Qardul Hasan Cash Note

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A “benevolent loan” offerred from Bank Islam Malaysia Berhad?

Prepared by: Jamil Hassan & Badruzzaman Ishak 2nd April 2008

Highlights – Qardul Hasan Cash Note

1. Product Financials and Background

2. Definition of Qardul Hasan

3. What is Qardul Hasan Cash Note a) Product Structure

b) Process Flow

c) Accounting Treatment

4. Commentary on the Product

5. Conclusion

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1. Financials – Bank Islam’s Qardul Hasan Cash Note

Financing 2003 RM (M)

2004 RM (M)

2005 RM (M)

2006 RM (M)

2007 RM (M)

1 Qardul hasan

535 540 835 1061 1267

2 Financing Net

6816 7640 9168 8501 8002

3 Financing Gross

7194 7985 10350 10216 9838

4 % /Gross Financing

7.4% 6.7% 8.1% 10.4% 12.4%

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From 2005, Qardul hasan Cash Note was renamed to Bai Inah Cash Note.

2. Qardul Hasan Cash Note Product Background

Product was introduced to the market in late 90’s and was aimed as a personal financing offering to the Bank’s retail customers.

Product is very well accepted and by 2007, Qardul Hasan Cash Notes was 2nd most popular product (RM1.27b or 12.4% of Financing Asset), the first being BBA for House Financing (at RM5.8b or 59% of Financing Asset). It is one of the most successful products ever launched by Bank Islam.

Product is offered to customers without collaterals and guarantors, and is targeted to staff and employees of government departments, Universities, GLCs and other big companies.

A specialized package is offered to the staff of each institution on the basis that the institution is agreeable to arrange repayments via salary deductions

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2. Definition of Qardul Hasan

Qardh Hasan (Benevolent Loan) - A Shariah principle governing a loan contract between two parties for social welfare or for short-term bridging finance. Repayment is equal to the amount borrowed. The borrower can pay more than the amount borrowed so long as it is not stated or agreed upon ( Asian Bond Online http://asianbondsonline.adb.org/knowledge_center/glossary/glossary.php?ABI_Market_Name=MY&selectedletter=Q)

Qardul hasa (A benevolent or good loan): An interest free loan given either for welfare purposes or for bridging short term funding requirements. The borrower is required to pay only the amount borrowed (Ref: Al Barakah Bank - http://books.themajlis.net/node/300)

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2. Interpretation of Qard (Lending) in Islamic Banking and Finance

Lending in Islam is a charitable act since the lender according to Shariah tenets has to give away the lent goods/money to the borrower for the period of the loan without seeking any worldly compensation.

Therefore, in loan contracts, any increase over the principle of a loan is a Riba.

Hence, Islamic banks are not active in lending like conventional banks because they are not interest based. Facility given in Islamic banking practice is not al-qard al Hasan (benevolent loan).

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3. Bank Islam’s Qardul Hasan Cash Note

1. Qard Hasan Cash Note is basically a personal financing.

2. For the Customer to obtain this facility, he has to agree with the Bank on the following:-

The Bank will give a loan to the Borrower an amount of money as stated in the cash Note (The

Loan) under the principle of Qard Hasan Contract in the form of cash note. The cash note is only valid to buy foreign currency from the Bank. The loan has to be paid to the Bank in the amount and manner as agreed by both parties.

The Borrower agrees to buy from the Bank the foreign currency at the amount of the cash note

(on spot) and pay the foreign currency using the cash note (The Sale Price).

The Borrower then agrees to sell back to the Bank at the price of the actual personal financing

approved (spot) and the Bank will pay to the Borrower by bankers cheque or other mode of payment as agreed by both parties.

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3. Qardul Hasan Cash Note Process Flow

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Bank Borrower

Bank Borrower

Loans (Qard Hasan) of Cash Note RM150,000)

Bank Borrower

Sells Cash Note SAR100,000

Purchases Cash Note RM150,000

Purchases Cash Note SAR 100,000

Sells Banker’s Cheque RM100,000

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2

3

Borrower owes

RM150,000

Borrower receives

RM100,000

3. Qardul Hasan Cash Note Accounting Entries

1. Booking of Loan (Qardul Hasan)

a. Dr Qardul Hasan Financing RM150,000

b. Cr Cash RM100,000

c. Cr Unearned Income RM50,000

2. Sale of Saudi Rial

a. Cr Saudi Rial Stock RM100,000

b. Dr Cash RM100,000

3. Purchase of Saudi Rial

a. Dr Saudi Rial RM100,000

b. Cr Banker’s Cheque RM100,000

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4 .Product Commentary

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• Literally : excess, expand, increase, etc. Any unjustified excess above and over the capita, whether in loans (between creditor and debtor) or in trade (with similar commodities).

Meaning of Riba

• Riba al Buyu’ (exchange transaction)

• Riba al fadl (due to excess)

• Riba al Nasi’ah (due to delay)

• Riba al Duyun (loan/debt)

• Riba al Nasi’ah (due to delay)

Types of Riba

4. Product Commentary

•

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Riba Al Duyun (Loan)

Prohibition of riba in loan as a result of delay in time is the Quranic verses, e.g.

2:275.

In loan riba will occur if the three conditions below are fulfilled :

• there is excess or surplus over the loan capital;

• determination of this surplus in relation to time;

• stipulation of this surplus in the loan agreement.

Riba Al Buyu

Prohibition of riba in the exchange of ribawi commodities in the hadith of the

Prophet on six commodities :

“Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, equal for equal,

and hand to hand (spot); if the commodities differ, then you may sell as you wish, provided that the exchange is

hand to hand or spot transaction”.

4. Product Commentary Riba Al Buyu – Rules of Hadith

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Rule Conditions

1 Money1 + Money1 1. Equality 2. Hand-to-Hand (spot)

2 Food1+Food1 1. Equality 2. Hand-to-Hand (spot)

3 Money1 + Money2 1. Hand-to-Hand (spot)

4 Food1+Food2 1. Hand to Hand (spot)

5 Money+Food No condition – Free Trading

6 Others + Others No Condition – Free Trading

4. Product Commentary Riba Al Nasiah & Riba Al Fadl

Riba Al Nasi’ah (Riba due to delay)

1. In a loan transaction because of delay in repayment – riba al duyun;

2. In the exchange of certain riba-bearing (ribawi) items, whereby the exchange is defferd or not spot/cash – riba al buyu’.

Riba Al Fadl (Riba due to excess)

1. In the exchange of exactly similar riba bearing (ribawi) items, whereby the exchange counter values are not equal in amount/quantity

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4. Product Commentary Qardul Hasan Cash Note

It seems like Qard Hasan Cash Note is legalizing the mode of financing under rule 3 of the hadith.

Under this rule, there is no condition for equality.

By utilizing Foreign Currency in exchange with Ringgit Malaysia, equality is not a condition. The only condition is hand to hand - i.e. spot payment. By making spot payment, although the amount differ, no riba’ has occurred.

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Rule Condition

Money1 + Money 2 Hand to Hand (Spot)

4. Product Commentary Is Qardul Hasan Cash Note a Qardul

Hasan? Qard Hasan is supposed to be a benevolent loan where if the lender lends

RM100, 000, the Borrower only needed to pay RM100,000.

The Borrower is encouraged to pay more than the loan amount but the lender cannot impose and/or ask for such condition.

In this facility, it involves 3 agreements:-

1. Qardhul Hasan Agreement 2. Asset Sale Agreement 3. Asset Purchase Agreement

Clearly from the set of agreements, it also involved a sale and purchase

(selling and buying). So can we call this facility as Qard Hasan? Can we call the facility as Murabahah? Cost not declared, no goods involved. Can we call the facility as Al-Inah? Yes – 2 parties involve but no goods involved.

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4. Product Commentary Is Qardul Hasan Cash Note a Qardul

Hasan? Can we call the facility as tawarruq? No, since only 2 parties are

involved, and no commodity is traded

So, actually the facility is under what /which underlying principle???

Qard Hasan is a lending and borrowing without any interest. It does not involve trading i.e. buying and selling.

The product seems to use rule 3 of the hadith as a tool to legalize the product where money1 and money 2 can be exchanged/traded if it is done on the spot.

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5. Conclusion

We are of the opinion that the facility shall not be use and/or called Qard Hasan as it really confuses the public.

As per the resolution of Shariah Council of BNM - The Council in its

51st meeting held on 28th July 2005 / 21st Jamadil Akhir 1426 resolved that the word ‘Hasan’ should be taken out after the word ‘qardh’ implying that qardh is an obligation for borrowers to repay their loan to lenders. (Malaysian Islamic Finance Center – MIFC

http://www.mifc.com/publication/srif/10_qardh.pdf

Bank Islam, as of end 2005 onwards (as evidenced in its Annual Report 2005), has renamed this product to Bai Inah Cash Note, to be in line with the direction of the Shariah Council of BNM.

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Thank You

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