FYI: The Good Loan in an Institutional Framework

Asharq Alawsat
Lahem Al-Nasser

In a previous article, I discussed the good loan [al Qard al Hassan] and its importance in Islam as one example of social responsibility encouraged by our true religion in which providing good loans is considered a highly-rewarding deed. Suffice it to say that when a lender gives his Muslim brother a loan for the sake of God, it is as if he has given that loan to Almighty God as he would receive his reward in the hereafter in return for that worldly loan. In the article, I touched on the applications of the good loan in some Islamic banking institutions that had deprived this form of [social] responsibility of its noble significance. They turned it into a means of marketing to double their profits or perhaps to bypass usury, which is prohibited in Islamic Sharia law and which clients try to keep away from. Perhaps the reason for this is that all those institutions are fundamentally profit-oriented bodies. Consequently, there is a conflict of interest between the real purpose of legislating the good loan – which is to provide some comfort to those in need through social responsibility in search of reward from God – and the objective of the founders and operators of Islamic banking institutions – which is to make profit from investment. This is a legitimate goal provided that the means are also legitimate.

In light of the existence of this conflict of interests, I believe it is essential to separate both trends. It would be wrong of us to ask Islamic banking institutions to present their financial services to their clients in the form of good loans because that would gradually invalidate Islamic banking institutions as business models. Investors would lose interest in setting up funds because those institutions would cease to be profit-oriented bodies that meet investment objectives, thus they would turn into charities.

Those who call on Islamic banking institutions to present their financial services by way of providing good loans are actually advocating the elimination of Islamic banking institutions as business models. Some Islamic banking theorists fell into this trap when they reacted to the use of organized Tawarruq which has grown to become one of the most important instruments of funding in the Islamic banking industry today as it constitutes around 65 percent of all funding operations within the industry. Some Islamic banking theorists advocated substituting the good loan system for organized Tawarruq but it never crossed their minds that this kind of change would invalidate Islamic banking institutions as businesses.

I believe that such calls reveal to us how far from reality some Islamic economic theorists are; a fact that makes a lot of their theories inapplicable. This particular case is a clear example of the division between theory and practice in Islamic banking. However my call for separating the good loan system from Islamic banking institutions does not mean that this sector is exempt from its duties towards society including reviving the old tradition of providing the good loan. I believe Islamic banking institutions should implement this system via separate bodies specifically set up for this purpose by Islamic banking institutions alone or in collaboration with charities or institutions for the public good. These entities should be sponsored by Islamic banking institutions. These institutions should provide the initial capital required for establishing those bodies and supervise them administratively and technically owing to the Islamic banking sector’s wealth of expertise in this field as their activities (to provide funding) are similar despite the different objectives. It is common knowledge that funding is an activity that requires managerial and professional efficiency as well as administrative and IT systems that could only be found in financial institutions owing to their high costs.

This is how we could achieve a complete separation between the good loan system, as an instrument of social solidarity on the one hand, and Islamic banking institutions as profit-oriented business models on the other. Moreover, the existence of institutions providing good loans would encourage all segments of society to take on institutional work that encourages social responsibility. We would then see a difference in the pattern of religious endowments. Instead of giving land and buildings as a form of endowment, money would also be given in the form of good loans. We would also see a shift in the pattern of Takaful funds that exist today, whether they are based on family, tribal or employment ties. The simple and limited patterns of these funds will turn into institutional patterns that are run in line with up-to-date financial and administrative systems, thus helping these funds achieve their goals efficiently.