Transactions

Loans and Debts

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There are different ways through which funds could be raised to meet individuals and organisations needs and funding requirements. Raising loans is one of the various ways these requirements can be fulfilled. In the terminology of Islamic framework, Qard and Dayn relate to the giving or taking of loans. However, the word Dayn has a broader connotation then the word Qard. Dayn incurs in any way which leaves a debt as a liability to another party to be paid later without any profit over the principal amounts. Whereas, Qard could be defined as an interest-free loan for needy borrowers extended on a goodwill basis; in particular Qard al Hasan provides funds for humanitarian and welfare purposes without any profit accruing to the lender.

In fact, Qard consists on giving ownership of anything having value for the benefit of another by way of virtue. The ownership of the loaned objects is transferred to the borrower who can use, buy, sell, or donate them as the borrower wishes. Qard is only applied when one gets obliged to return the equivalent of the thing taken and repayment is for the same amount as the amount lent. Goods of the same kind will be paid back on demand or at the settled time. Qard should not bring any return or addition to the lender because that would be equivalent to taking Riba. However, a borrower can pay more than the amount borrowed, but it must not be stipulated in the contract. Further, the date of payment of the loan may or may not be included in the Qard contract as the lender can demand repayment at any time. And the loan should not be conditional upon any other contract, such as Bai´ and vice-versa.

Ariyya is another structure of borrowing goods in a virtuous act. However, in the case of Ariyya, the exact borrowed commodity has to be returned to its owner, not any replacement. While in Qard, the same kind of the loaned commodity with essentially the same nature or character could be paid back.

On the other hand, a Dayn is the result of any contract or credit transaction. The created debts ought to be returned without any profit over their principal amounts. Salaf is a form of Dayn that is similar to Salam. It is used for a loan of fixed tenure and in that sense it is closer to Dayn; Salaf includes loans for short, intermediate and long term loans and the price of the commodity is paid in advance, while it is delivered at a future date. The amount given as Salaf cannot be called back before its due date. Therefore, this creates a liability for the seller to supply the commodity in the future.

In addition, in all credit transactions, Islam recommends witnesses and documentation. This provides safeguards against disputes and allows credit transactions for a fixed or known time period. And since Islamic banks can neither pay interest nor charge any return on loans, they have the right to ask for collateral to ensure recovery of the loan amount. In fact, the client cannot refuse to repay the loan or debt in case he has incurred loss in the business conducted with the bank’s loan. Also, The Shari´ah puts a great deal of emphasis on repayment of loans/debts and the borrower also has a moral obligation to repay a loan. For that reason, banks can include, with mutual consent of the clients, a penalty clause in the credit contract to mitigate the risk of default, but the penalty charged on any default has to go to charity.

With regard to a possible rebate that could be given to the debtor for repaying the loan earlier than the due date, the Shari´ah considers that as a reduction of interest in the financing costs arising from prepayment of the amount that would be stipulated in a contract. And, there is unanimity about the illegality of remitting a part of the debt payable by anyone and getting the remaining part. However, Muslim jurists have differentiated between loans or debts that have become due or can be called back at any time (Duyoon Haalah), and loans where time of payment settled between the creditor and the debtor and the debt is not yet due (Duyun Mu’ajjalah). Duyoon Haalah are allowed by almost all Muslim jurists on the rationale that in such loans, delay is not the right of the debtor. In fact, rebate should neither be provided in the agreement nor be made a condition in the loan contract. In opposition, remission of a part of a debt not yet due involves Riba.

Responsabilities of debtors and creditors

The fulfilment of one’s obligation under all contracts is a religious duty in Islam. Therefore, the Shari’ah defines specific rights and responsibilities of debtors and creditors. The most important duty of the debtor is to repay the loan in fulfilment of the promise or contract made with the creditor. God’s punishment will be severe to the borrower whose intention is to blemish or to usurp the loan. And the main duty of the creditor is not charge interest on the principal amount of the loan because those who charge Riba are compared in Quran to those controlled by the devil’s influence.

In fact, Islamic teachings stress that a borrower, when accepting loans, must be firmly determined to make repayment. The debtor should not only pay the debt in time, but also express gratitude to the creditor while repaying the borrowed amount. And if the debtor refuses to pay even though he has the means, he would be a perpetrator of injustice who exposes himself to possible punishment. In fact, in Shari´ah, if a debtor default wilfully, he can be arrested, punished and dealt with harshly.

In addition, Islam condemns the person who delays the payment of his dues without a valid cause. He could be admonished, disgraced or even jailed and if necessary could be disposed of his asset to pay the debt. A monetary fine, on the other hand, wouldn’t be a lawful option, since this would amount to a monetary penalty for delayed payment, which is Riba. However, Islam makes a distinction between debtors who default by Procrastination and those who default by necessity. The Qur’an recommends that the latter deserves compassion and is to be given be given respite until he is able to pay. In extreme circumstances, creditors are exhorted to forgive the debt, which can be counted towards obligatory Zakat or as a donation.

However, Islamic jurists see no harm if it is agreed between the parties that some indirect benefits do not involve any cost for the borrower. For example, debt could be paid in the form of cheques and drafts or in some other currencies if it is in the interest of both the parties.

In the case of a debt with a settlement date, the creditor is not entitled to ask for earlier repayment, so long as the debtor does not transgress the terms and conditions. But, if the creditor is not disposed to give more time for repayment, he cannot be compelled to do so and the debtor would then be liable to repay the debt at the falling due from whatever he has beyond his basic needs.

In addition, Shari´ah allows creditors to ask for collateral to ensure recovery of the amount in the case of failure by borrowers to fulfil their obligation for the repayment of the debt. The subject of the sale could be the subject of a pledge made to the extent of the debt. In fact, a pledge is permissible in the Shari´ah, whether a person is on a journey or at home and even between a Muslim and a non-Muslim. The ownership of the pledged goods remains with the pledger, who takes on the risk of losing the pledged commodity while the pledgee holds the goods on trust. Hence, if the pledged goods are lost without any fault of the pledgee, the loss would be that of the debtor. And if the due debt is not paid, the pledgee can apply to the court to have the pledged good sold and the debt recovered out of the sale.

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