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Management Fees in ‘Qardul Hasan'

( This article was published by NST Business Times, 20th Sept 2006)

by Ust Hj Zaharuddin Hj Abdul Rahman

‘Qard' is defined as the transfer of ownership of an asset or money from the original owner to others on condition that the asset or money will be returned to the owner in the same condition/form/ value as when it first received by the other party from the owner.

In other words, it is a debt given in the form of money or borrowed things like car or hand phone to others on condition that it will be returned to the owner as the way it is, without anything lacking out of it or anything added to it.

Borrowing or ‘Qard' in Islam is a contract, which is based on the concept of mutual help (tabarru') and contemplation for others' well being especially the people in need (Al-Mughni, Ibn Qudamah, 4/353). Thus, Islam highly encourage the practise of ‘Qardul Hasan' as stated in the Hadith of the prophet Muhammad S.A.W (pbuh) : "One who releases his brother from difficulties, Allah will release him from the hardships in the hereafter. ."  (Hadith Muslim)

Another hadith mentioned on the borrowing with no interest charged: From Anas r.a. , the prophet Muhammad S.A.W (pbuh) said: " I saw in the night of the journey (night of Isra' Mikraj) what written on the heaven's wall; One sadaqah will be multiple to gain ten rewards, and the ‘qard' (or the loan without interest) will gain eighteen rewards ..." (Ibn Majah, 2/812).

Thus, on this basis, the contract of loan in Islam is not at all to become a tool for businesses i.e. to gain profits; because business is meant to gain profit and may suffer from loss, but ‘qardul hasan' is an honourable deed, which gain no material profit for the practise.

Therefore, it is crucial to ensure that the objective of welfare and to come to one's aid in the ‘Qardul Hasan' is realized. Accordingly, Islam has laid down an obligation to return the money borrowed without any addition or lacking of a penny or less. 

For example, an amount of RM 5000 borrowed by a debtor must be returned to the creditor in the same amount i.e. RM 5000, without any additional amount or benefits being charged, forced, promised or agreed (for example; a 3 % interest charged on the RM 5000 borrowed money). All Islamic scholars mutually agreed that this is categorized as Riba an-nasiah, which is Haram (unlawful). (Al-Jami' fi Usul al-Riba, page 217).  The same applies to the thing, which is borrowed i.e. to return the thing in its original condition/form. 

The Administrative Cost/Management Fee Issue for Loan Granted

The administrative cost/ management fee for the loan granted under Qardhul Hasan has been widely questioned by Islamic scholars. A few parties have been introducing Islamic financing product in the name of Qardhul Hasan. The technical definition of Qardhul Hasan refers to an interest free loan; it means the borrower is required to repay the principle amount borrowed without any additional value. Islam has strongly recommended this practice and recognised it as an "Ibadah" as it serve to release needy people from difficulty without oppressing the borrower.

However, it is observed that the implementation of Qardhul Hasan seems to contravene from its benevolent objective and it has been transformed into a dual purpose financial instrument, which are meant for welfare service as well as profit taking behind the label of administrative cost /management fee so as it becomes lawful in the eyes of the public but it actually contradict with Shariah principle.

Before I proceed the discussion on the issue of service charge, presented here is the resolution of International Jurists Assembly under "Accounting and Auditing Organization for Islamic Financial Institutions" (AAOFI) (http://www.aaoifi.com/) which mentions that all kinds of benefit or additional (from the borrowed amount) agreed by both borrower and loan giver, or it is made conditional in the contract upfront, or it is charged upon the late payment, in the type of money, things or any benefit, are strictly prohibited which is considered as Riba'. (Shariah Standard, AAOIFI, page 336)

It is further stated in AAOIFI standards, which is inline with Resolution of International Fiqh Academy in its third assembly in the year 1986 that the charging of service cost is allowable with a strict condition that it is an ACTUAL COST. The resolution has mentioned further that the charge in excess of the actual cost is prohibited and thus the Islamic jurists has unanimously agreed in the assembly that the formula used to calculate the cost must be appropriate, exact and accurate. Moreover, indirect costs such as employment expenditure, office rental and expenses, other liabilities, are NOT inclusive in the ACTUAL COST for a financing.

In conclusion, we must understand that the service and administrative cost accumulated in the amount of percentage such as 2%, 3% or 4% from the principal amount in a label of service and administrative cost under Qardhul Hasan is not acceptable by many Islamic Jurists. International Shariah Advisers to AAOIFI has clearly decided, " It is not permitted to link the charge to the amount withdrawn (given)" Shariah Standard, no 10/3/2, page 338. The rationale of the view is to avoid the percentage ties up the cost amount according to financing amount and thus leads to the service charge become a changeable amount. In fact, this charge shall be the same amount even if whatever amounts disburse to borrower (for the reason of usage the same tools and system). The service charge based on percentage is actually Riba' hiding behind the label of service, administrative cost under Qardhul Hasan. Let us imagine that a cost for a financing given could only be MYR 500 (for example) for every transaction, which involves computer usage, overheads and administrative fee, etc. This fact brings us to an understanding that on financing amount approved, the accurate actual cost charged to all borrowers shall be similar at MYR 500 not withstanding the amount borrowed is higher say at RM 50,000.00. If the cost be charged at percentage, in accordingly the cost charged is following the principal amount and thus it is no more considered as actual cost of service and administrative, but it consequently become a Riba, or an interest which charged for every cent borrowed.    

Finally, this writing essentially intend to deliver a message for everyone to ensure the concept of Qardhul Hasan and the fatwa of International Islamic Jurists on the permissibility of charging the cost of service and administrative is not being misunderstood by public or being manipulated

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