Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures

Chapter 13Qard

The contract of qard is one of lending money. It is not a sale contract or a lease contract, but rather a contract where one party transfers ownership over a certain asset to a counterparty. The counterparty is permitted to utilize the asset, but is required to return the asset after a specific period of time. The counterparty may return an asset similar in quality and quantity to the one borrowed provided the lender agrees to the arrangement.¹

The asset or subject matter lent may be an asset like an object, such as a machine, a tool, or it may be money. In either circumstance, the borrower is required to return the asset, and is liable if the asset suffers any damages, but the borrower is not required to return anything more than borrowed, so an interest payment would be out of the question if the subject matter borrowed is money.

In the context of Islamic finance, one party that has surplus money may lend the money to a counterparty that suffers from a deficit of money for a specific period of time. The borrower enjoys full ownership rights over the money borrowed, and may spend it, invest it, or even lend it to another party. However, the borrower is required to return the borrowed sums, but is not required to return any excess over and above the amount borrowed. The borrower may as a courtesy to the lender for lending money, pay the lender an excess amount at his or her discretion using the concept of hibah (Figure 13.1).

Figure 13.1 Qard Process Flow