Local Shariah banks wary of offering qard

By Habhajan Singh
Local Islamic bankers are in favour of offering qard hassan, or benevolent loan, but are reluctant to proceed aggresively as they fear that they may not be able to generate profit or recover their financing cost, a study found.
Qard hassan -- a non-bearing interest loan provided particularly to help the customers, stakeholders or society members at large who are in need of help -- is pracically non-existent in the local banking landscape, save for its use in card services by three Islamic banks.
The three players deploying the qard hassan concept are Bank Muamalat Malaysia Bhd, Al-Rajhi Banking & Investment Corporation (M) Bhd and Kuwait Finance House (M) Bhd (KFH Malaysia), according to the study by International Islamic University Malaysia (IIUM).
The survey, conducted by Dr Muhammad Akhyar Adnan and Dr Noraini Mohd Arifin from IIUM's accounting department, also noted that total outstanding qard hassan value was 'very much less than any other products or services rendered'.
In 2007, the study cited that the outstanding balance of qardh hassan in Bank Muamalat was only RM5.65 million, Al-Rajhi (RM2.84 million) and KFH Malaysia (RM33,000). In comparison to the total outstanding financing, these are only 0.1%, 0.15% and 0.001% respectively for each of the three banks.
A year later, in 2008, an inspection of the various bank's annual reports by The Malaysian Reserve shows some increase in the numbers for qard contracts with Bank Muamalat at 27.49 million, Al Rajhi Malaysia3.44 million and KFH Malaysia at3.16 milion. (In its 2008 annual report, Bank Muamalat stated RM13.49 million for qard hassan loan for 2007.
The KFH Malaysia 2008 annual report also showed up the use of the qard contract for the bank's demand deposit. In 2008, it stood at RM261.20 million, down from the year before at RM468.25 million, at the bank level.
The fact that qard does not feature prominently in the Islamic banking transaction is not a surprise as banks are generally driven by profit. Qardh, on the other hand, is a debt or borrowing contract between two parties in which repayment of the borrowed amount must be of the same.
Commenting on qard, Bank Negara Malaysia's (BNM) booklet on 'Resolutions of Shariah Advisory Council of Bank Negara Malaysia' has this to say: "Since qardh hasan concept is essentially benevolent in nature, it is improper to implement it in commercial transaction with profit orientation. Thus, the Council has made in-depth srcutiny on the terminology to modify it according to the current needs."
It noted that in the early stage of Islamic banking development in this country, several products were introduced based on qardh hasan, such as government investment certificate and benevolent loan. Now, the application has been expanded to include other products such as rahn, credit card and charge card.
It has also been used to structure liquidity management instrument for Islamic banking institution, noted the central bank guide for Islamic banking.
On this front, BNM Shariah council resolution on Dec 29, 2005 permitted the liquidity management instrument based on qardh, which is a contract of interest free loan between Islamic financial institution and Bank Negara Malaysia to facilitate the need of short-term loan.
Nevertheless, it added, that the central bank as the borrower can pay back more than the borrowed sum in the form of hibah provided it is at sole discretion of borrower and there is no pre-condition clause.
The IIUM survey found that majority of its respondents (90.2%) agreed that qard 'enhances a corporate social responsibility', with 85% respondents agreeing that Islamic banks should offer the qardh.
When asked what were the problems to launch qard, the survey gathered six main reasons. In its order of prevalence, they were: Not able to generate any profit, not able to cover the financing, high administrative and transaction costs, high risk, no support from top management, and, no demand from customers.
The survey, according to Dr Muhammad Akhyar and Dr Noraini, brought out a paradox with a good number of respondents in support of launching the qard, but at the same time still thinking about profiting from the product.
"No wonder than if most of Islamic banks do not implement this product," the wrote in a paper made available to The Malaysian Reserve. (The paper will be published the next Monday's edition of the Islamic finance sector pages).
When asked by under what circumstances should Islamic banks offer qard, Dr Muhammad Akhbar replied: "In Islamic point of view, profit is not the only thing to be targeted by a commercial company. This view has also been shared now even by capitalistic or conventional companies. It is why the CSR is becoming popular recently among them. The offer of qard, might be one of forms of CSR."
KFH Malaysia's current account has 'call account' or 'demand account' that is offered based on the principle of qardh. The bank says that under this Shariah principle, the money deposited into this account is not subject to any risk in investment nor is exposed to profit or loss. When demanded, the bank will pay you the total sum or part thereof standing to the credit of the customer's account.
At Al Rajhi, its charge card which 'offers you all the convenience of a card with none of the pitfalls of credit' is based on qard, where the bank pays for your purchases on a qard or loan basis, and the card holder pays back in full on the due date.