The concept of Qard (loan) and Islamic finance

What is it about?

The concept and application of Qard (loan) is central to banking and finance. The primary business of a bank or financial institution is to take or give a loan on the asset and liability sides of its balance-sheet. However, from Islamic perspective, a contract of loan cannot be used to generate profit i.e. if an Islamic bank gives a loan to its client, it cannot charge interest. Here, the question arises about the underlying reasoning of this ruling in Shariah. Additionally, the concept and application of Qard Hasan (a shariah-compliant and reward-worthy interest-free loan) is at occasions misunderstood. This papers provides an excellent explanation on the nature of Qard as well as Qard Hasan.

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Why is it important?

This paper provides a framework to understand the concept, nature, character and application of Qard (loan) from Shariah perspective. The discussion of the paper is highly relevant to all those who aspire to grasp the idea of why Islamic banking products cannot be based on lender-borrower relationship. Additionally, this paper argues that Qard Hasan (loan par excellence) is a charity-based product, and it does not fit with the nature of banking business.

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