IRP 64 – Benefitting from a Loan (Qard) Contract: An Analysis of Juristic Opinions

EXECUTIVE SUMMARY

In Islam, a loan (qard) is considered a gratuitous contract, and providing a loan to a person in need is a recommended (mandub) act for which a lender is rewarded. The gratuitous nature of the loan contract is emphasised in various hadiths which also prohibit the lender from deriving any stipulated benefit from the loan he has provided. Loans that generate conditional benefit to the lender are considered usurious. The practice of usury (riba’) is inextricably tied to the loan and debt where a lender charges the borrower an additional amount. The main focus of this research paper is to provide a critical discussion on the ruling that prohibits the lender from deriving conditional benefit from the loan, and its related issues. We have examined, in the light of juristic opinions, the status of different types of stipulations that would entitle the lender to various types of pecuniary and nonpecuniary benefits.

Regarding the stipulation that a borrower should compensate the lender for inflation, we have argued that a creditor is entitled to the return of his money based on the original purchasing power of the currency at the time when the loan was provided. However, this should be resorted to only in cases of hyperinflation when the value of the currency is drastically depreciated.

Suftajah is a classic example where a lender provides a loan on the condition that the borrower should return it at another place. In this case the lender benefits by the transfer of his money to another place and the borrower is not harmed when he has an arrangement in place to settle the loan in the stipulated locality. Furthermore, the borrower ideally also prefers to settle the loan in the stipulated place. As such, there is a mutual benefit to the lender and the borrower. After examining the various juristic opinions, we found that the opinion of Ḥanbalī jurists that argues for the permissibility of suftajah is preferable.

The idea of a reciprocal loan in its various forms is then examined in detail. We have argued that providing a loan on the condition of receiving another loan provides benefit to the lender and is not acceptable. We next discuss the arrangement among members of a certain group (jamʿīyah) who agree to provide loans to each other. Under this arrangement members of a group agree to contribute a certain amount of money on specific periodical dates. The combined amount in each period is given to a member of the group based on rotation. Hence, a member is lending a certain amount of money to another member and in turn receives a loan from other members. Consequently, the loan he provides is on the condition that other members of the group should provide him with a loan. A critical appraisal is made, and it is found that the arrangement is valid as it does not impose any condition on the borrower but requires the other members of the group to provide loans.

The paper critically examines the practice of combining a loan and a sale contract. We have argued that providing a loan on the condition that the borrower should sell or purchase something to the lender may result in benefit to the lender and is therefore not allowed. The paper also discusses combining a loan with a pledge and found that various juristic opinions prohibit the utilization of pledged property by the pledgee. In this context we have discussed the promise sale (bayʿ al-wafā’) and its various forms. These include providing a loan on the condition that the borrower sells his property, which will then be resold to the borrower upon the settlement of the loan. Bayʿ al-wafā’ may also take another form where a seller sells a certain property to a purchaser on the condition that the purchaser should resell it to the seller if the latter gives back the full price to the former. The paper discusses juristic opinions and arguments from various fiqh schools on the permissibility or otherwise of bayʿ al-wafā’. We found bayʿ al-wafā’ in substance similar to the pledge where the pledgee utilizes the pledged property. The latter Ḥanafī jurists argued in favour of bayʿ al-wafā’ in cases of necessity and as an alternative to a usurious loan where a lender would not provide loan to a person in need of cash without pecuniary benefit. The last contract delineated is the sale of exploitation (bayʿ al-istighlāl), which is closely related to bayʿ al-wafā’. Bayʿ al-istighlāl takes place when a property is sold through the sale of wafā on the condition that the seller of the property should lease it from the purchaser and pay rentals. Bayʿ al-istighlalis a variety of bayʿ al-wafā’ and is therefore subject to the same ruling.

The loan contract is one of the principal vehicles through which usury is practised. The ḥadīths therefore emphasise the gratuitous nature of the loan contract and prohibit the lender to derive any pecuniary or non-pecuniary benefit from the loan he has provided. A conditional benefit imposed by the lender on a borrower not only deprives the loan contract of its gratuitous nature but is also considered usurious. Muslim jurists have therefore devoted extensive discussions to the loan contract and in particular to the conditional benefit that a lender may receive from the borrower. Stipulating a conditional benefit to the lender will change the effect of the loan contract and deprive it of its gratuitous nature. However, it is permissible if a borrower voluntarily provides such benefits to the lender.

Keywords: loan contract, stipulated benefit, suftajah, bayʿ al-wafā’, combined contracts, reciprocal loans, mortgage