in Understanding and Misunderstanding Riba: Al-Jassas Link, unpublished
essay, August 2006.
78 Saleh, op. cit. p. 27.
76
c. As far as approaching the issue of qard as ribawi contact from the riba al-fadl angle, it has its
own serious pitfall. First, there were leading companions, some regarded as the most respected
jurists of their time, such as Ibn Abbas, did not regard riba al-fadl as impermissible. Second,
unlike riba al-jahiliyyah, which is based on the Qur’an, riba al-fadl is based purely on hadith. The
jurists have failed to develop any reasonably uniform understanding and position about riba alfadl, and thus when they have attempted to identify the cause or criteria (illa) at the applied level,
the variation and discrepancy are so great that often what is considered haram (prohibited) by
one school turns out as halal (permissible) by other schools of Islamic law, and vice versa.
This stems from problems with hadiths pertaining to riba, and riba al-fadl to be specific. In this
regard, one needs to understand and appreciate some of the fundamental aspects of hadith as a
source of knowledge and information, especially for legal applications. For example, according to
Islamic scholars, only mutawatir type of hadith - a hadith which is reported by such a large
number of people that they cannot be expected to agree upon a lie, all of them together - yields
certainty of knowledge about a particular hadith. Even then, only mutawatir bil lafz (mutawatir
hadiths that contain exact words in each chain) belongs to this category of hadith that yields
certainty of knowledge. Mutawatir bil ma'na (mutawatir hadiths that contain only similar, but not
exact words in each chain) does not carry the same weight. The first type, mutawatir bil lafz, is
very few in number. Indeed, scholars have identified fewer than a dozen hadiths that belong to
this category. Non-mutawatir hadiths are known as ahad (solitary). Since mutawatir hadiths are
fewer than a dozen (out of hundreds of thousands of hadiths including the variations of chains), it
can be said that virtually all hadiths, including sahih hadiths, are ahad and yield only
probabilistic knowledge. To help understand such relevant issues of hadith in the context of
problems in Islamic law, the readers are strongly recommended to read my essay “Islamic law
and the Use and Abuse of Hadith.”79
While it is routinely claimed or assumed that based on hadith we can come up with a reasonably
working definition of riba, especially riba al-fadl, unfortunately that is not the case. For example,
consider what constitutes the criteria or rationale (illa) of six commodities the Prophet presumably
specified as ribawi? When we try to apply the issue of illa to delineate the scope of the prohibition
of riba based on al-fadl, it becomes obvious that defining riba using hadith is a daunting task. This
important matter is the theme of my analytical essay, Riba, Interest and Six Hadiths: Do We Have
a Definition or a Conundrum?.80
Thus, trying to define riba and equating interest with riba has not been very convincing. More
importantly, the traditionally given rationales of prohibition of riba, - (1) Unfair exchange (taking
something from a party without giving him something in return); (2) economic argument: idle class
argument; (3) moral argument: Undermining of charitable attitude among people; and (4) social
argument: - are easily understandable and demonstrable. However, when extended to interest in
a simplistic manner these same rationales do not hold up. For a detailed essay of mine on this
subject, see “The Riba-Interest Equation and Islam: Reexamination of the Traditional
Arguments.”81
The Crux of the Analysis
Let’s begin this part with some generally given definition of riba, on the basis of which interest is
equated with riba. I have cited below illustrations from both scholarly sources as well as nonscholarly ones. The latter category helps us understand how the scholarly views have filtered to
the non-scholarly level.
79
Unpublished, June 2006.
Unpublished essay, June 2006.
81 Unpublished essay, November 2006
80
“The literal meaning of interest or Al-RIBA as it is used in the Arabic language means to
excess or increase. In the Islamic terminology interest means effortless profit or that profit
which comes free from compensation or that extra earning obtained that is free of
exchange.”82
“Literally, the word riba means excess, increase, augmentation, expansion or growth. ...
Ibn Hajar al-Asqalani held that the essence of riba is excess, whether it is in the
commodity or money. Abu Bakr ibn al-Arabi held that every excess in return of which no
reward is paid is riba.”83
“The prohibition was meant to cover every amount charged in excess of the principal ...”84
Statements similar to the above ones on riba identify and emphasize “excess” over the principle
as the indicator or criteria of riba. Based on that indicator of “excess,” interest would fall under
riba. However, there is a problem. Excess is not really the issue, even according to the traditional
fiqh and the contemporary sharia scholars. There are numerous hadiths that are generally
regarded as sahih (sound) that make it clear that the excess is acceptable, if it is voluntary on the
part of the borrower at the time of repayment.
Narrated Jabir bin Abdullah:
I went to the Prophet while he was in the Mosque. (Mis'ar thinks that Jabir went in the
forenoon.) After the Prophet told me to pray two Rakat, he repaid me the debt he owed
me and gave me an extra amount. [Sahih al-Bukhari, Vol. 3, Book 41, # 579]
It needs to be noted here that there are quite a few hadith similar to the above permitting extra
payment, or excess above the principal in a loan. Since I have already elaborately documented
this in a separate essay,85 let me present a typical position that voluntary excess paid over and
above the agreed amount is not only permissible, but also virtuous.
Referring to a hadith in Sunan Abu Dawud [Book 22, #3330], one commentary on
Riyadus Salehin states: “This Hadith highlights the desirability on part of the customer of
paying in excess of the agreed price. The seller is induced to give more than the agreed
(quality/weight/number of goods etc.) against the settled price. This is a step ahead of
justice - that is Ihsan, which has very salutary effects on society.” 86
Permissibility of voluntary excess payment is the typical position. However, it is not uncommon for
some scholars to have a tendency of “having the cake and eat it too”. In the Historical Judgment,
Mufti Muhammad Taqi Usmani defends the acceptability of the hadith: "Every loan which derives
a benefit is a kind of riba."87 Usmani acknowledges that this is a disputed hadith at best. 88 Then,
he engages in not so uncommon sophistry to explain that “Every loan ...” is not every loan.
Instead, he rationalizes that this hadith about “Every loan ...” does not cover “any voluntary
amount given by the debtor at the time of repayment ...”89 So, Usmani also concludes that the
excess in itself is not really an indicator of riba.
82
http://www.inter-islam.org/Prohibitions/intrst.htm
Engku Rabiah Adawiya Engku Ali. “Riba and its Prohibition in Islam,” International Islamic University,
Malaysia; online document.
84 Supreme Court of Pakistan (with Justice Muhammad Taqi Usmani). The Text of the Historic
Judgment on Interest [1999; exact date: 14 Ramadan, 1420], section. #99
85 For detailed discussion about this excess issue, please see “Riba, Interest and Six Hadiths: Do We
Have a Definition or a Conundrum?”, unpublished essay, June 2006.
86 Item #1375. Also, see #1374.
87 Usmani, section #101; referring to Baihaqi.
88 Usmani, section #101.
89 Usmani, section #105.
83
Then, what is the indicator or criteria of riba? It is if the excess is “stipulated.” Another word, riba
is a “stipulated excess.”
“Semantically, riba means excess or an addition. It refers to an excess stipulated in a
contract or an exchange.”90
“Riba has been described as a loan with the condition that the borrower will return to the
lender more than and better than the quantity borrowed.” 91
“It is the considered opinion of the experts on Islamic jurisprudence that interest charged
by commercial banks ‘is identical with the excess stipulated as an obligatory condition in
the contract, which is one of the two types of usury prohibited by Islamic Shariah’.”92
Reading the commonly available or circulated material by Islamic banking industry one can’t
escape the impression that this notion of “stipulated excess” is based directly on the Qur’an and
hadith. However, that is not so. Unfortunately, there is no short explanation of this “stipulated”
qualifier to “excess.” It is important to recognize that the Qur’an itself does not define what is riba,.
However, the Qur’anic exegeses almost consistently identify the Qur’anic riba as the riba aljahiliyyah, and there is no established proof of “stipulation” in regard to the “excess”. However,
there is a fault-line in the consistency of explanation of riba al-jahiliyyah. It occurs with al-Jassas’
commentary of the Qur’an, Ahkam al-Qur’an. Al-Jassas’ work (d. 370 AH) is almost four centuries
after the Prophet. He was the first to identify the “stipulation” aspect of “excess” and defined riba
in such as way that has been followed by those who take a blanket approach to prohibition of
riba. “Almost all jurists have quoted al-Jassas to say that the Arabs in the early days used to
undertake loan transactions with interest.”93
Interestingly, rarely there is any scholarly scrutiny of the evidence al-Jassas offered in his
exegesis. An evaluation of the evidence and argument he presented exposes vital problems of
his claim that “stipulation” is the defining condition of riba. Since there is no short cut to this
discussion, interested readers must indulge themselves in reading a well-documented essay in
this regard: Stipulation of Excess in Understanding and Misunderstanding Riba: Al-Jassas Link.94
One other interesting and notable point. Let’s revisit the following statement:
Ibn Umar said concerning loans for a fixed time, "There is not objection to it, even if the
debtor gives more than he owes if the creditor gives more than he owes, if the creditor
has not stipulated it." [Bukhari, trans. by M. Muhsin Khan, Vol. 3, p. 346]
Apart from the fact that these juristic observations are without any isnad, or in cases like those
pertinent ones in Muwatta cited earlier that do not reach the Prophet, in none of these the jurists,
such as Imam Malik or, going further back, Umar or Ibn Umar refer to the verse about riba (i.e.,
only principal sum is allowed). This is quite interesting because the understanding of the common
Muslims about qard al-hasana is that this must be excess-free because riba is prohibited and
qard al-hasana must be interest-free because it is subject to the same prohibition. Indeed,
generally our scholars and jurists, going back all the way to some of the companions, seem to
subject qard to the condition of no stipulated excess. However, quite curiously, as demonstrated
already, not a single juristic observation about qard in hadith collections uses the prohibition of
riba as the basis of their opinions. They neither refer to any Prophetic statement in this regard,
90
http://www.islamicvoice.com/March2006/Islam&Economy/
Riba (Usury and Interest): According to Quran and Sunnah, Muttqoon.com.
92 Islami Bank Bangladesh Limited. “What is Islamic Banking”, undated.
93 The translation, Excerpt on Riba from Ahkam al-Qur’an is available at
http://www.nyazee.com/islbanks/riba/riba.html. Opening the document requires a password, which is
provided by the author/webmaster. Type in “nyazee” to open the document.
94 Mohammad Omar Farooq. Unpublished essay, August 2006.
91
nor to the riba-related verses in the Qur’an. Why not? The most obvious explanation might be that
none of the companions must have considered the issue of excess in case of qard related to the
issue of riba. If they did, then they would simply have stated that qard must not have any excess
(or stipulated excess) because it is subject to the prohibition of riba.
Indeed, there is another powerful argument presented in the (in)famous fatwa of Sheikh alTantawi of al-Azhar, where pre-specified excess is not only regarded as acceptable, but also
desirable for the protection of the deposits in an age of greater corruption and moral probity. In
this regard, Tantawi also refers to other major scholars in support of this argument.
“Dr. Tantawi concentrates on the consensus that when a mudaraba is deemed defective
due to pre-specification of the investor’s profits, the contract becomes one of hiring
(‘ijara), whereby the entrepreneur/worker is entitled to market wages (ibn al-Humam in
Fath Al-Qadir, and Al-Shafi’i in Al-’Umm). He concluded (2001, p.133):
‘Thus, we say that the bank investing the money for a pre-specified profit becomes a
hired worker for the investors, who thus accept the amount the bank gives them as their
profits, and all the excess profits (whatever they may be) are thus deemed the bank’s
wages. Therefore, this dealing is devoid of Riba.
In summary: we do not find any Canonical Text, or convincing analogy, that forbids prespecification of profits, as long as there is mutual consent.’ “95
Further comments from the renowned Islamic jurist of al-Azhar Dr. Abdel Wahab Khallaf are
adduced.
“Dr. Tantawi (2001, p.95) quotes Dr. Khallaf, who in turn quoted Muhammad 'Abduh’s
1906 Manar (#9, p.332) article:
’When one gives his money to another for investment, and payment of a known profit,
this does not constitute the definitively forbidden Riba, regardless of the pre-specified
profit rate. This follows from the fact that disagreeing with the juristic rule that forbids prespecification of profits does not constitute the clear type of Riba which ruins households.
This type of transaction is beneficial both to the investor and the entrepreneur. In
contrast, Rib harms one for no fault other than being in need, and benefits another for no
work except greed and hardness of heart. The two types of dealings cannot possibly
have the same legal status (hukm)’.
Dr. Khallaf, Liwa’ Al-’Islām (1951, #4(11)) proceeded to say (quoted in ibid., pp. 95-6):
’The jurist condition for validity [of mudaraba] that profits are not pre-specified is a
condition without proof (dalīl). Just as profits maybe shared between the two parties, the
profits of one party may be pre-specified… Such a condition may disagree with jurists’
opinions, but it does not contradict any Canonical Text in the Qur’ān and Sunnah’.” 96
According to Khallaf, that return percentage must not be pre-specified:
“has no proof (dalil) from the Qur’an and Sunnah. Silent partnerships follow the
conditions stipulated by the partners. We now live in a time of great dishonesty, and if we
do not specify a fixed profit for the investor, his partner will devour his wealth.”97
As the prevailing position, even in regard to mudaraba, does not allow pre-specification of return
percentage, Khallaf’s argument is relevant in the case of loan as well, because stipulation of
95
Quoted by Mahmoud El Gamal at this link at Lariba Bank.
ibid.
97 ibid.
96
excess is considered one of the main features that make conventional loans ribawi from the
orthodox perspective.
“If the mudaraba is deemed defective due to a condition, the entrepreneur is thus a hired
worker, and what he takes is considered wages. Let that be as it may, and there is no
difference between calling it a mudaraba or an ‘ijara. It is a valid transaction that benefits
the investor who cannot directly invest his funds, and benefit to the entrepreneur who
gets capital with which to work. Thus, it is a transaction that benefits both parties, without
harming either party or anyone else. Forbidding this beneficial transaction would result in
harm, and the Prophet (p) forbade that by saying: “No harm is allowed ‫الورر ض ال رارض‬.”
Thus, those who claim that pre-specification or stipulation of excess in financial transactions,
even in mudaraba, find it more unacceptable in qard. However, as clarified above, there are
compellingly contrasting views in this regard, and many might find that the view of Tantawi,
Khallaf and many others carry more merit.
The az-Zubair al-Awwam Hadith about Salaf
As has been mentioned already, some IFIs regard bank deposits (current account deposit, to be
specific) as qard al-hasana. A few people, who have also done works in the field of Islamic
banking and finance were not aware of the relevance of the qard al-hasana in this regard. I
contacted the former chairman of the leading Islamic bank in Bangladesh, and he wrote: “As far
as I know, these deposits are not considered as Qard al Hasanah, these accounts are called
Wadiah accounts. This means that the Bank keep these as safe deposits (Bank guarantees
safety) with the condition that Bank is authorised to use these without any risk to depositors.
These conditions are written in account opening form.”98
I have been trying to get some feedback from a number of stalwarts of the field, including Dr.
Nejatullah Siddiqi. He clarified during a telephone conversation that, even though the terminology
of qard al-hasana is not preferable in this context, it can be treated as qard al-hasana, because
the depositors already know such deposits as interest-free.
On October 26, 2006, I was speaking to Dr. Irfan Ahmad Khan, an elder scholar (and the author
of a Qur'anic commentary, Reflections on the Qur'an99, about this issue. He was also taken aback
when I mentioned to him that I am trying to understand how bank deposits can be categorized as
qard al-hasana to the bank. He suggested that we have a three-way call involving Mufti
Barkatullah, a Shariah scholar, based in United Kingdom. He also serves as an advisor on
several IFI Shariah boards.100 Dr. Khan was able to immediately connect us to have the threeway call. I broached two questions to Mufti Barkatullah: (a) How is current account deposits
treated as qard al-Hasana, as some IFIs do? (b) What is Shar'i proof (dalil) that qard al-hasana is
payable on demand?
Basically his answer was that it is not qard al-hasana, but merely trust (wadiah) - a safe custody
contract between the depositor (customer) and the custodian (bank).101 According to him, in
South Asia, there is a cultural tendency to call the same thing as qard al-hasana. I am not quite
convinced about this “cultural” explanation. He also said that qard al-hasana is simply between a
servant and Allah. Then, in regard to wadiah, he referred to a hadith in Sahih al-Bukhari. Below I
reproduce the lengthy hadith and then I present my humble analysis of it.
98
I received an email from Shah Abdul Hannan on October 26, 2006.
Irfan Ahmad Khan, op. cit.
100 For brief biographical information about Mufti Barkatullah, see Islamicretailfinance.com 2004
101 http://www.alburaq.co.uk/Key/Glossary.htm
99
Narrated 'Abdullah bin Az-Zubair:
When Az-Zubair got up during the battle of Al-Jamal, he called me and I stood up beside
him, and he said to me, "O my son! Today one will be killed either as an oppressor or as
an oppressed one. I see that I will be killed as an oppressed one. My biggest worry is my
debts [dayni]. Do you think, if we pay the debts, there will be something left for us from
our money?" Az-Zubair added, "O my son! Sell our property and pay my debts."
Az-Zubair then willed one-third of his property and willed one-third of that portion to his
sons; namely, 'Abdullah's sons. He said, "One-third of the one third. If any property is left
after the payment of the debts, one-third (of the one-third of what is left) is to be given to
your sons." (Hisham, a sub-narrator added, "Some of the sons of 'Abdullah were equal in
age to the sons of Az-Zubair e.g. Khubaib and 'Abbas. 'Abdullah had nine sons and nine
daughters at that time." (The narrator 'Abdullah added:) My father (Az-Zubair) went on
drawing my attention to his debts saying, "If you should fail to pay part of the debts,
appeal to my Master to help you." By Allah! I could not understand what he meant till I
asked, "O father! Who is your Master?" He replied, "Allah (is my Master)." By Allah,
whenever I had any difficulty regarding his debts [ma waqa'tu fi kurbatin min daynihi], I
would say, "Master of Az-Zubair! Pay his debts on his behalf [aqda 'anhu daynahu]." and
Allah would (help me to) pay it.
Az-Zubair was martyred leaving no Dinar or Dirham but two pieces of land, one of which
was (called) Al-Ghaba, and eleven houses in Medina, two in Basra, one in Kufa and one
in Egypt. In fact, the source of the debt which he owed was, that if somebody brought
some money to deposit with him [anna-r rajula kaana ya'tihi bil maal fayastaudyuhu
iyyahu]. Az Zubair would say, "No, (i won't keep it as a trust), but I take it as a debt
[lakinnahu SALAF], for I am afraid it might be lost." Az-Zubair was never appointed
governor or collector of the tax of Kharaj or any other similar thing, but he collected his
wealth (from the war booty he gained) during the holy battles he took part in, in the
company of the Prophet, Abu Bakr, 'Umar, and 'Uthman. ('Abdullah bin Az-Zubair added:)
When I counted his debt, it turned to be two million and two hundred thousand. (The subnarrator added:)
Hakim bin Hizam met Abdullah bin Zubair and asked, "O my nephew! How much is the
debt of my brother?" 'Abdullah kept it as a secret [fakatamahu] and said, "One hundred
thousand," Hakim said, "By Allah! I don't think your property will cover it." On that
'Abdullah said to him, "What if it is two million and two hundred thousand?" Hakim said, "I
don't think you can pay it; so if you are unable to pay all of it, I will help you." Az-Zubair
had already bought Al-Ghaba for one hundred and seventy thousand. 'Abdullah sold it for
one million and six hundred thousand. Then he called the people saying, "Any person
who has any money claim on Az-Zubair should come to us in Al-Ghaba." There came to
him 'Abdullah bin Ja'far whom Az-Zubair owed four hundred thousand. He said to
'Abdullah bin Az-Zubair, "If you wish I will forgive you the debt." 'Abdullah (bin Az-Zubair)
said, "No." Then Ibn Ja'far said, "If you wish you can defer the payment if you should
defer the payment of any debt." Ibn Az-Zubair said, "No."
'Abdullah bin Ja'far said, "Give me a piece of the land." 'Abdullah bin AzZubair said (to
him), "Yours is the land extending from this place to this place." So, 'Abdullah bin AzZubair sold some of the property (including the houses) and paid his debt perfectly,
retaining four and a half shares from the land (i.e. Al-Ghaba). He then went to Mu'awiya
while 'Amr bin 'Uthman, Al-Mundhir bin Az-Zubair and Ibn Zam'a were sitting with him.
Mu'awiya asked, "At what price have you appraised Al-Ghaba?" He said, "One hundred
thousand for each share," Muawiya asked, "How many shares have been left?" 'Abdullah
replied, "Four and a half shares." Al-Mundhir bin Az-Zubair said, "I would like to buy one
share for one hundred thousand." 'Amr bin 'Uthman said, "I would like to buy one share
for one hundred thousand." Ibn Zam'a said, "I would like to buy one share for one
hundred thousand." Muawiya said, "How much is left now?" 'Abdullah replied, "One share
and a half." Muawiya said, "I would like to buy it for one hundred and fifty thousand."
'Abdullah also sold his part to Muawiya six hundred thousand.
When Ibn AzZubair had paid all the debts. Az-Zubair's sons said to him, "Distribute our
inheritance among us." He said, "No, by Allah, I will not distribute it among you till I
announce in four successive Hajj seasons, 'Would those who have money claims on AzZubair come so that we may pay them their debt." So, he started to announce that in
public in every Hajj season, and when four years had elapsed, he distributed the
inheritance among the inheritors. Az-Zubair had four wives, and after the one-third of his
property was excluded (according to the will), each of his wives received one million and
two hundred thousand. So the total amount of his property was fifty million and two
hundred thousand." [Sahih al-Bukhari, Volume 4, Book 53, Number 358]
Reading this rather long hadith, I found it quite interesting and illuminating as well as a few aspects
rather puzzling. First, obviously, Az-Zubair was regarded highly trustworthy and hence people used
to come to bring some of their money to deposit with him for safekeeping. However, the first thing
one notices is Az-Zubair’s anxiety: “My biggest worry is my debts [dayni]. Do you think, if we
pay the debts, there will be something left for us from our money?"
One can’t but wonder, why would he be in such anxiety? Did he not have any record of
all the deposits and what has been done with those deposits? Receiving deposit as a
very trustworthy person and not having adequate record keeping is unthinkable. At the
same time, if the records were kept, the worry and anxiety seem unwarranted. How can
this anomaly be explained?
Second, he was concerned that his estate might not cover his liabilities and he explained
to his sons how he used to appeal to Allah to help him in regard to the debts. He said:
"By Allah, whenever I had any difficulty regarding his debts [ma waqa'tu fi kurbatin min
daynihi], I would say, ‘Master of Az-Zubair! Pay his debts on his behalf [aqda 'anhu
daynahu]’ and Allah would (help me to) pay it.”
When he is supplicating – “whenever I had any difficulty regarding “his” debts - it is quite
confusing as to who this “his” is. Then, his supplication – “Pay his debts on his behalf” –
is further confusing. If Az-Zubair is referring to his own liabilities to the depositors, to
describe that as “his debt” [daynahu] in the supplication does not make any sense.
Third, as per his own prognosis, he became martyred without leaving any liquidity. “AzZubair was martyred leaving no Dinar or Dirham but two pieces of land, one of which was
(called) Al-Ghaba, and eleven houses in Medina, two in Basra, one in Kufa and one in
Egypt.”
Does this make any sense? If the deposits with him are to be regarded as the basis for
IFIs bank deposits, then how in the world he had no liquidity at all and all of his assets
were in real estate, usually an asset category of relatively low liquidity. Even if one
assumes that depositors did not use to withdraw from him even occasionally or except
with advance notice, does it make any sense to have such high level of deposits without
any liquidity whatsoever?
Fourth, the hadith explains that people used to bring money to him as deposit as trust
[yastaudiyuhu], from which one can derive the connection of “wadiah” - A safe custody
contract between the depositor (customer) and the custodian (bank). “In fact, the source
of the debt which he owed was, that if somebody brought some money to deposit with
him [anna-r rajula kaana ya'tihi bil maal fayastaudyuhu iyyahu]. Az Zubair would say, ‘No,
(i won't keep it as a trust), but I take it as a debt [lakinnahu SALAF], for I am afraid it
might be lost.’"
Curiously, this hadith clearly mentions that he was reluctant to receive the deposit as
“trust” or “wadiah”. Instead, he wanted to accept those deposits as debt or liability, which
also meant that he could utilize the deposits at his discretion. It is interesting that he was
concerned that he might lose the deposit (taken as trust). However, he was willing to
accept the deposit and invest at his discretion, which also involves risk and potentially
much greater risk (of course, with the potential for return as well). Using this hadith as a
basis for bank deposits in IFIs’ “wadiah” would mean that banks would take the deposits
as liabilities with complete discretion, including investment with significant potential for
profit or loss.
Fifth, the hadith does not use the word “qard”, but salaf. According to the State Bank of
Pakistan (SBP), the latter is defined as following:
Salaf or Loan/Debt
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.102
The above definition, about which of course there is no universal agreement, distinguishes salaf
from qard. The former is for fixed periods for varying duration and it can’t be called back before it
is due. Thus, this hadith cannot be the basis for bank deposits, especially the demand deposit,
payable on demand by the depositors. Quite interestingly, State Bank of Pakistan defines qard as
following: “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.”
Once again, SBP defines qard as “payable on demand”, but Az-Zubayr’s arrangement for
the deposits were on the basis of salaf, which can’t be called back “before it is due.” So,
where is the shar’i proof that (a) bank deposits can be categorized as “qard al-hasana”
and (b) qard al-hasana is payable on demand?
Sixth, when the son of az-Zubair kept the actual level of the debt a “secret” – and some
may regard this as lying - some of Az-Zubair’s close friends offered to help.
Hakim bin Hizam met Abdullah bin Zubair and asked, "O my nephew! How much
is the debt of my brother?" 'Abdullah kept it as a secret [fakatamahu] and said,
"One hundred thousand."
Of course, Az-Zubair’s estate did not need any help and the offers of discounting,
forgiveness or rescheduling of the loan was declined by az-Zubair’s designated son. One
has to conclude here that these offers were Islamically valid. Otherwise, there would be
some indication in the hadith about their unacceptability. Ultimately, the debts were
adequately covered by the liquidation of a portion of az-Zubair’s estate (al-Ghaba, to be
specific). However, can we accept bank deposits to be handled on the basis of the
depositor’s generosity or graciousness? Once again, this part of the hadith and the
specific circumstances does not apply to the modern banking arrangements.
Lastly, upon payment of those specific debts, Ibn Az-Zubair held the estate from
inheritance distribution and decided to publicly announce during hajj if there was still
102
“Glossary on Islamic Banking” http://www.sbp.org.pk/departments/ibd/glossary.pdf
anyone who had deposits with az-Zubair. Unquestionably, this step was a reflection of
the highest integrity and God-consciousness on the part of Ibn az-Zubair. However, could
all these deposits be based on only oral communication? Obviously, either there was no
record, or he maintained inadequate record. Otherwise, why would there be any
necessity for public announcements and withholding the distribution of inheritance for
such a long period of time? Thus, even though his son’s effort to ensure that all the
creditors are repaid is most noble and praiseworthy, it still leaves the question as to how
could such large number of people feel comfortable to entrust their deposits with azZubair and he accepting those, without adequate (or even no) record-keeping?
Banking practices regarding Qard al-Hasanah
While qard al-hasana is for the needy, one should not misunderstand that just any needy
person can walk up to an Islamic bank and seek qard al-hasana. The practices widely
vary in different banks.
“Most of the Islamic banks also provide interest free loans (Qard Hasan) to their
customers. If this practice is not possible on a significant scale, even then, it is adopted at
least to cover some needy people. Islamic view about loan (Qard) is that it should be
given to borrower free of charge. A person is seeking a loan only if he is in need of it. ...
The practices of various Islamic banks in this respect differ. Some Islamic banks provide
the privilege of interest free loans only to the holders of investment account with them.
Some extend to all bank clients. Some restrict it to needy students and other
economically weaker sections of the society. Yet some other Islamic banks provide
interest free loans to small producers, farmers and entrepreneurs who are not qualified to
get finance from other sources. The purpose of these loans is to help start them their
independent economic life and thus to raise their incomes and standard of living.” 103
Sudin Haron describes the wide variation in various Muslim-majority countries in terms of the
model of their respective deposit structure.
“There is no standardised Sharia principle used by all Islamic banks in delivering deposit
facilities. In the case of current accounts for example, Iran and Kuwait use the principle of
qard hassan whereas other countries such as Bangladesh, Jordan, Bahrain and Turkey
use the principle of wadiah. For savings accounts, Iran uses the principle of qard hassan
whereas in Kuwait, both the principles of qard hassan and mudaraba are applicable for
these accounts. The principle of qard hassan is applied for the uninvested portion of
funds in the savings accounts and the principle of mudaraba is for the invested portion. In
Malaysia, savings accounts are governed by the principle of al-wadiah yad dhamanah or
guaranteed custody. Islamic banks in some Muslim countries ( Bangladesh, Jordan,
Kuwait, Pakistan and United Arab Emirates) use the principle of mudaraba for their
savings accounts facility. As for the investment accounts facilities, the principle of
mudaraba is the only principle used by the Islamic banks in all countries.” 104
One may wonder why so much variation and when all these are presented as Shariah-compliant,
what is the basis or dalil from the primary sources in Islam about such matters. Only when such
questions are raises, one finds the paucity of concrete or solid grounding of these matters in
Shariah. Contrary to the claim that IFIs are distinctive based on Islam, as Sudin Haron
“A Glossary of Islamic Banking Terms”
Sudin Haron. “A Comparative Study of Islamic Banking Practices,” King Abdulaziz University
document center; available online.
103
104
acknowledges: “In most cases, the operational aspects and practices of these deposit facilities
are similar to practices of conventional bank deposit facilities.” 105
Banking practice also varies whether qard al-hasana type loans are treated as payable on
demand or payable as possible by the borrower. Also, some banks require recovery of
administrative cost of qard al-hasana through service charge, while others do not.
“Loan financing takes the form either of qard al-hasanah loans given on compassionate
grounds free of any interest or service charge (repayable if and when the borrower is able
to repay) or of loans with a service charge.” 106
Some banks, as in Iran, categorize all deposits, demand and savings, as qard al-hasana, while
others treat only demand deposit as qard al-hasana.
“The law allows the banks to accept two types of deposits, viz., qard al-hasanah deposits
and term investment deposits. The qard al-hasanah deposits comprise of current as well
as savings accounts which differ in their operational rules.”107
Legally defining and structuring current deposits as qard al-hasana or wadiah is common. Neither
of these should have any stipulated return. However, many IFIs regularly come up with alternative
ways to reward the depositors. Iran, a country with system-wide ban on interest, as well as many
IFIs, including HSBC, treat deposits as qard al-hasana and regularly offer gifts and benefits that
are publicly disclosed. It is not demanded by the depositor on a contractual basis, and thus it is
technically not riba, but it is nothing but a form of hiyal (legal stratagems or artifices to circumvent
the spirit of the Islamic commandments or guidance).
“When deposit products are modeled after wadiah or qard, the customer does not
participate in any way in risk. The nominal value of deposits is not allowed to decline if
the bank incurs losses instead of profits. As we have discussed above, banks invariably
provide gifts or bonus – in cash and in kind and various other benefits to the depositor.
These constitute reward for the depositor. However, is such a reward Islamically
admissible given that the depositor is not exposed to any risk? The answer to this
question is somewhat tricky. On the one hand, the excess or expected return is not
contractual in nature. The bank is under no obligation to provide a return and the return is
purely in the nature of gift. Gifts, by definition, do not constitute riba.
At the same time, you may note that classical scholars have generally frowned upon gifts
that accompany such deposits or loans. Even while the returns in the form of gifts are not
part of the agreement, these may be recurring in nature. When the bank provides such
gifts at a certain rate on deposits without fail, the customer would now have a clear
expectation of returns. He/she would expect returns without bearing any risk. This comes
dangerously close to devouring riba. As ... in case of the HSBC Interest-Free Services ...
the depositor receives a host of benefits that are contractual in nature and come with
deposits or qard. Can these be justified simply as withdrawal mechanisms that provide
for the right of the lender to seek partial or full redemption of his loan or that of the
depositor to seek withdrawal of his/ her deposits any time?”108
If it is assumed that the borrower can pay extra on a voluntary basis, then treating deposits as
qard al-hasana allows the banks (as the borrowers) to pay extra to the depositors (lenders).
105
Sudin Haron. op. cit., online.
Ziauddin Ahmad. op. cit., p. 35.
107 Ziauddin Ahmad. op. cit., p. 37.
108 Mohammad Obaidullah, op. cit., pp. 54-55.
106
“Unlike savings account facilities at conventional banks, where depositors are automatically
rewarded upon placement of their funds, rewards to savings account holders are dependent
on the Shariah (Islamic laws) principles which are adopted by Islamic banks when offering this
facility. When wadiah (trusteeship) or qard hassan (benevolent loan) are used, the returns are
entirely at the discretion of the banks.”109
If this extra is essentially comparable to the rate of return earned on fixed deposits, then this is
nothing but hiyal (legal artifice) to get around the prohibition. The traditionalists generally do not
approach these matters from the perspective that our understanding of the prohibition might be
problematic.
A major problem with applying qard al-hasana approach to bank deposits or loans is that in case
of loans under this rubric, the Qur’an specifically commands that if the borrower faces difficulty in
repayment, the lender must be charitable (for the sake of Allah) to reschedule the debt or even
forgive it in part or whole.
“If the debtor is in a difficulty, grant him time Till it is easy for him to repay. But if ye remit
it by way of charity, that is best for you if ye only knew. [2/al-Baqarah/280]
Thus, as clearly specified in the Qur’an, qard al-hasana concept is not consistent with any
guarantee. That means that if the IFIs took in deposits or extended loans as qard al-hasana, and
either side defaulted, in light of the Qur’anic guidance, the lender has to be generous and lenient.
“Different nations apply different principles with references to qard hassan and wadiah.
When demand deposits are viewed as benevolent loans then the qard hassan principle is
applied. This means the depositor cannot demand it back and should not expect any
returns. In the unlikely event that the money is lost in a bad investment the depositor has
no legal recourse and must write off the sum.”110
However, the IFIs neither can expect the depositors to deposit nor they can offer loans to the
customers (or others) as qard al-hasana without some kind of guarantee, especially when they
also have to compete with conventional banks. So, regardless of clear Qur’anic verse, they
guarantee the deposit.
“In practice, Islamic banks provide guarantee to return the full amount of deposits placed
by customers in accounts even though the facilities operate on qard hassan or
wadiah.”111
A fundamental problem in assessing these terminologies is that bank in Islamic finance is not like
banks elsewhere, and similarly commonly used terms, such as deposit, are not used in the same
sense either.
If the clients of Islamic banks want a return on their money, they must pay into investment
accounts (also called ‘participation accounts’ or ‘PLS [profit and loss sharing] accounts’).
However, credit balances on these accounts are not deposits in the conventional sense.
The returns are not fixed in advance; the clients participate by a certain percentage in the
financial results of the utilization (investment) of their funds by the bank. These results
could be, at least in principle, negative (i.e., a loss). Then the clients have to bear a part
109 Sudin Haron. “The effects of management policy on the performance of Islamic banks,” Asia Pacific
Journal of Management. Singapore: Oct 1996.Vol.13, Iss. 2; pg. 63-76.
110 V.K. Arasan. “Rise of of Islamic Banking – Problems and Prospects,” Online document at the
European Association of University Teachers in Banking and Finance, University of Siena, Italy, undated.
111 Sudin Haron, op. cit., online.
of the loss; this reduces the nominal value of the credit balances of their investment
accounts. In such a case, the clients could not claim a full repayment of the money paid
in. The full repayment, however, is constituent for a deposit in the strict sense. 112
Conclusion
The purpose of this essay was to explore the topic of qard al-hasana and some widespread
misinterpretation and misunderstanding about it. According to the Qur’an, qard al-hasana is
essentially any kind offering or sacrifice in the path of Allah. It also covers a charitable or
benevolent loan, where the lender offers the loan without any intention or desire to benefit, except
blessing in this world and hereafter from Allah. However, even though the Qur’an does not
associate the concept of the qard al-hasana with any business transaction, in traditional Islamic
law all kinds of qards (loans) were equated with qard al-hasana. Similarly, even though hadith
does not use the term qard al-hasana at all and the Qur’anic prohibition of riba is linked with the
issue of injustice and exploitation, in absolutist legalism, riba has been defined in terms of any
“stipulated excess” delinking it from the Qur’anic maqasid (intent). Thus, the Qur’anic verses
could not be used as the basis for a blanket prohibition of interest, and consequently, hadith was
used to come up with riba al-fadl. Curiously, nowhere in hadith riba al-fadl is discussed in the
context of loan. Instead, it involves barter, trade, or sale.
As has already been explained in this essay with references to more detailed exposition of the
related topics, it is not the “excess” in loan that is in contention. According to traditional Islamic
law not any “excess”, but only “stipulated excess” is prohibited. However, there is nothing in the
Qur’an or in hadith (in words of the Prophet or in actual events involving the Prophet) that
provides the evidence that “stipulation” makes a loan transaction prohibited. Thus, the issue of
excess (al-fadl) and its stipulation were projected back to qard al-hasana, equating with qard,
available only on a charitable basis, and describing it as “interest-free” loan.
This misinterpretation, on one hand, constrained or handicapped the IFIs to categorize demand
deposits from Islamic viewpoint. At the same time, the same misinterpretation provided an
opening for the IFIs to categorize demand deposits as qard al-hasana, which is acknowledged as
rather unique usage of the term.
“... the term ‘Qard al-Hasanah deposit’ is used to denote demand deposits. This use of
the term is unique and permits the banks to utilize these deposits as if they were the
banks' own resources. They earn no return and are treated as if they are interest-free
loans made by the depositors to the banks, with the understanding that the depositors
are aware that the bank is using these deposits but that the depositors can withdraw
them at will.”113
How can they justify from Islamic viewpoint receiving deposits without paying any return and also
being able to appeal to the depositors to feel Islamically inclined to use the service of IFIs? Thus,
some IFIs categorize demand deposits as qard al-hasana (or as interest-free loan) to the bank,
payable on demand. This actually may expose the IFI depositors to relatively greater risk. As one
of the IFI experts Munawar Iqbal, Chief, Islamic Banking and Finance Division of Islamic
Development Bank (and coauthor Philip Molyneux) reveals:
“Since the current deposits are in the nature of loans to the bank, they are not entitled to
any return. In theory, the principal is guaranteed but, in the absence of any deposit
112
113
Volker Nienhaus, op. cit., pp. 130-131.
Mohsin Khan and Abbas Mirakhor, op. cit., online.
insurance, these deposits are exposed to more risks than in the case of conventional
banks. The rights of current deposit holders need special treatment.”114
Even with guarantee of demand deposit there might be additional risk, if there are major
underlying conditions that unfold as a crisis.
“Even though demand depositors are not exposed directly to the risks of banking
business, they may be exposed indirectly if the losses suffered by banks on their PLS
advances are substantial and the capital and reserves plus investment deposits are not
sufficient to cover them. This is unlikely to happen except in extreme circumstances when
a substantial proportion of investment deposits has been withdrawn. Such withdrawals
may take place due to a number of reasons, including the spread of correct information or
rumours about the performance of the bank itself or other banks. Hence it is necessary
not only to have a strong capital base for Islamic banks to provide an adequate safety net
but also to adopt some effective strategy that would help prevent the risks of investment
deposits from being transferred to demand deposits.” 115
Thus, it is not surprising that IFIs’ need for maintaining depositors confidence through better
protection and guarantee of deposits in general and demand deposit in particular is now being
confronted and measures similar to the conventional banking system are being instituted. Many
of these measures have nothing to do or are well beyond the scope or parameters of the
traditional understanding of qard or qard al-hasana. Some recommendations for capital adequacy
of IFIs, which are already adopted by some banks and under consideration by others, are: “Giving
a share of profits to demand depositors; paying a rate of return that is closely related to LIBOR;
relying excessively on sales-based modes; and free entry and exit of depositors.”116
However, do the depositors know about such risk? Also, do the depositors know or feel that by
depositing their money they are actually offering qard al-hasana to the banks? Where is the
charitable aspect or “need” of the borrower? Just as injustice or exploitation aspect as the intent
(maqasid) has been delinked from riba in equating it to interest in a blanket manner, treating
demand deposit as qard al-hasana is another glaring illustration of delinking a guidance of Islam
from its maqasid. Also, where is the dalil that qard al-hasana is payable on demand?
Other IFIs have categorized demand deposits as “wadiah”, a guaranteed deposit, where the
hadith of az-Zubair is quoted by some Shariah scholars as the dalil.117 However, as illuminated
above, that hadith, even though from Sahih al-Bukhari, is full of anomalies and it explicitly
mentions that az-Zubair has been reluctant to accept the deposits as “trust”. Instead, he wanted
to accept the deposits as “debt” and then having complete discretion about the use of the
deposited fund. Moreover, his transactions were based on salaf, fixed duration loans, while
demand deposits are payable on demand. None of these aspects corresponds to bank deposits
as understood and practiced by the banking institutions, conventional or Islamic. Also, the only
way the concept of qard al-hasana (or qard) can be related to the case of az-Zubayr is by
delinking the charitable/need aspect of qard al-hasana.
As explored in this essay, equating qard al-hasana with qard is based on the definition of riba as
“stipulated excess”, where the prohibition then is extended backward to interest on loans.
However, as there is problem with the riba-interest equation and reductionism, such projecting
back the notion of interest-free loan to qard or qard al-hasana begs serious questions, the most
important of which are: (a) What is the Islamic evidence that qard al-hasana is necessarily
114
Munawar Iqbal and Philip Molyneux. op.cit, p. 121.
M. Umer Chapra and Tariqullah Khan. “Regulation and Supervision of Islamic Banks,” IDB Islamic
Research and Training Institute, Occasional Paper #3, Jeddah, Saudi Arabia, 2000, p. 13.
116 ibid., p. 49, n#52.
117 See note #86 above.
115
payable on demand? (b) Where is the evidence that “stipulation” of excess renders a loan
contract unislamic or prohibited? And (c) What is the evidence that loan (qard) should be
classified as ribawi?
The answer to the first questions is that there does not seem to be any evidence. The answer to
the second question is that analysis of all the evidences offered in this regard does not add up to
support the claim that “stipulation” of excess renders a loan contract unislamic or prohibited. As
far as the third question, hopefully, it has been adequately addressed in this essay that there is
serious problem with the position that qard or loan is ribawi.