non-interestbanking banking products & services

NON-INTEREST BANKINGBanking Products & Services

- Oyindamola Dada

❖Trade Based Contracts

• Murabaha

• Bai’-Muajjal

• Salam

• Istisna’

❖Lease Based Contracts

▪ Ijarah

▪ Ijarah of Services)

3

ISLAMIC BANKING PRODUCTS & SERVICES

❖Equity (Partnership) Based Contracts

▪Musharakah

▪Mudarabah

❖Fee Based Contracts

▪Wakalah

▪ Kafalah

❖Other Contracts

▪ Qard Hassan (Benevolent Loan

MURABAHA (COST PLUS FINANCING)

The origin of Murabaha is the word ‘Rabaha’ (i.e. to make a

profit (from a deal). It is one of the trust sales contracts,

which requires a seller to fully disclose the cost price of a

good or asset and his profit margin, which could be a lump

sum or a percentage of the cost price.

A Murabaha is a sale in which the seller’s cost of acquiring

the asset and the profit earned from it are disclosed to the

client or buyer.


The Murabaha operated by NIFIs is referred to as Murabaha To Purchase Order (MTPO)

MURABAHA …..CONT’D

August 27, 2021 ©2019 Your Company. All Rights Reserved

6

FEATURES OF MURABAHA

SUBJECT MATTER

The subject matter/asset

must exist at the time of

contract execution.

The bank must own the

asset and have either

physical or constructive

possession. The asset must

be a tangible good, clearly

identified, quantified and

Shariah compliant

✓The Murabaha asset cost,

including all expenses involved

in the asset’s acquisition, must

be declared to the client

✓Parties to the contract

establish a profit rate by

mutual consent or in relation

to a specific and known

benchmark which must be

disclosed.

✓The Murabaha price may be

charged at spot or be deferred

and paid as a lump sum at the

end of the contract or in

installments on fixed dates

during the term.

PRICE DEFAULT REPRICING

There is no concept of a late

payment in a Murabaha

contract, however, a charity

clause is established at

contract execution to serve

as a deterrent to default.

Based on the charity clause,

the client is obliged to pay a

predetermined amount to a

designated charity account,

which shall not be benefited

from by the Bank, its staff or

ACE members, and which

disbursement is to be

supervised by the ACE.

This is prohibited because

the Shariah does not

permit an increase in debt

once it is fixed.

Rescheduling is only

permissible when the

creditor provides an

extension to ease the

burden of a debtor, so a

roll-over where the bank

increases the debt in

return for an extension is

impermissible as the

resulting amount of debt

is analogous to riba or

interest.


MURABAHA……CONT’D STEPS OF MURABAHA EXECUTION


7

PRU (Purchase Requisition Undertaking)

The client’s

submission of a

purchase

requisition for

Murabaha goods.

EARNEST MONEY

The client’s unilateral promise to purchase the Murabaha goods and the financial institution’s acceptance of collateral. The Bank requests the client to furnish a security or earnest money called HaamishJiddiyyah. In case the client backs out from entering into a Murabaha, the bank makes up for the actual loss from it and returns the remainder to the client.

AGENCY

The agency agreement

between the financial

institution and the client or a

third party. During the Agency

stage the bank’s exposure to

asset risk. The Bank must also

ensure that the asset to be

purchased is not already in the

client’s possession by paying

to the supplier before the

agent/customer purchases the

goods. The Bank can equally

procure Murabaha goods

directly or establish a third

party agency.

POSSESSION

The possession of the Murabahagoods by the agent on behalf of the financial institution

ACTUAL SALE

The exchange of

an offer and

acceptance

between the client

and the financial

institution to

implement the

Murabaha sale.


BAI’ MUAJJAL (DEFERRED/CREDIT SALE)

Bai’ Muajjal is a contract between a

Buyer and a Seller for the sale of a

specific asset to the Buyer at an

agreed fixed price payable at a

fixed future date in lump sum or

by fixed instalments.

As a Sale contract, the buyer must

have ownership of the asset before

the sale of same. The ownershipmay be actual or constructive


DIFFERENCES BETWEEN MURABAHA AND BAI’-MUAJJALMURABAHAH BAI’ MUAJJAL

1. Sale on an agreed mark-up which may

be at the spot or deferred

Sale on credit or deferred payment basis

2. Key objective of a Murabahah is to

make profit, the profit mark-up is thus

an essential part of the contract

The key objective of a Bai’ Muajjal is

deferred payment of a sale which may be at

discount, par, or premium of the cost price

of the asset.

3. As one of the Trust Sale contracts, the

actual purchase price of the asset and

the mark-up must be transparently

disclosed in the contract document

The Vendor/Seller is not bound to disclose

the actual purchase price to the customer

orally or in the contract documents.

4. Murabahah purchase may be effected

either in cash or on credit

Bai’ Muajjal sale must always be on credit.

Payment is deferred.


i. Ribawi items (are six items associated to interest) against same exceptwhile fulfilling the required rules of same quantity and on the spot and ifdifferent any quantity but also on the spot as guided by the Prophet(peace be upon him).

ii. Non-existent items except in Salam and Istisna.iii. Items not owned by the seller.iv. Items already owned by the buyer (buy back).v. Items that could not be delivered by the seller.vi. Injurious assets that are harmful to either individual or society.vii. Items prohibited by Shari’ah such as alcohol, pork meat and pork

accessories, dead animals, blood, phonographic films, etc.viii.Stolen items if the seller is aware.

ITEMS THAT CANNOT BE FINANCED IN SALE CONTRACTS


➢ Ribawi items or similar against one another.

✓Gold-Silver

✓Gold –Naira ALL MUST BE ON THE SPOT

✓Naira – USD

✓USD – Gold

➢Transactions where both subject and payment are deferred.

ITEMS THAT CANNOT BE SOLD ON DEFERRED PAYMENT


➢ Vehicles

➢ Household appliances

➢ Undeveloped plot of land

➢ Automobiles

➢ Computers and accessories

➢ Electronics

➢ Furniture

➢ Agricultural equipment

➢ Imports Finance

➢ Any other goods that can be easily delivered

AREAS OF FINANCING USING MURABAHA/BAI’ MUAJJAL


i. Identification of Asset.

ii. Promise to Purchase.

iii. Provision of a valid invoice in the name of the bank or endorse to the bank.

iv. Agency Agreement.

v. Offer Letter (containing details including price and profit mark-up for Murabahaonly). While in Bai Muajjal, Bank is only required to disclose the sale price).

vi. Necessary Documentations.

vii. Purchase of asset by the Bank by way of disbursement directly to thesupplier/vendor.

viii. Signing of Murabaha/Bai Muajjal agreement and other sale related documents.

PROCESS FLOW OF MURABAHA/BAI’ MUAJJAL


SALAM (FORWARD SALE)

Salam is one of the exceptions to the

general rule of sale, i.e. tangibility,

availability and ownership of the asset

to be sold.

Salam is a sale where the price of the

subject matter is paid in full at the

time of the contract’s execution while

the delivery of the subject matter isdeferred to a future date.


SALAM (FORWARD sale)…..CONT’D

It is not necessary that the subject matter

exist, and be owned and possessed by the

seller at the time of the Salam’s execution as

is the customary requirement of a standard

sale, provided it meets the other criteria

specific to it.

Salam allows the buyer to purchase

commodities for a price lower than the spot

market price, while providing capital for the

vendor at the point when he needs it most,

thus creating a win-win situation. Thevendor wins and the purchaser wins.


FEATURES OF SALAM (FORWARD SALE)

HOMOGENEIT

YSalam may be

executed for

homogeneous

commodities but

not for specific

commodities and

mediums of

exchange

The quantity and

quality of Salam

goods must be

specified in order to

avoid any ambiguity

that may lead to

dispute between

contracting parties

NO AMBIGUITY PRICE DELIVERY

Salam price must

be paid at spot. The

price is fixed and

cannot be

increased due to an

increase in the

price of Salam

goods in the

market during the

contract’s term

The place of

delivery of Salam

goods must be

specified and

they must be

delivered in their

entirety on a

fixed future date

or in instalments

on

predetermined

dates


FEATURES OF SALAM (FORWARD SALE)….CONT’D

PARALLEL SALAM

Salam goods cannot be sold to

a third party before receiving

possession however a parallel

Salam may be executed for

them. A Parallel Salam is a

transaction executed

simultaneously with the

original Salam. The buyer of

goods in the first Salam is the

seller of goods in the second or

Parallel Salam. It is permitted

with a third party only.

The Khiyar al ‘Aib

(option of defect)

may be exercised

for Salam subject

matter, however,

not the Khiyar al

Rooyat (option of

refusal).

OPTIONS SALAM

TERMINATIONOnce executed, a Salam

may not be revoked

unilaterally by either

party. It is a sale contract

binding on both parties

and may be terminated

completely or partially by

mutual consent by

returning the actual or

proportionate amount of

the price paid


➢Agricultural Financing such as fertilizer, seeds, equipment, etc.

➢Working Capital Financing (for raw materials requirement of

companies).


AREAS OF FINANCING USING SALAM

PROCESS FLOW OF SALAM (FORWARD SALE)


❑ Discussion/Request to the Bank

❑ Application

❑ Promise to sell

❑ Items identified and description made

❑ Bank enters into parallel Salam with a buyer

❑ Offer Letter (with full details)

❑ Necessary documentation

❑ Sale/Buy agreement signed

❑ Disbursement is made to customer

❑ Described goods supplied to the Bank at harvest or on maturity

❑ Facility terminated.

❑ Bank deliver goods to the second buyer in parallel Salam.

PROCESS FLOW OF SALAM……CONT’D


ISTISNA’ (MANUFACTURING/CONSTRUCTION) FINANCING

Istisna, like Salam, is the second exception to the

general rule of sale.

An Istisna is a transaction used to acquire an asset

manufactured on order. It may be executed directly

with the supplier or any other party that undertakes to

have the asset manufactured.

There are usually three parties involved in an Istisna

contract; the Istisna requestor, or orderer, the

manufacturer and the Bank.

An Istisna takes place when one party agrees to

manufacture a product for another party at a specific

price. This agreement involves an exchange of an offer

and an acceptance which completes the contract.


FEATURES OF ISTISNA’SUBJECT

MATTER

The subject

matter of an

Istisna need not

exist, be owned

or possessed by

the

manufacturer at

the time of

contract

execution

It must be an

item that is

manufactured as

customary market

practice and

undergoes

processing to

convert from one

form to another

SUBJECT

MATTER

SUBJECT

MATTERPRICE

The quantity or

quality of Istisna

subject matter can

be changed by

mutual consent of

the contracting

parties

The Istisna price,

agreed at the time of

contracting between

the istisna requestor

and the manufacturer,

may be paid at the

time of contract

execution, in fixed

instalments over the

contract’s term or as a

lump sum at the end

of the contract’s term


FEATURES OF ISTISNA’

PARALLEL ISTISNA

A parallel Istisna is a second Istisna contract executed alongside the first Istisna. The manufacturer in the original contract serves as the Istisna requestor in the parallel contract and profits from a difference in price. The parallel Istisna is completely separate and independent of the original Istisna contract

The Islamic bank may

demand security in its

capacity as requestor or

manufacturer. The

security is called Urbun.

Urbun is a non-refundable

down payment that the

seller/manufacturer

receives from the

buyer/requestor, in order

to secure the purchase of

goods

URBUN NO BUY-BACK ISTISNA

TERMINATIONThe Istisna must notinvolve a buy-back atany stage. Before theIstisna is executed itis important toensure that thecontracting partiesare separate andindependent legalentities

Either of the twocontracting parties mayterminate the Istisnaunilaterally provided themanufacturing processhas not commenced. Ifmanufacturing hasbegun, then the contractis binding on bothparties and can only beterminated by mutualconsent


➢ House Financing

➢ Project Financing such as power, roads, water treatment plants etc.

➢ Manufacturing Companies

➢ Financing of Raw Materials

➢ Government Awarded Contracts

➢ Any other Shariah compliant project.

AREAS OF FINANCING USING ISTISNA’


PROCESS FLOW OF ISTISNA’


➢ Idea discussion/request

➢ Promise to buy

➢ Identification and description of asset to be manufactured.

➢ Identification and engagement of contractor for second Istisna

➢ Offer letter (including details of price, payment date and delivery)

➢ Necessary documentation

➢ Istisna Sale Agreement

➢ Agreement with contractor (separate and independent from the Saleagreement above)

➢ Completion of the project

➢ Delivery to the Bank and the Bank to the customer.

PROCESS FLOW OF ISTISNA’…….CONT’D


DIFFERENCES BETWEEN SALAM AND ISTISNA’

Salam Istisna

Subject Commodity Agricultural produce or existing

and off the shelf goods or assets

Items not in existence or not fully

developed or assembled to be fit

for purpose

Price Paid in full in advance Flexible; may be in advance, at

milestones or upon project delivery

Time of Delivery Must be fixed at the contracting

stage

May be reviewed, especially in the

case of project delivery

Cancellation of Contract Can not be unilaterally cancelled

once concluded

Can be cancelled unilaterally even

after concluding the contract, but

must be before manufacturer or

developer commence the project


IJARAH (LEASING)

Ijarah is the lease of a specific asset or service to aclient for an agreed period of time in exchangefor rent which at the end of the lease period mayresult in transferring the subject matter’sownership to the lessee. In principle, an Ijarahcontract is executed for an asset owned by thelessor or an usufruct owned by the sub-lessor.

The subject of lease must have a valuable use, sothings having no usufruct at all cannot be leased.


IJARAH (LEASING)…..Cont’d

August 27, 2021

©2019 Your Company. All Rights Reserved

29

TYPES OF IJARAH

A lease contract in which someone

hire/employ a person on wages. It is a

contract in which someone is hired to

provide his skills and services and

gets paid in return for his services and

expertise

IJARAH TUL

AAMAALIJARAH TUL

MANAFAAY

A lease contract executed to transfer the

benefits of an asset, service or usufruct in

exchange for an agreed price. It does not

involve the services of specific persons.


IJARAH (LEASING)……cont’dIjarah classification based on transfer of ownership to lessee

Standard/Operating Ijarah

A lease contract where the lessee

benefits from the asset or a service

for a specific time period but it

does not result in the eventual

transfer of ownership of the asset to

the lessee.

Ijarah wa Iqtina

A lease contract to transfer

ownership of the leased asset

to the lessee gradually through

the lease period.

Ijarah Muntahiah Bitamleek

A lease contract conducted solely to transfer

ownership of the leased asset to the lessee at

the end of the lease period.

Ijarah Maushufa fi Dzhimah (Forward

Ijarah)

A lease contract used to finance asset under

construction. The customer pays advanced

rent during the construction period of the

asset.


IJARAH (LEASING)….CONT’D

The client and lessor enter into

a promise to execute an Ijarah

for the usufruct of a particular

asset or service

The bank undertakes to provide

the asset or service and the

client undertakes to enter into a

lease contract for it

The asset or service must be

owned by the lessor and made

available to the lessee before the

Ijarah commences

The lease period commences

once the subject matter of the

lease is made available to the

lessee.

Prerequisites of

an Ijarah


PROCESS FLOW OF IJARAH


✓ Idea discussion/Declaration of interest

✓ Promise to rent and buy

✓ Identification of asset

✓ Offer Letter and Acceptance

✓ Ijarah Wa Iqtina Agreement

✓ Necessary documentations

✓ Provision of equity contribution by customer

✓ Purchase of asset by the bank

✓ Signing of agreement (Lease and Sale).

PROCESS FLOW OF IJARAH……..CONT’D


IJARAH SERVICES

Ijarah Services is based on the contract of

Ijarah i.e. the hire/acquisition of services

of persons in exchange for a fee, financial

or material consideration.

The bank assigns to the customer the

enjoyment of the acquired service at a

marked-up rate, which the customer pays

up in a deferred lump sum or on agreed

instalments.


The service in anIjarah of servicescontract shall berecognized byShariah, valuable,identifiable andaccessible.

The service shall becapable of beingdelivered by theservice provider andassignable by theBank.

Permissible services

in this Ijarah contract

will be: Intangible

assets, such as

trademark, patent,

educational services,

property rent,

medical service, and

other forms of

services which are

capable of being

hired or acquired.

The Bank may

appoint the customer

or a third party as an

agent to acquire the

service.

Service fee shall be

determined and

agreed upon by the

contracting parties at

the inception of the

Ijarah contract.

The contracting parties

may mutually agree for

the service fee to be

paid by the customer in

the form of cash or kind;

in advance or in arrears;

in a deferred lump sum

or by instalments.

FEATURES OF IJARAH OF SERVICES

August 27, 2021

35

PERMISIBILITY OF SERVICE

PERMISIBILITY OF SERVICE …CONT’D

AGENCY & SERVICE FEE SERVICE FEES


The contractingparties may agreefor the service feeto paid in fixedamount; to bedetermined via areference to aspecifiedbenchmark orformula; or to bepaid using acombination ofboth.

The Bank cannotincrease the service feeonce it is fixed andagreed upon.No increase in theservice fee due may bestipulated by the bank incase of delay in paymentby the customer. Theunpaid fee becomes adebt and any penaltypaid by the customerdue to delay in paymentof the service fee shallbe donated to charity

It is permissible for the

Institution to require

the customer to pay

an initial service

amount to ensure the

customer’s seriousness

in hiring the acquired

service. This amount

of Customer’s

payment shall be

adjusted against the

total hire amount of

the Services

instalments.

The customer shall

be bound to utilize

the Services solely

for the purpose for

which it was acquired

and is intended

FEATURES OF IJARAH OF SERVICES…..cont’d


36

DYNAMIC OF SERVICE FEE

INCREASE IN SERVICE FEEINITIAL SERVICE

AMOUNTUTILIZATION OF SERVICE


STEPS OF IJARAH OF SERVICES CONTRACT


37

EARNEST MONEY

The client’s unilateral

promise to hire the service

and the financial

institution’s acceptance of

collateral. The Bank

requests the client to

furnish a security or

earnest money called

Haamish Jiddiah. In case

the client backs out from

hiring the service, the bank

makes up for the actual

loss from it and returns the

remainder to the client.

AGENCY

The agency agreement

between the financial

institution and the client or a

third party. The Bank must also

ensure that the service to be

acquired is not already in the

client’s possession by paying to

the service provider before the

agent/customer acquires the

services. The Bank can equally

acquire the services directly or

establish a third party agency.

ACQUISITION OF THE SERVICE

The acquisition

of the service by

the agent on

behalf of the

financial

institution.

ACTUAL ASSIGNING OF SERVICE

The exchange of an

offer and acceptance

between the client and

the financial institution

to implement the

assigning of the

service.


➢ Education

➢ Medical services

➢ Property Rent

➢ Airtime

➢ Consultancy/Advisory

➢ Travels including Hajj and Umrah

➢ Any other permissible services

MAJOR AREAS OF FINANCING USING IJARAH SERVICE CONTRACT


➢ Physical asset (buy)

➢ Already owned or enjoyed services

➢ Salaries of companies – Except where the Bank gets directcontact/contract with the employees of such companies.

➢ Any services that is unlawful or aims towards unethical.

NOT ALLOWED UNDER IJARAH SERVICES


➢ Identification of the services by customer

➢ Discussion with the bank

➢ Promise to buy/hire the service

➢ Provision of security deposit

➢ Offer Letter

➢ Ijarah Service Agreement

➢ Necessary documentation

➢ Purchase or hiring of the services by the bank

➢ Sale/re-hire of the services to the customer by the bank at a higher cost.

PROCESS FLOW OF IJARAH SERVICE


MUSHARAKAH (ACTIVE PARTNERSHIP)

A Musharakah is a partnership that is set up

between two or more parties usually to

conduct business or trade. It is created by

investing capital or pooling together expertise

or goodwill.

Partners share profit based on ownership

ratios and to the extent of their participation

in the business and share loss in proportion to

the capital they invest.

Profit cannot not be fIxed in absolute terms

such as a number or percentage of invested

capital or revenue.


Musharakah capital may be in the form of cash or it may be in kind, for instance contributing assets to the business in which case it is necessary to ensure the assets are valued at the time of Musharakah execution.

Profit may not be

guaranteed or fixed in

absolute terms for any

of the Musharakah

partners

Profit may not be set

as a percentage of

capital

One partner cannot

guarantee any part of

the profit or capital of

another partner.

Silent partner’s profit

ratio may not exceed

his investment ratio.

During the

Musharakah, a partner

may surrender all or

part of his profit share

to another provided

doing so is not agreed

at the time of

Musharakah

execution.

Profit sharing

mechanism and profit

ratios must be clearly

determined at

Musharakah inception.

Musharakah may only

announce an expected

return for the business;

actual returns are

declared only after they

are known.

FEATURES OF MUSHARAKAH

August 27, 2021

MUSHARAKAH CAPITAL MUSHARAKA PROFIT MUSHARAKAH PROFIT MUSHARAKAH PROFIT


PROCESS FLOW OF MUSHARAKAH


43


➢ Any business that is permissible can be considered.However emphasis should be on only businessesthat could not be accommodated by eitherMurabaha, Ijara etc.

➢ Bring examples…………………..

AREAS OF MUSHARAKAH OPERATIONS


MUDARABAH (SILENT PARTNERSHIP)

With respect to the scope of business activity, Mudarabah may be

unrestricted or restricted.

Unrestricted Mudarabah: The Mudarib is free to invest capital in any

Shariah-compliant project of his choice.

Restricted Mudarabah: The Mudarib’s investment of capital is restricted

to specific sectors and activities and/or geographical regions only. Here

too, all investments must be Shariah-compliant.


A Mudarabah is a partnership between

two or more parties usually to conduct

business or trade. Typically, one of the

parties supplies the capital for the

business and the other provides the investment management expertise

Partners capital maybe in the form ofcash or it may be inkind, for instancecontributing assetsto the business inwhich case it isnecessary to ensurethe assets arevalued at the timeof Mudarabahexecution

✓ The capital

contribution can be

made by more than

one Rabb al Maal.

The Mudarib can

also contribute

capital provided that

the Rabb al Maal/

Arbaab al Maal

approve

✓ Only the Mudarib

possesses the right

to manage the

business.

✓ The profit sharing

mechanism must be

clearly defined for all

the partners at the

Mudarabah’s inception

or before profit or loss

is generated.

✓ A partner may

voluntarily surrender

all or part of his profit

share to another

partner provided it is

not pre-agreed at

contract execution

✓ The Rabb al

Maal/Arbaab al

Maal bear(s) the

entire loss based

on capital

contribution

ratios. The

Mudarib does

not bear any loss

except that

caused by his

proven

negligence.

FEATURES OF MUDARABAH


46

MUDARABAH CAPITAL MUDARABAH BUSINESS MUDARABAH PROFIT MUDARABAH LOSS


PROCESS FLOW OF MUDARABAH


47

Rabb-ul-mal

(Investing Partner)

(4) Profit

Investor bears loss(2)

Capital

Mudarabah

Enterprise

Mudarib (Managing

Partner)

(3)

Expertise

(5)

Profit and

Performance Fee

(1)

Profit-Sharing

Agreement


Deposit Sourcing:

➢ Savings Account

➢ LOTUS Profit Sharing Account

➢ Mudaraba Term Deposit

Financing:Not yet operational due to issues of moral harzard.

AREAS OF MUDARABAH OPERATIONS


Differences between Musharakah and Mudarabah

Musharakah

All partners have the right to

participate in the business.

All partners must contribute capital.

All partners bear loss pro-rata to their

capital contributions

Mudarabah

The Mudarib is solely responsible for managing the

business.

The Rabb al Maalprovides the business

capital.

Rabb al-Maal bears any loss to the

business provided it is not due to the

Mudarib’s negligence


WAKALAH (AGENCY)

Wakalah is a contract in which a person (the principal or muwakkel) appoints a

representative (the agent or wakil) to undertake transactions on his/her behalf, that the

principal does not have the time, knowledge or expertise to perform themselves — similar to

a power of attorney agreement in conventional legal terms.

The agent's services may include selling and buying, leasing, lending and borrowing, debt

assignment, guarantee, gifting, litigation and making payments, and may be utilized in

numerous Islamic products like Musharakah, Mudarabah, Murabaha, Salam and Ijarah.

Wakalah are of two types viz:

Wakalah without Fee: where the Bank appoint its customer as an agent to undertake

transactions on his/her behalf such as in Murabahah finance, Istisna, etc.

Wakalah with Fee: where Customers appoint the Bank to invest their fund on agency

contract for a fixed fee, and at times with a promise to share from the profit, if the returns on

investment exceeds a particular benchmark.


KAFALAH (GUARANTEE)

This is a contract in which a third party accepts an existing obligation and becomes

responsible for fulfilling someone’s liability. It is a pledge given to the creditor that a

debtor will repay his debt.

In conventional finance, this situation is called surety or guarantee.

However, in Islamic finance, kafalah is a gratuitous contract. This means that the service

rendered by the guarantor is done freely without any reward or payment. However, it is

possible that a guarantor may recover actual cost incurred for his service.


QARD HASSAN (BENEVOLENT LOAN)

Qard is a loan extended on a goodwill basis, with the debtor only required to repay the amount

borrowed. It is that loan which a person gives to another as a help, charity or advance for a certain

time (charitable or non-commutative contracts).

The repayment of loan is obligatory.

The lender is not entitled to demand or enjoy any kind of benefits from the borrower on account of

the loan. This is because the lender has not undergone any risk, since the borrower must make

repayment to the lender upon request.

Imposing any specific benefit on account of the loan becomes usury, same applies where the

borrower promises the creditor a gift or benefit on account of the loan.

However, the shariah permits husnul Qada (i.e. gracious repayment of loans/debts) where a debtor

repays the lender in excess of the principal of his free will, devoid of preconditions or prior demands.


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