Turaths & Todays: Muamalat Essentials 

(Class #7, Summary of the class)

Qardh (القرض)

From Kitab Al-Yaqut An-Nafis fii Madzhab ibn Idris:  

Qardh: The Concept of Lending in Islam

1.Definition and Basic Distinctions

Qardh refers to lending with the obligation of returning a replacement (badal). This is different from lending specific items (like a laptop or a book), which in Islamic jurisprudence is known as ‘ariyah (الإعارة).

• Example: If you lend a laptop, the exact same laptop must be returned.
• But if you lend money, what is returned is the equivalent value, not the exact same physical currency note (e.g., not the same serial number).

2. Linguistic and Fiqh Definitions

• Linguistically, qardh comes from the Arabic root al-qat’u (القطع), meaning to cut.
• In fiqh (Islamic legal terminology), qardh means: transferring ownership of something to another with the expectation that it will be returned with an equivalent (not the exact same item).

3. Practical Examples of Qardh

• You lend someone 500g of rice. They cook and consume it. They are obliged to return 500g of equivalent rice, not the original batch.
• Similarly, lending USD 100 means lending value, not the specific banknotes themselves. What is repaid is an additional USD 100, regardless of the serial numbers.

4. Essential Pillars of Qardh Contract

For a qardh contract to be valid, it must contain four key elements:

1. Lender (Muqridhun)
2. Borrower (Muqtaridhun)
3. Loaned Object (Muqradun) – the item or value being lent
4. Offer and Acceptance (Sighah) – mutual agreement and contract

Qardh applies to al-mal al-mithli – items that:

• Can be weighed, measured, or counted
• Have equivalent value in the market
• Can be replaced with something of a similar nature

6. Comparison with ‘Aariyah (Loaning Specific Items)

Qardh	‘Aariyah
Return of equivalent value	Return of the exact item
Applies to money and fungible goods (e.g., rice, oil)	Applies to specific items (e.g., laptop, book)

Spiritual and Ethical Dimensions of Qardh

When studying qardh and Islamic financial ethics, it is essential to keep in mind that our ultimate purpose is to draw closer to Allah, increase our taqwa, and obey His commands.

Relevant Hadith:

إِنَّ أَعْظَمَ الجَزَاءِ مَا أَعْظَمَ البَلاَءِ

“Indeed, the greatest reward comes with the greatest trials.”
“When Allah loves a people, He tests them. Whoever is content will receive Allah’s pleasure, and whoever is displeased will receive His displeasure.”

Riba and Its Link to Qardh

Riba (usury or interest) is a significant concern in Islamic finance. In modern contexts, especially in places like Singapore, riba is often normalised in everyday transactions.

The two main types of riba:

1. Riba al-Fadl – Unequal exchange of the same type of commodity
2. Riba al-Nasi’ah – Interest or excess due to time delay in repayment

Qardh becomes vulnerable to riba al-fadl when there is an unjustified increase in the repayment amount.
For example, lending $100 and requiring $110 in return is impermissible and considered riba.

1. Conditions for the Lender (Muqridh)

The lender must meet the following:

• Free Will: The loan must be given voluntarily, without coercion.
• Legal Capacity: Must be legally fit to give gifts, because qardh falls under non-compensated contracts.

“It is not legally valid for a guardian to lend money belonging to a ward under his care unless in a case of necessity (darurah), as he is not legally authorised to give the gifts on behalf of the ward.”[1]

2. Conditions for the Borrower (Muqtaridh)

The borrower must:

• Act by Free Will
• Have Legal Capacity to Transact:
  • Must be of legal age (baligh), sane (aqil), and not interdicted (mahjur ‘alayh).
  • A person may not be allowed to give gifts but may still borrow or transact—e.g., a contract slave (mukatab) or a slave (qinn) with permission.

3. Conditions for the Loaned Item (Muqradh)

The item loaned must meet the same criteria as in salam/salaf (advance payment) contracts:

1. Immediate Possession: The loan must be handed over in the same sitting; otherwise, it’s a promise, not a contract.
2. Deferred Repayment: The borrower repays the loan at a later time; repayment does not have to be immediate.
3. Known Specifications: The loan’s amount, currency, and other essential characteristics must be known by both parties.
4. Clarity of Language: The contract must be stated in a language both parties understand.
5. Method of Repayment: While optional, it is recommended to specify the repayment method, especially when using bank transfers or other payment methods.

 

4. Conditions for the Contract Procedure (Sighah)

These follow the 13 conditions similar to trade contracts in Islamic law (mainly per the Shafi’i school):

1. No irrelevant interruptions between offer and acceptance.
2. No long silence between the two utterances.
3. Offer and acceptance must agree in meaning.
4. No conditional clauses (e.g., “If you do X, then I’ll lend…”).
5. No time-limited provisions (e.g., “Only for 10 years”).
6. The person making the offer must remain the same throughout.
7. The offer must be audible to someone nearby.
8. The offeror must remain legally capable of contracting until the process is complete.
9. The offer must be addressed to a specific person.
10. That particular person must respond (not someone else).
11. The price or loan amount must be mentioned.
12. Offer must be directed to the person (not to their hand, heart, etc.).
13. The person must intend what they say (not under the influence of sleep, intoxication, etc.).

Example of Valid Exchange:

Zaid says to Amru, “I lend you 1 Dinar (gold).”

Amru replies: “I accept.”

This fulfils the contract of qardh, and the dinar becomes a debt (dayn) upon Amr.

Repayment Timing Conditions

• Not Fixed by Default: Islamic law does not require the repayment date of a qardh (loan) to be fixed unless mutually agreed upon.
• It could be:
  • Open-ended / On-demand: Repayment is made when the lender requests it.
  • Fixed Term: E.g., “repay next year.”
• Once terms are agreed upon, they must be honoured.
• Borrowers cannot unilaterally change repayment terms during the loan term. Any such change must be agreed upon from the start.

If the Borrower Cannot Repay

فَإِنْ كَانَ ذُو عُسْرَةٍ فَنَظِرَةٌ إِلَى مَيْسَرَةٍ

“If the debtor is in difficulty, then [grant] them time until it is easy [for them to repay]”[2]

What Should Happen?

• Recommended (Sunnah): The lender should:
  • Extend the time.
  • Give leniency.
• If Lender Refuses Leniency: The borrower may:
  • Take another loan to repay the first one.
  • The lender may choose to forgive the loan as an act of generosity.

Question. Which Act Brings Greater Reward: Giving a Loan or Giving a Donation?

There are differing scholarly views on which act of kindness carries a greater reward: lending a loan to someone in need or making a donation outright.

Donation (Sadaqah)

Donations are often given from a person’s surplus wealth and are intended solely to earn reward from Allah. It is a commendable act encouraged throughout the Qur’an and Sunnah.

Lending a loan (Qard Hasan)

Some scholars, including Ustadz Aminuddin Abu Bakar, consider lending money to be more rewarding than giving charity. This is because:

• The lender may be parting with money they might still need.
• There is no expectation of profit or worldly benefit.
• The act reflects trust in Allah and genuine care for the borrower.

Question. Extension of Repayment Period in Loans: Is It Permissible?

Is the Lender allowed to extend the loan repayment period?

Yes, it is permissible for a lender to extend the repayment period out of leniency or compassion, especially if the borrower is facing hardship. This is encouraged in Islam and reflects the value of mercy and social solidarity.

Can the Lender ask for something in return for the extension?

No, it is not permissible for the lender to demand any form of compensation or increase in return for extending the deadline. Doing so would fall under riba (usury), specifically riba jahiliyyah or riba qard, even if the borrower agrees to it voluntarily.

Why is it considered riba?

Because any increase in repayment linked to the extension of time in a loan contract—regardless of consent—is considered unjust enrichment and a form of prohibited interest under Islamic law.

What if the borrower offers something extra voluntarily?

If, at the time of repayment, the borrower chooses to give extra as a gesture of gratitude, and this was not stipulated or agreed upon in the loan contract, then it is considered a gift (hibah) and is permissible. The key condition is that:

• It must not be pre-agreed, either explicitly or implicitly.
• No pressure or expectation should be placed on the borrower.

Question:
In a situation where we loan money to someone with the condition that they will repay it within a specific period, and an additional amount is specified, such as $100 or $200. But before the period ends, the company forgives the remaining amount. So, at first they intended to earn interest, but before it is due, they cancel the remaining balance, and the borrower ends up paying only the original amount (e.g., borrow $1,000, was supposed to pay $1,200, but the $200 is forgiven before the due date).

Answer:
This contract is already problematic because it contains an interest clause. From the beginning, it is wrong, whether we are the borrower or the lender. A loan should be repaid with the same amount that was given, no more.

In this case, if the borrower settles the debt before the due date and only repays the original amount, it is allowed, as long as the repayment doesn’t exceed the original amount. It means the lender is showing leniency and forgiving the excess, which is considered a gift (hibah) and is permissible.

But again, the original structure of the contract is not valid according to Shariah if it includes any pre-agreed increase, even if that increase is later waived.

Another topic: Late Payment and Interest Clauses in Islamic Finance

Interest triggered by late payment

In cases such as credit card debt, when a person fails to pay on time, and interest is charged as a penalty, this is riba and strictly prohibited in Islam.

What is allowed to do?

In Islamic finance, we do not allow interest clauses even if the debtor is late in repaying. However, what may be permissible is asking for compensation for actual loss, not for time value or opportunity cost.

Example:
If someone was supposed to pay you on time so you could purchase an item at a fixed price, but due to their delay, the price of that item increased, then you may claim compensation for that actual increase in cost.

This is not interest, it is a real documented financial loss.

Note: Opportunity cost (theoretical loss) is not a valid basis for compensation in Islamic law. The loss must be real and measurable.

Practices in Islamic Banking (Late payment)

In Malaysia:

• Islamic banks do not charge interest for late payments.
• However, due to dual banking systems (conventional and Islamic), some customers began taking advantage by defaulting with Islamic banks (knowing there’s no penalty).
• As a result, Bank Negara Malaysia (BNM) introduced deterrence mechanisms:
  • Islamic banks are allowed to impose late payment fees, but:
    • If actual costs are incurred, they must be evidenced and can be charged.
    • If not, the late payment fee must be channelled to charity.
  • This fee is not considered interest because:
    • It is either based on actual cost or
    • Voluntarily pledged by the customer to charity.

In the Middle East:

There is a practice of including a “forth clause” related to late payment fees. The amount of this fee can sometimes be higher than the market rate for late payment if the actual loss suffered is greater than the standard late payment fee. However, this fee must always be based on the actual loss incurred.

Furthermore, some Islamic banks include a clause stating that if a customer pays late, they agree to pay an additional amount. This extra amount is not considered a profit by the bank but is donated to charity.

This commitment to give an additional amount to charity is called Iltizaam Bittabarru’ — a promise to provide extra funds as charity in case of late payment, reflecting an act of goodwill.

Clarification on Deposits and Custody (Wadi‘ah vs Qardh)

In Singapore and other jurisdictions:

• Bank deposits are considered loans (qardh), because the bank utilises the deposited funds.
• However, if someone hands over money for safekeeping (e.g. “Please hold this $1,000 for me”), and the money is not to be used, then the contract is one of:
  • Wadi‘ah (safe custody), or
  • Amanah (trust)

In such cases:

• The holder cannot use the money.
• If a fee is charged, it is for the service of safekeeping, not as interest.

Other examples in Singapore include bank deposits, which are considered a form of loan.

One key characteristic is when someone holds money that belongs to someone else and uses that money. This often happens in lending situations.

For example, if I give you $ 1,000 as an amanah (trust), the person holding the money is not engaging in a qardh contract, but rather a wadiah (safekeeping) contract, where the money is kept safe until the owner requests it back. In wadiah, the holder may charge a fee, but not interest, and is not allowed to use the money that is being entrusted.

What happens if the money is held for a week and the holder feels the need to use the money?

In this case, the contract changes from amanah (trust) to a wadiah (safekeeping) that effectively involves a guarantee element, known as yaad al-damaanah. This automatically turns into a qardh contract.

The holder can request permission from the owner before using the money or use it without permission, but must replace it immediately. This usage makes the contract a qardh by default.

Another example is the Rahn contract we discussed

We hold a person’s money without liquidating it, but if we face an emergency and need to use the funds, the rahn contract converts into qardh.

Another form of Qardh is a bank deposit contract

When we deposit money in a bank, do they use it? Yes, banks loan the money out. So, the deposit is a liability on their books.

The actual cash held is much less than the total deposits because central banks require banks to maintain a specific liquidity ratio (statutory requirement).

In Islam, it is permissible to borrow money and utilise it under specific rules.

How do Islamic banks justify returns?

This will be discussed later. If they use other contracts, the approach differs. But if they use qardh, the amount given to you is a hibah (gift), not a conditional part of the contract.

In Malaysia, Kuwait Finance House (KFH) do not provide returns, which led to complaints because other banks offer hibah, Similarly, the returns on qardh contracts are not given in Saudi Arabia.

Therefore, in Malaysia and Singapore, banks give hibah in qardh contracts. Bank Negara Malaysia has attempted to facilitate the attraction of customers to Islamic banks by incorporating a predictable hibah rate into the contract, allowing customers to know in advance what return they will receive.

This follows the principle of “al-ma’ruf ‘urfan kal-masyrut bi-shartin” — meaning something good and commonly accepted can be included as a condition in a contract.

Conventional Contracts and Interest

In conventional banking, when you deposit money, the bank uses it and pays you interest on the amount. That money is then loaned out to individuals or companies to earn even more interest. In this case, you are participating in the interest system, both by receiving interest and by contributing to the creation of more interest. This is a clear warning, as riba (interest) is strictly prohibited in Islam.

Financing

If someone needs money and borrows from a conventional bank that charges interest, is this permissible? Islam classifies this as riba qardh (interest-based loan), which is not allowed.

What are the alternatives?

• Avoid taking interest-based loans, although this may be very difficult.
• A common alternative is renting. For example, in Singapore, buying an HDB unit using a CPF loan may cost $1,000 per month, while renting the same type of unit may cost $3,000. Because of this, many scholars and Asatidz in Singapore consider taking such loans as falling under darurah (necessity). Owning a home is a fundamental need that often cannot be fulfilled without financing.
• For car loans, it may not be classified as darurah. However, alternatives already exist, such as Maybank Islamic, which offers Islamic car financing, albeit at a higher rate.
• Don’t just accept any price from a bank — compare with others and try to negotiate for a better rate.

Darurah (Necessity)

Sometimes people are too shy to borrow money. If you are certain that your need is genuine and you are confident in your ability to repay, it is better to borrow from relatives or friends before approaching a bank.

For Muslims living in Singapore, it’s easy to practice ritual worship, but engaging in Islamic finance is challenging due to the prevalence of riba. This is part of our test — it’s very challenging to find Islamic finance facilities in this area.

Service Fees vs Interest

Charging a service fee is only permitted if it accurately reflects the actual costs. For example, if someone borrows $10,000 and you have to take a taxi to deliver the money, you can charge that transportation cost. But you cannot charge anything beyond actual expenses.

Prohibition of Combining Two Contracts

There is a hadith that prohibits combining two contracts in one, as this may be a disguised form of riba.

نَهَى رَسُولُ اللَّهِ صَلَّى اللهُ عَلَيْهِ وَسَلَّمَ عَنْ بَيْعَتَيْنِ فِي بَيْعَةٍ

“The Messenger of Allah forbade two sales in one sale.” (Narrated by Ahmad, Abu Dawud, and An-Nasaa’i).[3]

For instance, “I will loan you $100 only if you buy this item from me for $50.” Such transactions must be avoided.

Rahn and Tawarruq Contracts

In Islamic pawnbroking, if you deposit gold and they charge a monthly fee (e.g., $100) for safekeeping, while also offering a loan on top of that, it becomes problematic. There’s a sale and a loan in one contract. Previously, in Malaysia, this setup existed, but it was later replaced with tawarruq, which better complies with Islamic principles.

Home and Business Financing

For home purchases, Islamic contracts such as murabaha (a markup-based sale) are used. The bank buys the house (say $500,000) and sells it to you at a higher price (e.g., $700,000) on instalments.

In business, some scholars allow companies to take loans to operate, as without financing, many companies can’t function. While it’s best to avoid interest-based loans, if no Islamic option is available, some scholars permit it due to maslahah (public interest).

For a second property or investment, this becomes more complicated. Some scholars permit it as part of wealth-building for the community, while others argue it’s not a necessity and should be avoided.

In Singapore and Malaysia, obtaining Islamic financing for public housing is relatively straightforward. But for private property, it’s more difficult. Yet having such a house can be a darurah and a legitimate investment as prices appreciate due to the government-managed housing supply.

Working at a Bank

Working in a bank isn’t automatically haram. It depends on the job scope. If you’re in IT, admin, or operations, and not directly involved in interest-bearing transactions, then it’s generally fine. We need Muslims working in banks — especially Islamic banks — to help develop these institutions.

Late Payment Fees

If a service provider delivers a service late, you can agree on a discount for every day of delay instead of charging a penalty.

If a customer pays late, the late fee can be collected; however, it must not be retained as income — it should be donated to charity. If the penalty amount exceeds the actual loss, the excess must be donated. If the amount is equal to or less than the actual damage, it may be kept.
This is where the principle of iltizaam bittabaru’ comes in — the customer commits to giving to charity if they default or delay payment.

Benchmarking in Islamic Home Financing

In Islamic finance, a buyer may sometimes pay part of the house price, and the bank pays the remaining amount. Over time, ownership shifts from the bank to the buyer. The issue is — what benchmark is used for profit margin? Many Islamic banks still refer to conventional interest rates. Is this acceptable?

Some scholars argue for using actual rental rates in a given location instead. However, rental rates are often significantly higher than interest-based rates, making it difficult for customers to afford them.

Whether or not Islamic banks can use interest rates as a benchmark is a heavily debated topic. Islamic banks often follow conventional rates to stay competitive. Issues such as staff training and awareness also make achieving full Islamic compliance difficult.

To this day, no country has fully implemented a purely Islamic banking system.

 

[1] Al-Imam Ahmad bin Salim As-Shatiri, Al-Yaqut An-Nafiis fii Madzhabi ibn Idris, p. 376.

[2] Al-Qur’an, Surah Al-Baqarah (2:280).

[3] Abu Dawud, Sunan Abu Dawud, Vol. 3, p. 283

https://islamicfinance.sg/summary-class-6/