Qardul Hasan Cash Note

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 Islams Qardul Hasan Cash Note

Financing
1 Qardul hasan

2003 RM (M)
535

2004 RM (M)
540

2005 RM (M)
835

2006 RM (M)
1061

2007 RM (M)
1267

2
3

Financing Net
Financing Gross

6816
7194

7640
7985

9168
10350

8501
10216

8002
9838

% /Gross Financing

7.4%

6.7%

8.1%

10.4%

12.4%

From 2005, Qardul hasan Cash Note was renamed to Bai Inah Cash Note.
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2. Qardul Hasan Cash Note Product Background

Product was introduced to the market in late 90s and was aimed as a personal financing offering to the Banks 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 shortterm 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)

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).

3. Bank Islams Qardul Hasan Cash Note

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

3. Qardul Hasan Cash Note Process Flow

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

Borrower owes RM150,000

Borrower

Sells Cash Note SAR100,000

Bank
Purchases Cash Note RM150,000

Borrower

Purchases Cash Note SAR 100,000

Borrower receives RM100,000

Bank
Sells Bankers Cheque RM100,000

Borrower

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. b. Cr Saudi Rial Stock Dr Cash RM100,000 RM100,000

3.

Purchase of Saudi Rial

a. b. Dr Saudi Rial Cr Bankers Cheque RM100,000 RM100,000

4 .Product Commentary
Meaning of Riba
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).

Types of Riba

Riba al Buyu (exchange transaction) Riba al fadl (due to excess) Riba al Nasiah (due to delay) Riba al Duyun (loan/debt) Riba al Nasiah (due to delay)

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4. Product Commentary
Riba Al Duyun (Loan)
Prohibition of riba in loan as a result of delay in time is the Quranic verses, e.g. 2:275.

Riba Al Buyu

Prohibition of riba in the exchange of ribawi commodities in the hadith of the Prophet on six commodities :

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.

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.
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4. Product Commentary Riba Al Buyu Rules of Hadith

Rule
1 2 3 4 5 6 Money1 + Money1 Food1+Food1 Money1 + Money2 Food1+Food2 Money+Food Others + Others

Conditions
1. Equality 2. Hand-to-Hand (spot) 1. Equality 2. Hand-to-Hand (spot) 1. Hand-to-Hand (spot) 1. Hand to Hand (spot) No condition Free Trading No Condition Free Trading

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4. Product Commentary Riba Al Nasiah & Riba Al Fadl

Riba Al Nasiah (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

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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 Condition hadith. Rule
Money1 + Money 2 Hand to Hand (Spot)

Under this rule, there is no condition for equality. By utilizing Foreign Currency in exchange with Ringgit Malaysia, equality is not a condition. The

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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. 2. 3. Qardhul Hasan Agreement Asset Sale Agreement 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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