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Ministry of Rural Rehabilitation and Development Afghanistan Rural Enterprise Development Program Islamic Finance Product Development The Use of the Qardh.

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Presentation on theme: "Ministry of Rural Rehabilitation and Development Afghanistan Rural Enterprise Development Program Islamic Finance Product Development The Use of the Qardh."— Presentation transcript:

1 Ministry of Rural Rehabilitation and Development Afghanistan Rural Enterprise Development Program Islamic Finance Product Development The Use of the Qardh al-Hasan prepared by Alberto G Brugnoni - AREDP May 19, 2013 ISLAMIC REPUBLIC OF AFGHANISTAN


3 INTRODUCTION: LOANS AND DEBT IN ISLAM  Though loans are an accepted way in Islam to raise funds to meet individuals’ and organizations' requirements: →shariah recommends to avoid debt as much as possible →the issue of debt is indeed a difficult one, and debts should not be undertaken except in cases of necessity →the Prophet (pbuh) said: “Whoever dies free from three things – arrogance, cheating and debt - will enter Paradise” →“Beware of debt, for it starts with worry and it ends with war” (narrated by Malik in al- Muwatta’)  The debt for which a person will be kept out of Paradise is that for which: →he left behind enough to pay it off but he did not leave instructions to that effect →or he was able to pay it off but did not do so →or he took the loan for some unlawful or extravagant matter and died without having paid it off  As for the one who took a loan for something lawful because he was poor, and he died without leaving behind anything to pay it off, Allah will not keep him from Paradise because of it 3

4 DIFFERENT KINDS OF DEBT DAYN  It has a broad connotation: it is incurred in any way that leaves a debt as a liability to be paid later: →it is the result of any contract or credit transaction →the created debt ought to be returned without any profit over the principal amount  The linguistic meaning of the word dayn in Arabic refers submission and humiliation: →the connection between the shariah meaning and the linguistic meaning is clear: the debtor is a prisoner →the Prophet (pbuh) said: “Your companion is being detained by his debt”  Trading of debt is called ‘bay’ al-dayn’. The majority of scholars in the Middle East consider the trading of debt to be similar to trading of money: →hence, a debt can only be transferred at face value and cannot be traded at market value, as conventional bonds are →trading at values other than par is permitted, as a temporary measure, for pooling of assets with a minimum of 51% in tangible assets (ijarah financing) alongside a maximum of 49% of what is considered debt (murabahah financing). Any change of value, is considered to be a change of value of the tangible assets inside the pool 4

5 DIFFERENT KINDS OF DEBT  Shariah scholars in Malaysia do have a different view on debt trading, which they consider as permissible if the debt is originated out of an asset finance transaction: →such a debt can be traded at market value, while a debt based on loan can only be traded at face value  Recommended reading: →“An Analysis of the Classical and Contemporary Juristic Opinions on Bay al-Dayn”, by Hanudin Amina →“The Application of Bay al-inah and bay al-dayn in Malaysian Islamic bonds: An Islamic Analysis”, by Saiful Azhar Rosly & Mahmood M. Sanusi 5

6 DIFFERENT KINDS OF DEBT  Salaf is a form of dayn and is generally regarded as a loan for a fixed tenure and includes short, intermediate and long-term loans: →it cannot be called back before it is due →the word salaf may also be used in the sense of salam  ‘Āriyya indicates the transfer of ownership of the usufruct of a specific thing without compensation: →it is recommended, and even more so in the case of relatives, neighbors and friends →however, the exact borrowed commodity has to be returned to its owner, not any replacement as in qardh 6

7 CONDITIONS OF DEBT  The scholars have stipulated three conditions for debt to be permissible: →the borrower should be determined to repay it →it should be known or thought most likely that he is able to repay it →it should be for something that is permissible according to shariah 7

8 REBATE OF DEBT  With regard to a possible rebate that could be given to the debtor for repaying the loan earlier than the due date: →there is unanimity amongst the scholars about the illegality of remitting a part of the debt payable by anyone and getting the remaining part  However, Muslim jurists have differentiated between loans or debts that have become due or can be called back at any time (duyun haalah), and loans where time of payment settled between the creditor and the debtor is not yet due (duyun mu’ajjalah): →duyun haalah are allowed by almost all Muslim jurists on the rationale that in such loans, rebate is not the right of the debtor →in fact, rebate should neither be provided in the agreement nor be made a condition in the loan contract →in opposition, remission of a part of a debt not yet due involves riba’ 8

9 RESPONSABILITIES OF DEBTORS AND CREDITORS  The fulfillment of one's obligation under all contracts is a religious duty in Islam: →hence, Shariah defines specific rights and responsibilities of debtors and creditors  The most important duty of the debtor is to repay the loan in fulfillment of the promise or contract made with the creditor: →God’s punishment will be severe to the borrower whose intention is to blemish or to usurp the loan →a borrower, when accepting loans, must be firmly determined to make repayment →the debtor should not only pay the debt in time, but also express gratitude to the creditor while repaying the borrowed amount →in shariah, if a debtor default willfully, he can be arrested, punished and dealt with harshly  The main duty of the creditor is not charge interest on the principal amount of the loan: →those who charge riba are compared in Quran to those controlled by the devil's influence 9

10 COLLATERAL  Shari´ah allows creditors to ask for collateral to ensure recovery of the amount in the case of failure by borrowers to fulfill their obligation for the repayment of the debt →the subject of the sale could be the subject of a pledge made to the extent of the debt. In fact, a pledge is permissible in the Shariah, whether a person is on a journey or at home and even between a Muslim and a non-Muslim →the ownership of the pledged goods remains with the pledger, who takes on the risk of losing the pledged commodity while the pledgee holds the goods on trust →hence, if the pledged goods are lost without any fault of the pledgee, the loss would be that of the debtor →and if the due debt is not paid, the pledgee can apply to the court to have the pledged good sold and the debt recovered out of the sale 10

11 QARDH AL-HASAN  Qardh is an interest-free loan for needy borrowers, extended on a goodwill basis (humanitarian and welfare purposes) without any profit accruing to the lender: →it consists on giving ownership of anything having value for the benefit of another, by way of virtue →the ownership of the loaned objects is transferred to the borrower who can use, buy, sell, or donate them as it wishes →it is applied when one is obliged to return the equivalent of the thing taken and repayment is for the same amount as the amount lent (goods of the same kind) →the same kind of the loaned commodity with essentially the same nature or character may be paid back  A loan contract between two parties for social welfare or for short-term bridging finance  As a Shariah-approved method to provide financing: →the Islamic banking system uses it as an instrument of income redistribution →it can fulfill a short-term need (bridging finance) of the borrower, such as financing the building of low-income housing, small scale agribusinesses and industrial cooperatives (often without stringent collateral requirements) →in this case, it helps the recipient start his/her independent economic life and raise income and standard of living 11

12 THE QARDH AL-HASAN IS FOR THE NEEDY  A qardh al-hasan is a loan that the Qur’an exhorts Muslims to make available to those who need it: →is the most natural and selfless loan available for people of the Muslim faith  Except when brought up in the context of Islamic banking and finance, qardh hasan is consistently described and understood as an act of benevolence toward those who are in need or in difficulty, but are expected to be able to pay it back: →qardh al-hasan (beneficence loans) are “zero-return loans that the Qur’an exhorts Muslims to make available to those who need them” →qardh al-hasan (interest-free loan) is a “charitable act and not a business transaction” →qardh al-hasan is “an interest-free loan given mainly for welfare purposes. The borrower is only required to pay back the amount borrowed”  A person in qualified need, who is not expected to be able to pay back the qardh al- hasan, is deserving of either zakat (mandatory alms for individuals with certain level of wealth or nisab) or sadaqah (charity) not of qard al-hasan  It is an accepted practice in Shariah that the provider of qardh al-hasan is permitted to charge the borrower a service charge to cover administrative costs of handling it on condition that charge is not related to its amount or the time period, and represents solely the cost of administering the loan 12

13 EXTRA AMOUNT MAY BE PAID  The borrower ought to repay the principal amount only, without interest (ribà), mark-up or a share in the business for which the loan was used: →however, in terms of good faith, it is permissible for the borrower to pay back more money (bonus or extra payment) as a means to thank the provider →yet, it cannot be discussed or agreed upon (stipulated by) during the contract →and it is not contractually due  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 acceptable, as a gesture of gratitude from the borrower (but it must not be expected by the lender). 13

14 PAID BACK ON DEMAND BY THE CREDITOR  The date of payment of the qardh may or may not be included in the qardh contract: →it can be paid back on demand or at the settle time  In the former case, the lender can demand repayment at any time and borrower has the moral obligation to pay back the amount borrowed on demand: →the Prophet (pbuh) is reported to have said: “... Every loan must be paid back...”. →but if a debtor is in real difficulty, the creditor is expected to extend time or even to voluntarily remit the whole or a part of the principal →in extreme circumstances, creditors are exhorted to forgive the debt, which can be counted towards zakat or as a donation  The qardh should not be conditional upon any other contract, such as bai´ and vice-versa  Collateral is usually not required, though is deemed permissible by Shariah 14

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