Application n Misapplication

Electronic copy available at: http://ssrn.com/abstract=1418202

Qard Hasan, Wadiah/Amanah and Bank Deposits:

Applications and Misapplications of Some Concepts in Islamic Banking

Dr. Mohammad Omar Farooq

Royal University for Women [email protected]

Paper presented at Harvard Islamic Finance Forum April 19, 2008

Cambridge, MA

[Feedback welcome; at the time of presenting this paper, the author was at Upper Iowa University, USA]

Electronic copy available at: http://ssrn.com/abstract=1418202

This essay on qard evolved in the context of an online discussion on IBFnet,1 the leading online

forum on Islamic finance and banking. Hifzur Rab 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."

2 In

reply I posed a question whether the expression qard al-hasana occurs in hadith.3 In reply Mark

Robbani wrote: "Since Riba is forbidden, any mention of 'Qard' in hadith automatically implies a Riba-free loan (i.e. Qard-al-Hasana)."

4 The views about Qard hasan as expressed above reflect

the traditional position.

However, are qard and qard hasan synonymous? Is qard hasan for non-charitable purpose as well? The issue has become critical as concepts such as qard hasan, wadiah, amanah, etc. are lent to shaping of banking aspects, such as demand deposits (or even deposits in general). Is there justification and textual evidence (dalil) to consider demand deposits in Islamic Financial Institutions (IFIs) as qard hasan to the banks? Is there Islamic evidence that qard hasan is payable on demand by the lender? More importantly, is there basis to subject qard to the blanket prohibition of riba and categorize as well as define qard or qard hasan as “riba-free” or “interest-free” loan? A closer look at these issues reveals that some traditionally held views are not quite borne by the two primary sources of Islam: the Qur’an and the sunnah (hadith).

5 The purpose of this essay is

to explore the pertinent material about qard and qard hasan to identify some of the possible misinterpretations and misunderstandings. Even though the primary focus of this essay is qard hasan and qard, two other concepts, wadiah and amanah, will also be briefly discussed, as some IFIs define deposits in terms of wadiah or amanah. By using these Islamically-nuanced terms, the IBF movement has transcended the issue from polemical to practical. However, another important dimension should be noted at the outset. All interest-based loans lose Islamic legitimacy when qard is equated with interest-free loans. Due to the legal implication that an Islamic society may enforce the ban on interest-based loans even at a personal level, people can be denied access to interest-based loans or loans with any “stipulated excess” when they genuinely need it. When interest-free loans are unavailable, those resorting to interest-based loans would thus, from the traditional viewpoint, commit a sin as well as violate the law. Thus, the issue is relevant to both institutional and personal levels. For those who believe that the final words about qard or qard hasan have already been spoken from the Islamic perspective, this essay might not interest them. However, for other Muslims with an open mind and commitment to due diligence in learning about and understanding of issues of importance – instead of deferring such matters to venerable scholars, particularly from the past – what is presented here might be worthwhile.

The pitfall of sweeping generalization

1 http://finance.groups.yahoo.com/group/ibfnet. Access to and participation in the forum requires

free subscription. 2 Message #5566, October 10, 2006. (http://finance.groups.yahoo.com/group/ibfnet/message/5566)

He has authored an e-book on Riba, which is available for download from his site, http://www.hazariba.com.. 3 Message #5573, October 10, 2006. (http://finance.groups.yahoo.com/group/ibfnet/message/5573)

4 Message #5601. (http://finance.groups.yahoo.com/group/ibfnet/message/5601) Director, Institute

of Islamic Finance, Essex, England. (http://www.insif.org/) 5 Sunnah and hadith are not synonymous. However, particularly since the time of Imam Shafi’i, the

founder of the Shafi’i school of jurisprudence, there has been rather broad agreement that hadith must be the basis for authentication of any sunnah. Therefore, the particular textual source for sunnah is hadith.

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 use the word riba so sweepingly, 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,

6 “Not all interest is the prohibited Riba, ... [and] Not all Riba is

interest.”7

The Qur'an forbids al-Riba in a special sense from the Islamic perspective. The Qur'an categorically and unambiguously prohibits riba. However, as it is known and widely acknowledged, the Qur'an does not define 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 enable us to determine a clear idea of what is riba.

8

However, as I presented on IBFnet before, even with all the hadith about riba combined, 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.

9

Also, since even some of the sahabas, such as Ibn Abbas, believed that riba applied only to nasia' (deferment), implication that those sahabas didn't regard riba al-fadl as impermissible, any such sweeping claim that riba is haram is misleading, and it engenders confusion among Muslim masses.

The issue of Qard and Qard Hasan

In the context of the specific online exchange, this sweeping mentality next lent itself over to qard, which to Robbani, has to be riba-free (meaning, interest free), because riba is prohibited. Of course, his is not an isolated view. Rather, it is traditional or prevalent. However, the simplest problem with such assertion is that if Allah means qard when he is using qard al-hasana, why is this redundant expression hasan? 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]?

10

Indeed, if qard is qard hasan or vice versa, then Allah simply used the latter expression without any special or useful meaning. In other words, we couldn’t lose anything by eliminating the added qualifier, or disregarding it altogether. Is that what Muslims should conclude about Allah's communication? But before we delve into a detailed analysis, let us acknowledge the traditional understanding of qard, which is frequently synonymous with qard hasan. Presented below are some of the rules and applications that are stated by various IFIs and other relevant sources, presumably, in

6 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. (http://elgamal.blogspot.com/)

7 “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.

8 Abdulkader Thomas (ed.). Interest in Islamic Economics [Routledge, 2006], p. 127.

9 Mohammad Omar Farooq. "Riba, Interest and Six Hadiths: Do We Have a Definition or a

Conundrum?" [Forthcoming, Review of Islamic Economics, 2009). 10

The Qur’an/3/ale Imran/7; trans. "of established meaning”, A. Yusuf Ali, "clear revelations", Pickthall; "decisive", Shakir].

accordance with the approval of their shariah-advisors or advisory boards. Of course, beyond stating these rules, rarely do such sites provide any proof or dalil. Also, on most such issues at the detailed level, we should expect wide opinion variation among Muslims; most such details about Islamic finance and banking are merely human interpretations. a. Qard Hasan 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.”

11

“Qard (interest-free loan): a charitable act and not a business transaction.”

12

“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).”

13

Qard al-Hasana is: “An interest-free loan given mainly for welfare purposes. The borrower is only required to pay back the amount borrowed.”

14

11

Mohsin S. Khan and Abbas Mirakhor. “Islamic Banking: Experience in The Islamic Republic of Iran and in Pakistan,” Economic Development and Cultural Change, January 1990; available online. Abbas Mirakhor, IMF Executive Director, and Mohsin Khan, Director of the IMF Institute, are the 2003 prize wnners 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.]

12 Imran Ahsan Khan Nyazee, “Islamic Law of Persons Glossary”.

(http://www.nyazee.com/islaw/personal/personal.html) 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. (http://www.amalpress.com/index.php?l_dis=our_authors&action=open&id=57)

13 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 may not be additive 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. (http://globalwebpost.com/farooqm/writings/islamic/maududi-faisalprize.htm)

14 “A Glossary of Islamic Economic Terms.”

(http://islam.worldofislam.info/index.php?option=com_content&task=view&id=461&Itemid=62)

Except when brought up in the context of Islamic banking and finance, qard hasan is consistently described and understood as an act of benevolence toward those who are in need or in difficulty, but generally are expected to be able to pay back. A person in qualified need, who is not expected to be able to pay back, is deserving of either zakat (mandatory alms for individuals with certain level of wealth or nisab) or sadaqah (charity). 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.

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.

15

Notably, the issue of the traditional legitimacy or acceptability of extra payment revolves around whether the extra is stipulated in the original contract or not. If stipulated, it is regarded as riba; if not, then it is regarded alright as a gesture of gratitude from the borrower (but it must not be expected by the lender).

c. Current accounts of IFIs are treated as qard hasan or qard (alternatively, as wadiah/amanah)

Qard al-Hasana: “Deposits whose repayment in full on demand is guaranteed by bank.”16

“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.”

17

“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.”

18

[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

15

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.

16 Ziauddin Ahmad. “Islamic Banking: The State of the Art,” IDB Islamic Training and Research

Institute, 1994. (http://www.irtipms.org/OpenSave.asp?pub=64.pdf) 17

Mabid Ali Al-Jarhi and Munawar Iqbal. "Islamic Banking: Answers to Some Frequently Asked Questions," IDB Occasional Paper #4, 2001, p. 17.

18 ibid., p. 23.

agents’ fees payable to banks, and (iii) according priority in the use of banking finances.”

19

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 ....”

20

Just as in most other cases, opinions differ in this regard as well. Those who consider demand deposit as amanah or wadiah (trust) often insist on 100 percent reserve requirement. Those who regard demand deposit as qard hasan 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 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.

21

Mohammad Obaidullah explains his perspective why the amanah approach to deposits is not acceptable, and why those should be 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.

22

According to Obaidullah, deposits cannot be treated as amanah, but those 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.

23

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.”

24 Notably, there is 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.”

25

19

Iqbal and Molyneux, op. cit., p. 41. 20

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.

21 Ziauddin Ahmad. op. cit., p. 17.

22 Mohammad Obaidullah, op. cit., p. 44.

23 ibid., p. 45

24 Ausaf Ahmad, “Contemporary Practices of Islamic Financing Techniques,” IDB Islamic Research

and Training Institute, Research Paper #20, 1993. 25

Mohammad Hashim Kamali. Principles of Islamic Jurisprudence [Islamic Texts Society, 3rd Ed., 2003], p. 335.

However, one need 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.

26

Readers must be reminded that, just because some scholars treat amanah differently from wadiah or qard, one may not deduce 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.

27

Amanah = refers to deposits in trust; Wadiah = safekeeping

28

Then, others in the Islamic finance industry even distinguish different types of wadiah, where wadiah and amanah are mixed up. This is particularly poignant for 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.

29

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.

30

Because many of these notions are not discussed in public domain with corroboration or basis, I contacted some personal sources to obtain further information. One such contact is Shah Abdul Hannan, former Chairman, Islami Bank Bangladesh Limited (IBBL). He obtained the following clarification

31 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

26

ibid., p. 45. 27

IBFnet. “Further Grounds for Justifying an Islamic Model of Life Insurance Policy,” undated. (http://islamic-finance.net/islamic-insurance/t-family/furthergrounds.html)

28 Islamic Finance Training. Glossary. (http://www.islamicfinancetraining.com/glossary.php)

29 Islamic Banking and Finance Institute Malaysia. “Glossary”.

(http://www.ibfim.com/index.php?option=com_content&task=view&id=32&Itemid=48) 30

Mohammad Obaidullah, op. cit., p. 50. 31

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.

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.

I was most interested to find explicit textual proof (dalil) for such concepts to apply to modern banking concepts. The clarification of Maulana Doha mentioned a hadith as follows:

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’]

Two notable points. First, this hadith is weak (da’if). About this hadith 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 the basis of good faith, or best effort. 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'an 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]

Noticeably, the clarification cites no textual proof (dalil) for that guarantee. Rather, it suggests that it is “fair.” The cited Qur’anic verse on amanah neither states nor implies any guarantee based on legal injunction. Of course, Islam takes trust very seriously and the Qur’an warns us about 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 seeks out or solicits amanah or trusts from others. Rather, based on the trustworthiness and integrity of the trustee, people seek such service as sort of a 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 such guarantee. To legally require of banks to offer such guarantee as part of any modern national banking system would be inconsistent with this hadith. The hadith makes no distinction whether the trustee accepts the trust with or without the consent of the depositor, to use the fund as the trustee wants. An argument can be made that since banks are commercial enterprises involved in financial intermediation, and as such, different from the trustees mentioned in the hadith, could the banks be not treated differently so that they could be required to guarantee? They definitely can and

should be required, but the point is that such requirement can’t be justified based on the particular cited hadith or other textual evidences generally cited for this.

It seems that wadiah account is more popular with the IFIs than qard hasan 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.

32

It should be noted that qard hasan 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 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.

33

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.

34

Notably, even in these profit-oriented models, there is room for qard hasan.

... 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.

35

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

32

Mohammad Obaidullah, op.cit., p. 50. 33

ibid., p. 128. 34

ibid., p. 128 35

ibid., p. 139

bank for investment and other purposes. Obviously it has to be paid back to you, in full, on demand.

36

Qard al-hasana: “Deposits whose repayment in full on demand is guaranteed by the bank.

37

It should be noted that current account (or demand) deposits are payable on demand is understood. That’s standard practice of a modern banking system. Thus, both the bank and anyone depositing at the bank as demand deposit understand 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, as shown below.

Demand deposit: “A deposit that can be withdrawn at any time, and which has no fixed maturity date.”

38

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 not reserve the right to require at least 14 days written notice of intended withdrawal. Commonly takes the form of a checking account.”

39

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.”

40

Definition and understanding of demand deposit are quite uniform around the world, and nowhere is any notion of “loan” attached to demand deposit.

41 Thus, how can demand deposits be defined

in terms of qard hasan? Or, how can the definition of qard hasan in general have “payable on demand” feature, without any qualifier or exception? Do the depositors of IFIs realize that they are giving “loans” to their 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.

42

36

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. (http://www.islamic-bank.com/islamicbanklive/IslamicTerms/1/Home/1/Home.jsp)

37 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. 38

Canada Deposit Insurance Corporation. Glossary. (http://www.cdic.ca/?id=106&descid=39) 39

Federal Reserve Bank, Cleveland, Glossary. (http://www.clevelandfed.org/Research/Glossary/demandep.htm)

40 Ludwig Von Mises Institute, “Mises Made Easier” (http://www.mises.org/easier/D.asp)

41 For further examples, see Trinidad and Tobago Deposit Insurance Corporation

(http://www.dictt.org/depositor_resources/index.php?pid=3005); TIAA-CREF, Investment Glossary (http://www.tiaa-crefbrokerage.com/invest_glosry_DegDh.htm); United Nations ODC, Glossary (http://www.unodc.org/unodc/money_laundering_glossary.html#D) ; FAO Glossary of Terms for Agricultural Insurance and Rural Finance. (http://www.fao.org/ag/AGS/subjects/en/ruralfinance/pdf/glossary_e.pdf)

42 Munawar Iqbal and Philip Molyneux. Thirty Years of Islamic Banking: History, Performance and

Prospects [Palgrave, 2005], p. 39.

Such flexibility in repayment is only on the loan side of the bank, where a borrower (qard hasan term) in difficulty might be offered some reprieve. However, there might not be too many pious Muslim depositors anxious to make deposits even to “Islamic” banks, if they understood that their deposits are “loans” to these IFIs and, based on the concept of qard hasan, 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.

43

As indicated above, salaf is generally regarded as a loan for a fixed period. However, a survey of the variations in the usage of the term is quite confusing.

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.

44

Thus, while a distinction between qard hasan and salaf might seem simple to make – the former is viewed as a loan “payable on demand” whereas the latter is for fixed periods. However, when salaf is used in the sense of salam, it becomes merely a short-term loan, where advance 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.

45

In many cases, salaf is not described as loan at all. Instead, it is defined outright as a trade-related 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.

46

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

43

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.

44 IMF, “Islamic Banking,” Appendix to “Monetary and Financial Statistics Manual September 2000,

online document. (http://www.imf.org/external/pubs/ft/mfs/manual/pdf/mmfsap2.pdf) 45

State Bank of Pakistan, op. cit., online. 46

Ziauddin Ahmad, op. cit., p. 6, p. 38.

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.

47

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.”

48

Banking.com defines loan as follows: “Loan: A business contract by which a borrower and lender enter into an agreement. Loans are classified according to the lender or borrower involved, whether or not collateral is required, the time to maturity, conditions of repayment, and other variables.”

49

Obviously, loan is not understood in terms of a trade or contract involving commodities. Thus, loans being categorized into “payable on demand” (qard hasan) and salaf, and then also considering salaf as a synonym for 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 follows:

Funds given to a bank cannot be considered a form of loans (qard), since the bank is not in need, and loans are only requested by those in need. Anas narrated 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.

50

f. Only one type of loan, qard hasan, 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:

47

Arab Finance House, “FAQ/Glossary,” online document. (http://www.arabfinancehouse.com/faqgen/index.asp)

48 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.

49 http://www.banking.com/terminology.asp#L

50 Mahmoud El Gamal quotes this in his presentation “The recent Azhar fatwa: Its logic, and

historical background” [2003] (http://www.lariba.com/knowledge-center/articles/pdf/LARIBA%202003%20-%20Elgamal%20Azhar%20Fatwa.pdf)

‘…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.

51

Of course, this position contradicts the one stated earlier in #b - borrower can pay an extra if not stipulated by contract.

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.

52

The Iranian banks offer qard hasan (interest-free loans) at nominal service charges to the agricultural sector.

53

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 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.

54

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.

55

If one wonders as to what is the dalil justifying such service fee to cover actual cost of extending qard hasan, it seems that there is none.

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

51

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. (http://www.takaful.com.sa/m1sub2.asp)

52 Rahul Dhumale and Amela Sapcani. “An Application of Islamic Banking Principles to

Microfinance,” UNDP Technical Note #23073, December 1999; available online. 53

Siddiqi, op. cit. p. 119. 54

Frank Vogel and Samuel Hayes, III. Islamic Law and Finance: Religion, Risk, and Return [London: Brill, 2006], pp. 105-106.

55 ibid., p. 131, referring to Cf. decision 1, third session (1986), Fiqh Academy Journal (fatwa

specifically for the Islamic Development Bank).

amount of financing on qard hasan terms, free of any profit-sharing margin, but usually repaid by installments and backed by collateral.

56

Once again, there is nothing wrong from Islamic viewpoint to require collateral in debt-based transactions. However, there is no dalil for requiring collateral in case of qard hasan. If qard is synonymous to qard hasan and it is benevolent loan for the needy, the issue of collateral should not apply.

Anomalies and incongruent aspects of contemporary usage of the terms Discerning readers would readily recognize some major discrepancies in the above statements.

1. If qard is for the needy and essentially it is charity (see footnotes #11-14 above), then how current account deposit in the banking system can be justified as qard hasan 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 hasan 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 hasan as it is understood traditionally) is for the needy, how “payable on demand” is commensurate with the goal of qard hasan. Moreover, what is the proof (dalil) from the Qur’an and Sunnah (hadith) in this regard that qard hasan is payable on demand?

This issue of “payable on demand” is vital in the context of qard hasan 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 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.

57

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 some of the questions that have not been satisfactorily addressed by those who regard qard hasan as only gratuitous loan. I will also return to these matters after surveying the issue from the Qur’an and hadith. But before that let me share two pertinent observations.

56

Omar Imady and Hans Dieter Seibel. “Principles and Products of Islamic Finance,” University of Cologne Development Research Center; available online, p. 2. (http://www.uni-koeln.de/ew-fak/aef/06-2006/2006-1%20Principles%20and%20products%20of%20Islamic%20finance.pdf)

57 Frank Vogel and Samuel Hayes, III. op. cit., pp. 79-82.

1. There is no verse in the Qur'an that refers to qard without qualifying it as qard hasan.

2. Based on 9 collections of hadith [Bukhari, Muslim, Abu Dawud, Nasai, Ibn Majah, Tirmizi, Muwatta, Musnad Ahmad, and Darimi], in no hadith does the expression qard hasan appear unlike as it does in the Qur'an. In hadith, qard is referred to as qard, no additional expression of hasan.

58

If someone has information contrary to the above two observations, I would be eager to know so as to 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 noted, I did not find the expression qard hasan in the nine collections that I searched. Among these, Muslim, Abu Dawud, Ibn Majah, Tirmidhi, and Muwatta have no separate book/chapter (kitab/baab) 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, in Bukhari qard and dayn are interchangeable even though in Islamic fiqh a distinction was made, so that (just as Mark Robbani argued) qard by definition would be with no excess and that is in the sense of qard hasan. 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 that a person gives to another as help, charity, or advance for a certain time."

59 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. 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.

60 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.”

61

58

A.J. Wensinck, Concordance et indices de la tradition musulmane, Leiden, 1936-69. This meticulously comprehensive concordance is in Arabic.

59 http://www.islamicbankingcourses.com/html/glossary.html.

60 See Vol. 3, Book of Loan, Chapter 17, p. 346. 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.

61 http://glossary.reuters.com/index.php/Fungible.

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,”

62 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.”

63

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. As Vogel and Hays explain:

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 al-Qari (d. 1940), Majallat al-ahkam al-shar’iyyah, ed., ‘A. Abu Sulayman and M. ‘Ali (Jiddah: Tihama Publications, 1981, art. 749).

64

Thus, the relevant question is why such incoherence and disagreement at the level of applied details, on the subject of riba and qard? The answer may lie in the fundamental problem with the traditional way riba or qard is defined and then attempts are made, to apply 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 al-qard]. 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 neither relates to qard nor does it use the term qard, but to salaf (money exchange; bai' salaf), a different kind of loan.

65 Of course, some make a

distinction between qard and salaf whereas others 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 certitude about the exact reference):

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 must be noted that the highlighted part in parentheses is 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

62

Frank Vogel and Samuel Hayes, op.cit., p. 71. 63

Vogel and Hayes, op.cit., p. 71. 64

Vogel and Hayes, op.cit., n#16, p. 71 65

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]

while he possesses it (money) while the one who demands loan does not demand it but because of his need.'”

66

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 hasan, as it is mentioned in the Qur’an. So, this hadith does not answer my question. The Arabic text reads (without the interpretive insertion of Robbani): As-sadaqa bi ‘ashri amthaliha wa al-qard bi thamaniyata ‘ashra.

Careful readers would also notice whether the content of the hadith makes 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 saw no 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 makes little sense, does not really contradict my observation that in the nine collections of hadith, including sihah sitta, the expression “qard hasan” does not appear. The question then remains as to why the Qur’an does not use the word qard except as qard hasan, while hadith (based on the 9 collections) does not use the expression qard hasan at all. Well, the clue for this answer might lie in the Qur’an, which we explore next. However, let’s identify another pertinent point first. Not a single of the few (actually, very few) hadiths that refer to qard contains information pertaining to any extra or that such an extra is prohibited for a loan. There are juristic observations from the companions (sahabas) and successors (tabiun) in Bukhari, Muwatta and elsewhere. But those are juristic opinions of the respective companions. No more. Here are some of those 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."

67

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 is from Muwatta

68 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?"

69

66

Trans. Muhammad Tufail Ansari, Kitab Bhaban, India, 2000, Vol. #3, p. 438, #2431. 67

Bukhari, trans. by M. Muhsin Khan, Vol. 3, p. 346. 68

Muwatta Imam Malik, Trans. by M. Rahimuddin, [Lahore, Pakistan: Sh. Muhammad Ashraf, 1985], p. 305.

69 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."

70

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."

71

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."

72

None of the above items from Muwatta reaches the Prophet. These are athar (a saying from a companion of the Prophet), not hadith. None 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 juristic observations. 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

The word qard appears in six places in the Qur’an: 2.245, 5.12, 57.11, 57.18, 64.17, 73.20. To each place consistently two additional aspects are added: (a) it is not just qard, but qard hasan; and (b) this qard is not to any human being, but to Allah. No exception to the two aspects exists in the Qur’an. Because each of these verses comes in a context it is important to study the 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.

73 The actual verses in which

qard hasan is mentioned are shown 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.

74

70

Book 31, Number 31.43.93 71

Book 31, Number 31.43.94. 72

Book 31, Number 31.43.95. 73

It is important to note that, while the categorization of surahs as Makkan and Madani is generally agreed, there is no absolute agreement about their chronological order, or the verses in each surah. Therefore, observations about the chronological order are mere approximations.

74 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-hasanah]

75

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 hasan. It is clear that the mention of qard hasan here is not as something newer than or different from the previous verse but merely a continuation, in restating spending in the path of Allah with 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.

76

The next occurrence of qard hasan is in another Makkah surah, al-Muzzammil.

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]

77

This one is of especial importance in the discussion about qard hasan since 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 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.

78

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 hasan]

79

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 hasan]

80

75

The Qur’an/64/al-Tagabun/17 76

n#5500, p. 1560. 77

The Qur’an/73/al-Muzzammil/20 78

The Qur’an/57/al-hadid/10 79

The Qur’an/57/al-hadid/11 80

The Qur’an/57/al-hadid/18

The above three verses are from al-Hadid, a Madani surah. In this surah, qard hasan is mentioned twice. Once again, notice the transition from verse 10 to verse 11, where qard hasan 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.

81

Qard hasan appears again in al-Maidah, a Madani surah.

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 hasan

82

Once again, in this verse salat (prayer) and paying zakah are juxtaposed with belief in the messengers. Such belief should be reflected in the honor Muslims show and assistance they offer to their cause. Quite naturally, such assistance is regarded by Allah as a loan (a beautiful loan). Maulana Abul Kalam Azad, a noted Islamic scholar from twentieth century India, 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.

83

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.

84

Quite clearly, such spending is general in nature and it is spent in the Path of Allah, as once again qard hasan is mentioned in al-Baqarah, a Madani surah.

Then fight in the cause of Allah, and know that Allah Heareth and knoweth all things.85

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 hasan]

86

These verses are significant in understanding the context of exhortation about qard hasan. It does not require much explanation that qard hasan is mentioned in verse 245 in the context of

81

Available online, see The Qur’an/57/al-Hadid/11. http://www.geocities.com/masad02/040 82

The Qur’an/5/al-Maida/12 83

Azad, The Tarjuman al-Qur'an, (trans. by Syed Abdul Latif), New Delhi: Kitab Bhaban, Vol. 2, p. 113.

84 Maududi, Towards Understanding the Qur'an, Leicester, UK: The Islamic Foundation, 1196, Vol.

II, n#33, p. 142.] 85

The Qur’an/2/al-Baqarah/244 86

The Qur’an/2/al-Baqarah/245

fighting in the path of Allah. The struggle in its comprehensiveness requires commitment to our life and resources. Whatever we offer to Allah is graciously recognized and treated as loan. Below are some 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."

87

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?"

88

Asad: "by sacrificing one's life in, or devoting it to, His cause..."89

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.”

90

The verses pertinent to qard hasan are quite clear about the following points.

1. Qard hasan 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 hasan in the Qur’an specifies no detail whatsoever in regard to conditions or limitations, including whether qard (used as a substitute for only qard hasan) must be without excess. On the contrary, qard hasan, 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 hasan 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 hasan is taken in the context of the pertinent verses in the Qur’an, the presence of excess is consistently declared and thus specified or stipulated on the part of Allah. After all, “...who is more faithful to his covenant than Allah?”

91

3. When the verses about qard hasan 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 presents it, qard hasan involves “excess” above and beyond the qard (loan) and it is

87

Maududi. Vol. I, n#267, p. 187. 88

Abdullah Yusuf Ali, n#275, p. 97. 89

Muhammad Asad, The Message of the Qur'an; online; http://www.geocities.com/masad02/002c. 90

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.

91 The Qur’an/9/at-Taubah/111

“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.

92

4. The above observations about the pertinent verses in the Qur’an need supplementation with 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 hasan.

5. It also needs to be noted that neither the verses about riba in the Qur’an nor the riba-related 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.

93

In light of the above observations, how in the world did qard and qard hasan become synonymous and while the Qur’an consistently mentions qard hasan as with promised excess for the “loan to Allah”, did qard become a charitable or benevolent loan, where there should neither be any excess nor any such excess should be stipulated?

Problem with the Traditional Position about Qard as ribawi contract

In order to appropriately answer the above question, two related factors must be addressed. First, the juristic treatment of qard (loan) is not based on qiyas (analogical reasoning) from the Qur’anic verses about qard hasan, but actually from the analogy to sales transactions, where qard (loan) of money is considered without any “counter-value”. Secondly, qard hasan, consistently stated in the Qur’an as a loan to God, became subject to those 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 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.

92

The Qur’an/9/at-Taubah/111 93

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.

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 equal-footing. 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.”

94

Thus, in traditional Islamic law, qard, unless it is qard hasan, 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.”

95

“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.”

96

94

Farhad Nomani, “The Interpretative Debate of the Classical Islamic Jurists on Riba (Usury),” p. 7. (http://www.luc.edu/orgs/meea/volume4/NomaniRevised.pdf)

95 The Qur’an/2/al-Baqara/279

96 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? The problems with applying the prohibition of riba to qard are manifold. a. As we have already demonstrated above qard hasan or qard as consistently used in the Qur’an has nothing to do with worldly business transactions, as it implies both excess as well as promise of Allah (as a form of specification or stipulation). Also, qard as it is used in hadith establishes no 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 works that specifically address the specific 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.”

97

“Doubled and multiplied” as an essential dimension of riba al-jahiliyya has been understood by companions, such as son of Zayd b. Aslam

98 (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.’

99

Classical exegetes have rather consistently maintained that this is what riba al-jahiliyyah is.

100

Ibn Abbas, one of the major companions of the Prophet and earliest of the Islamic. jurists, and some 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].

101 Held by leading scholars such as Imam Ahmad Ibn Hanbal, this view is significant as

it takes into account not only the issue of excess [i.e., lenders are entitled only to principle sum], but also the injustice/exploitation (zulm) aspect as in The Qur’an/2/al-Baqara/279. Besides, the cause/rationale [illa] of prohibition of riba cannot merely be the excess over the principle as traditionally held, but also the injustice/exploitation embedded 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 resorted to qiyas of sales contracts, where qard would be covered as a ribawi transaction as part of riba al-fadl.

97

The Qur’an/3/Ale Imran/130. 98

Ibn Hajar, Tahdhib, III, p. 395, referred to in Abdullah Saeed, p. 22. 99

Tabari, Jami, IV, p. 59, quoted in Abdullah Saeed, op. cit., p. 22. 100

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, “ Arab Law Quarterly, 21/4, 2007.

101 Saleh, op. cit. p. 27.

c. As for approaching the issue of qard as ribawi contact from the riba al-fadl angle, it carries its own serious pitfall. First, 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-s, which is based on the Qur’an, riba al-fadl is based purely on hadith. The jurists have failed to develop a reasonably uniform understanding and position about riba al-fadl. Hence the variation and discrepancy when they tried to identify the cause or criteria (illa) at the applied level are so great that what one school often considers haram (prohibited) other schools of Islamic law may deem as halal (permissible), 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 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 its subject. Even then, only mutawatir bil lafz (mutawatir hadiths containing exact words in each chain) belongs to the hadith category that yields certainty of knowledge. Mutawatir bil ma'na (mutawatir hadiths that contain only similar, but not exact words in each chain) does not bear the same weight. The first type, mutawatir bil lafz, numbers very few. 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.

102

Although it is routinely claimed or assumed that based on hadith we can come up with a reasonably workable definition of riba, especially riba al-fadl, it is not true. Consider, for example, the criteria or rationale (illa) of six commodities the Prophet presumably specified as ribawi. When applying the issue of illa to delineate the scope of the prohibition of riba based on al-fadl, it becomes obvious that defining riba by using hadith is more than just a daunting task, which was dealt with in another paper.

103

Thus, attempts to define riba and equate interest with riba in a blanket manner have remained unconvincing. More importantly, traditional rationales of prohibition of riba - (1) Unfair exchange (taking something from a party without giving 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 simplistically, the same rationales prove inadequate.

104

The Crux of the Analysis

In this part let us consider some general definitions of riba, on the basis of which interest is equated with riba. Illustrations from both scholarly sources as well as non-scholarly ones are cited below. The latter category reveals the way scholarly views have morphed into the non-scholarly.

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

102

See the chapter “Islamic law and the Use and Abuse of Hadith,” in Mohammad Omar Farooq, Toward Our Reformation: From Legalism to Value-Oriented Islamic Law and Jurisprudence, forthcoming, 2009.

103 Mohammad Omar Farooq, “Riba, Interest and Six Hadiths: Do We Have a Definition or a

Conundrum?” Review of Islamic Economics, forthcoming, 2009. 104

See Mohammad Omar Farooq. “The Riba-Interest Equation and Islam: Reexamination of the Traditional Arguments, forthcoming.

which comes free from compensation or that extra earning obtained that is free of exchange.

105

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.

106

The prohibition was meant to cover every amount charged in excess of the principal ...

107

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 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. In numerous hadiths that are generally regarded as sahih (sound) it is clear that 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.

108

Notably, 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,

109 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 Dawood,110

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.

111

Permissibility of voluntary excess payment is the typical position. However, also common among some scholars is the tendency to “have one’s 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."

112 Usmani acknowledges that at best this is a disputed hadith.

113 Then,

he invokes a common sophistry to explain that “Every loan ...” is not every loan. He rationalizes that this hadith about “Every loan ...” does not cover “any voluntary amount given by the debtor at

105

http://www.inter-islam.org/Prohibitions/intrst.htm 106

Engku Rabiah Adawiya Engku Ali. “Riba and its Prohibition in Islam,” International Islamic University, Malaysia; http://www.cert.com.my/cert/pdf/RIBA_AN2.PDF,

107 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, http://tyo.ca/islambank.community/index.php?name=EZCMS&menu=2&page_id=2&POSTNUKESID=b193a0056c664d16cc69a0d71dc6c23a#Overall%20Effects%20of%20Interest.

108 Sahih al-Bukhari, Vol. 3, Book 41, # 579

109 For detailed discussion about this issue of excess, see “Riba, Interest and Six Hadiths: Do We

Have a Definition or a Conundrum?”, fn #103 cited earlier. 110

Book 22, #3330. 111

#1375. Also, see #1374. 112

Usmani, section #101; referring to Baihaqi. 113

Usmani, section #101.

the time of repayment ...”114

So, Usmani also concludes that the excess in itself is not really an indicator of riba.

Then, what is the indicator or criteria of riba? It is if the excess is “stipulated.” Another word, riba is “stipulated excess.”

Semantically, riba means excess or an addition. It refers to an excess stipulated in a contract or an exchange.

115

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.

116

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’.

117

From commonly available or circulated material by Islamic banking industry a reader might surmise that “stipulated excess” is based directly on the Qur’an and hadith. In reality it is not so. Unfortunately, no short explanation of this “stipulated” qualifier to “excess” exists. It is important to recognize that the Qur’an itself does not define riba. However, the Qur’anic exegetes almost consistently identify the Qur’anic riba as the riba al-jahiliyyah, and there is no recognized 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 a way that has been followed by others taking 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.”

118

Interestingly, scholarly scrutiny of the evidence al-Jassas offered in his exegesis is rare. An evaluation of the evidence and argument he presented exposes vital problems in his claim that “stipulation” is the defining condition of riba. Since there is no short cut to this discussion, interested readers must indulge in a well-documented essay in this regard: “Stipulation of Excess in Understanding and Misunderstanding Riba: Al-Jassas Link”.

119

One other interesting and notable point. Let’s revisit the following statement from al-Bukhari:

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."

120

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 since, according to the common Muslim understanding, qard hasan must be excess-free because riba is prohibited and qard hasan must

114

Usmani, section #105. 115

http://www.islamicvoice.com/March2006/Islam&Economy/ 116

Riba (Usury and Interest): According to Quran and Sunnah, Muttqoon.com; http://muttaqun.com/riba.html.

117 Islami Bank Bangladesh Limited. “What is Islamic Banking”, undated.

118 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 “nyazee” to open the document.

119 Farooq. 2007, op. cit.,.

120 Bukhari, trans. by M. Muhsin Khan, Vol. 3, p. 346.

be interest-free because it is subject to the same prohibition. Indeed, generally our scholars and jurists, dating back to some 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 – the leading nine collections I consulted - pegs the prohibition of riba as the basis for their opinions. They neither refer to any Prophetic statement in this regard, nor to the riba-related verses in the Qur’an. Why not? The obvious explanation might be that no companion must have considered the issue of excess in case of qard related to the issue of riba. For, if they did, 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, in another powerful argument offered on the (in)famous fatwa of Sheikh al-Tantawi of al-Azhar, 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 lower 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 pre-specification of profits, as long as there is mutual consent.’

121

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 pre-specification 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’.”

122

121

Quoted by Mahmoud El Gamal at Lariba Bank website, http://www.lariba.com/knowledge-center/articles/pdf/LARIBA%202003%20-%20Elgamal%20Azhar%20Fatwa.pdf.

122 ibid.

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.

123

As the prevailing position, even in regard to mudaraba, does not permit pre-specification of return percentage, Khallaf’s argument is relevant in case of loans, as well, because stipulation of 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 رارض �ورر�������.”

Thus, those who claim pre-specification or stipulation of excess in financial transactions, even in mudaraba, deem it less acceptable in qard. However, as clarified above, compellingly contrasting views in this regard do exist; many might consider the view of Tantawi, Khallaf and many others to have greater merit.

The az-Zubair al-Awwam Hadith about Salaf

As previously mentioned, some IFIs regard bank deposits (current account deposit, to be specific) as qard hasan. Some people who have contributed to the field of Islamic banking and finance were unaware of the relevance of the qard hasan 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.”

124

I have sought feedback from some stalwarts in the field, including Dr. M. Nejatullah Siddiqi. He clarified during a telephone conversation that, even though the term of qard hasan is not preferable in this context, it can still be treated as qard hasan, because the depositors already know that such deposits are interest-free.

On October 26, 2006, when I spoke to Dr. Irfan Ahmad Khan, an elder scholar (and the author of a Qur'anic commentary, Reflections on the Qur'an

125, about this issue, he was also surprised

when I mentioned I was seeking to understand how bank deposits could be categorized as qard hasan to the bank. He suggested we conduct 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.

126 Dr. Khan was able to immediately connect us for the three-way call. I broached two

questions to Mufti Barkatullah: (a) How are current account deposits treated as qard hasan, as some IFIs do? (b) What is Shar'i proof (dalil) that qard hasan is payable on demand?

123

ibid. 124

Personal email from Shah Abdul Hannan on October 26, 2006. 125

Irfan Ahmad Khan, op. cit. 126

For brief biographical information about Mufti Barkatullah, see Islamicretailfinance.com 2004

Basically he answered that it is not qard hasan, but merely trust (wadiah) - a safe custody contract between the depositor (customer) and the custodian (bank).

127 According to him there is

a cultural tendency in South Asia, to call the same item qard hasan. I remain unconvinced about this “cultural” explanation. He also noted that qard hasan 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, followed by my humble analysis thereof.

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 sub-narrator 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."

127

http://www.alburaq.co.uk/Key/Glossary.htm

'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 Az-Zubair 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 Az-Zubair 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.

128"

This rather long hadith is quite interesting and illuminating even though a few aspects of it seemed rather puzzling, as well. As Az-Zubair was considered highly trustworthy, people used to bring their

money to him for safekeeping. However, one almost immediately notices 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 he would suffer such anxiety. Did he not keep records of the deposits and what was done with those? Accepting deposits as a very trustworthy person but lacking adequate record keeping seems impractical. On the other hand his anxiety would seem unwarranted, if he had kept records. What might explain this anomaly? Second, he was concerned his estate might not cover his liabilities; he explained to his sons how he pleaded with 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.” What kind of trust did he develop, while he seems to be in such disarray in regard to his liabilities? Third, as per his own prognosis, he was martyred leaving no liquidity. “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.” Does this make sense? If the deposits with him are to be regarded as the basis for IFIs’ bank deposits, then how could he possibly have no liquidity and all his assets were in real estate, an asset category of relatively low liquidity? Even if one assumes that depositors seldom withdrew from him or only with advance notice, would it seem sensible to have such high level of deposits with little if any liquidity?

128

Sahih al-Bukhari, Volume 4, Book 53, Number 358.

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 is clear on his reluctance to receive the deposit as “trust” or “wadiah”. He wanted to accept those deposits as debt or liability, instead, which also implied he could utilize the deposits at his discretion. It is interesting that he was concerned he might lose the deposits (taken as trust). Regardless, he was willing to accept the deposit and invest at his discretion, which involves risk---potentially much greater risk (of course, along with potential for return). Using this hadith as a basis for bank deposits in IFIs’ “wadiah” would mean that banks would consider the deposits liabilities while reserving 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.

129

The above definition, on which no universal agreement exists, distinguishes salaf from qard. The former is for specific periods of varying duration and it can’t be called before it is due. Thus, this hadith cannot be the basis for bank deposits, especially the demand deposit, payable on demand to the depositors. Quite interestingly, State Bank of Pakistan defines qard as follows: “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 was on the basis of salaf, which can’t be called “before it is due.” So, where is the shar’i proof that (a) bank deposits can be categorized as “qard hasan” and (b) qard hasan is payable on demand? Sixth, when the son of az-Zubair kept actual debt levels a “secret” – and some may deem it akin to lying - some close friends of Az-Zubair 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 needed no help and offers to discount, forgive or reschedule the loan were declined by az-Zubair’s designated son. One has to conclude these offers were Islamically valid. Otherwise, the hadith would have indicated their unacceptability. Ultimately, the debts were covered by 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

129

“Glossary on Islamic Banking” http://www.sbp.org.pk/departments/ibd/glossary.pdf

of the hadith and the specific circumstances do not apply to modern banking arrangements. Lastly, upon payment of the specific debts, Ibn Az-Zubair held the estate from inheritance distribution and decided to publicly inquire during hajj if there was still anyone that 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 oral communication alone? Obviously, either there was no record, or he kept inadequate record. Otherwise, why the necessity of public inquiries as well as withholding of the inheritance distribution for such a long time period? Thus, even though his son’s effort to ensure that all creditors were repaid was most noble and praiseworthy, it still left unanswered the question how so many people felt comfortable entrusting their deposits with Az-Zubair as well as his accepting of those, without adequate (or even no) record-keeping? The bottom line is that this hadith leaves more questions that answers and it cannot be used as a definitive basis for any of the Islamic nuanced terms – namely, qard hasan, wadiah or amanah – being used for current or demand deposit in a bank.

Banking practices regarding qard hasan

While qard hasan is for the needy, one should not presume any needy person can approach an Islamic bank seeking qard hasan. The practices vary widely among 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.

130

Sudin Haron describes the wide variations across Muslim-majority countries 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

130

“A Glossary of Islamic Banking Terms,” http://islam.worldofislam.info/index.php?option=com_content&task=view&id=461&Itemid=62.

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.

131

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 raised, one notices the paucity of concrete or solid grounding of these matters in Shariah. Contrary to the claim that IFIs are distinctively based on Islam, as Sudin Haron acknowledges: “In most cases, the operational aspects and practices of these deposit facilities are similar to practices of conventional bank deposit facilities.”

132

Banking practice also varies whether qard hasan 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 hasan 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.

133

Some banks, as in Iran, categorize all deposits, demand and savings, as qard hasan, while others treat only demand deposit as qard hasan.

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.

134

Legally defining and structuring current deposits as qard hasan or wadiah is common. Neither of these should bear 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 hasan 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 ...

131

Sudin Haron. “A Comparative Study of Islamic Banking Practices,” King Abdulaziz University document center; http://www.kaau.edu.sa/CENTERS/SPC/page-092.htm.

132 Sudin Haron. op. cit., online.

133 Ziauddin Ahmad. op. cit., p. 35.

134 Ziauddin Ahmad. op. cit., p. 37.

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?

135

If it is assumed that the borrower can pay extra voluntarily, then treating deposits as qard hasan allows the banks (as the borrowers) to pay extra to the depositors (lenders).

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.136

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 hasan 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.

137

Thus, as clearly specified in the Qur’an, qard hasan concept is not consistent with any guarantee. That means that if the IFIs took in deposits or extended loans as qard hasan, 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.

138

However, the IFIs can neither expect the depositors to deposit nor can they offer loans to the customers (or others) as qard hasan without some form of guarantee, especially when they are also competing with conventional banks. So, regardless of the 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.

139

135

Mohammad Obaidullah, op. cit., pp. 54-55. 136

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.

137 The Qur’an/2/al-Baqarah/280.

138 V.K. Arasan. “Rise of of Islamic Banking – Problems and Prospects,” Website of the European

Association of University Teachers in Banking and Finance, University of Siena, Italy, undated, http://www.unisi.it/ricerca/dip/dir_eco/wolpert/papers/arasan.doc.

139 Sudin Haron, op. cit., online.

A fundamental problem in assessing these terminologies is that banks 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 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.

140

Conclusion

The purpose of this essay was to explore the topic of qard hasan and some widespread misinterpretation and misunderstanding about it. According to the Qur’an, qard hasan is essentially any kind offering or sacrifice in the path of Allah. It also covers a charitable or benevolent loan, which the lender offers 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 hasan with any business transaction, in traditional Islamic law all kinds of qards (loans) were equated with qard hasan. Similarly, even though hadith does not use the term qard hasan 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 was riba al-fadl discussed in the context of loan. Instead, it involves barter, trade, or sale. As has been explained in this essay with references to more detailed exposition of the related topics, the “excess” in loan is not 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 supplies the evidence that “stipulation” makes a loan transaction prohibited. Thus, the issue of excess (al-fadl) and its stipulation were projected back to qard hasan, 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 hasan, which is acknowledged as a 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.

141

140

Volker Nienhaus, op. cit., pp. 130-131. 141

Mohsin Khan and Abbas Mirakhor, op. cit., http://www.financeinislam.com/article/1_35/24/165.

From the Islamic viewpoint, how can they justify 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-hasanah (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 insurance, these deposits are exposed to more risks than in the case of conventional banks. The rights of current deposit holders need special treatment.

142

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.

143

Thus, it is not surprising that IFIs’ need for maintaining depositor 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 with or are well beyond the scope or parameters of the traditional understanding of qard or qard hasan. 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.”

144

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 hasan 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 hasan is another glaring illustration of delinking a guidance of Islam from its maqasid. Also, where is the dalil that qard hasan 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.

145 However, as illuminated

above, that hadith, even though from Sahih al-Bukhari, is full of anomalies and it explicitly mentions that az-Zubair was reluctant to accept the deposits as “trust”. Instead, he wanted to accept the deposits as “debt” and then have complete discretion about their use. Moreover, his transactions were based on salaf, fixed duration loans, while demand deposits,, according to IFIs are payable on demand. None of these aspects corresponds to bank deposits as understood and

142

Munawar Iqbal and Philip Molyneux. op.cit, p. 121. 143

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.

144 ibid., p. 49, n#52.

145 See note #86 above.

practiced by the banking institutions, conventional or Islamic. Also, the only way the concept of qard hasan (or qard) can be related to the case of az-Zubair is by delinking the charitable/need aspect of qard hasan. As explored in this essay, equating qard hasan with qard is based on the definition of riba as “stipulated excess”, where the prohibition is then extended backward to interest on loans. However, since problems exist with the riba-interest equation and reductionism, such projecting back of the notion of interest-free loan to qard or qard hasan begs serious questions, the most important of which are: (a) What is the Islamic evidence that qard hasan is necessarily 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 question is there seems to be no evidence. The answer to the second is that analysis of all the evidences offered in this regard seems insufficient to support the claim that “stipulation” of excess renders a loan contract unislamic or prohibited. As for the third question, I hope this essay has adequately shown that there is serious problem with the position that qard or loan is ribawi. Lest it is misunderstood, raising question about whether qard or loan in general is ribawi or not should not be construed as advancing a position that all loans, interest-free or interest-bearing, are non-ribawi. Quite the contrary, any loan transaction or contract that would involve zulm or injustice/exploitation of one party by the other would be regarded as ribawi. Thus, for examples, loan-sharking – sometimes at an astronomical rate of 99+%,

146 credit card lending at high or

variable interest rates, which is often targeted toward less creditworthy borrowers,147

zero interest financing with predatory fine prints,

148 sub-prime mortgage lending especially at adjustable rates

to vulnerable groups,149

would be regarded as ribawi, requiring legal protection for the potentially vulnerable groups. However, as discussed here, there is not sufficient basis for considering or religiously prohibiting all interest-bearing loans as ribawi. Money loans generally have been subject of various kinds of restrictions through out history. Indeed, historically it has been one of the supervised markets. “The oldest historical example of the supervised market is that for loans of money. The extent of social restraint has varied greatly, but some restrictions one loan contracts have existed in all civilizations from the earliest historical era to the present.”

150

Therefore, the issue is not whether money loans should still belong to supervised markets. Rather, the issue is whether loans should be considered ribawi, meaning that it must be only a

146

“Report: Cash Call,” Ripoff Report, May 31, 2007, http://ripoffreport.com/reports/0/251/RipOff0251427.htm.

147 “High-Fee, Low-Credit Predatory Credit Cards Prey Upon the Poor,” Forbes, November 1, 2007,

http://www.forbes.com/businesswire/feeds/businesswire/2007/11/01/businesswire20071101006136r1.html. Also, referring to his paper “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) Mahmoud El Gamal, Chair of Islamic Economics at Rice University, states: “My meager efforts to define riba have come up with the definition: ‘the unbundled sale of credit’, which will cover running credit card debt (riba al-jahiliya) as well as unsecured interest-bearing loans (as riba al-nasi'ah).” [message posted on IBFnet: #7047, June 3, 2007, accessed at http://finance.groups.yahoo.com/group/ibfnet/message/7047 December 25, 2007.

148 Attorney General’s office of State of North Dakota, “Scams, Shams and Flimflams,”

http://www.ag.nd.gov/CPAT/ScamsShamsFlimFlams.pdf. 149

Board of Governors of the Federal Reserve System. “Statement on Subprime Mortgage Lending,” July 24, 2007, http://www.federalreserve.gov/boarddocs/srletters/2007/SR0712.htm.

150 Rolf Nugent and Leon Henderson, “Installment selling and the consumer: A brief for regulation,”

in John Brainder. (ed). The Ultimate Consumer: A Study in Economic Illiteracy (Ayer Publishing, 1976), pp. 93-103. The specific quotation is from p. 100.

chartable transaction, without having any place in commerce. As demonstrated in this paper, denying any commercial role for loan or Qard has created an environment where the Islamic finance industry has to devise alternatives that are substitute to conventional finance mostly in label, but not in substance. While the issue of whether qard is to be considered completely ribawi merits further research and also open-minded considerations from Muslim scholars, one of the fundamental implications of what is presented in this paper is that if qard is not equated with qard hasan, - and there is no sufficient Islamic basis to do so, then there might be room for accommodating qard as part of Islamic finance; of course, in a supervised or regulated context of the competitive environment.