Money & Credit
Exchange through barter has been known to man since ancient times. Barter was an inconvenient method of exchange and introduced many rigidities in the market mechanism. It was the necessity of having an expeditious system of exchange that man looked for a medium of exchange. In the next many centuries money was developed to act as a measure of value and a medium of exchange.
In the sixth century A.D on the advent of the Holy Prophet (Sall Allah-o-alaihe wa sallam), money was already known to the people and coins of various denominations were being minted and circulated in the then civilised world. The Arab traders who were in frequent touch with the rest of the world were aware of these coins and used them in their day to day transactions. At the same time barter was still in vogue and a large number of transactions, especially in agricultural sector, were conducted through barter.
The Holy Prophet (Sall Allah-o-alaihe wa sallam) encouraged the use of money as a medium of exchange. He discouraged barter agreements because there were some practices which could lead to injustice and exploitation, barter was accepted only in a limited number of cases. For example, barter could take place in products of different kinds provided the possession was passed on simultaneously by both the parties. Exchange of two commodities of the same kind could not take place except that the quantity was equal and the possession was transferred simultaneously.[1] Barter transactions in these cases were only tolerated due to their prevalence but were not considered desirable. In a number of cases the Holy Prophet (Sall Allah-o-alaihe wa sallam) issued explicit instructions not to enter into barter agreements. He advised to sell a product for money and to buy the other with its price. Thus money was accepted as a medium of exchange by the Holy Prophet (Sall Allah-o-alaihe wa sallam). The role of money as a store of value was also recognized by the Holy Prophet (Sall Allah-o-alaihe wa sallam) when he levied zakah on monetary assets as well. Money like other assets is subject to zakah at the end of the year. The general theory of zakah lays down that the zakah is leviable on wealth having potential to grow. The fact that zakah is charged on monetary assets suggests that money has been treated as a factor of production as well. It has the potentiality to grow and create more value.
This takes us to the discussion of money as a productive agent and its reward for participating in production. In the capitalist economics, money has been assigned a supreme role amongst other factors of production. lrrespective of the results of productive activity, which takes place by the combination of land, labour, capital and enterprise, it has been accepted that the reward for money (as capital) should be pre-determined and insured. This reward is technically known as interest. The institution of interest has come to be internalised with the concept of money.
In Islam money has been accepted as a factor of production but its reward is not pre-determined or insured. Instead it is contingent on the results of production. In case the productive activity generates any surplus value it may be distributed among all the factors of production. In case of loss, the capital should bear the loss as it is entitled to the profit. Any reward for capital, irrespective of its productivity as ascertained by the results of the investment, has been prohibited in Islam and is considered riba. Capital cannot claim a fixed return periodically without ascertaining the extent of its productivity. Capital may participate in business as a partner of gain and loss. Therefore, those forms of transactions which guarantee a fixed return have been treated as involving riba. Instead the channels of shirkah and mudarabah are open for capital to partake in productive activities and grow.
The riba has a much wider connotation than a fixed return on capital as a factor of production. In case money is extended as a loan no surplus can be claimed over and above the principal.[2] All such increments over the principal sum constitute riba, irrespective of the purpose for which the sum was lent. In case the money is lent for commercial purposes the creditor has two courses open firstly, he may extend as qard hasan; secondly he may like to participate in the profit earned by the debtor. In the latter case he may agree to become a partner (for loss and gain) or rabb-ul-mal (financier) in a mudarabah contract. In any case he has to accept the responsibility of loss with the entitlement to gain. In the former case he cannot claim anything over and above the sum lent. If the loan is for consumption purpose, it has to be a qard hasan.[3] Extending qard hasan is meeting a moral no monetary reward can be claimed for it. Helping the poor and needy has been a virtue in all civilised societies throughout human history.
Qard hasan is an institution of the Islamic economy. It is an overall scheme of social insurance founded at different tiers, family, locality and nationality. It is the primary responsibility of the members of one’s family to extend qard hasan to needy members. In case they are not capable of doing so people living in the neighborhood are responsible to meet their social obligation. In an overall context, the state may undertake to provide this facility in those cases where the family and neighbours have failed to help. In any case the institution has to be organised so that no needy person is exploited by some one due to non-availability of qard hasan.
Qard hasan is a sister institution of infaq. Infaq is spending on the poor and the needy, including one’s own self and family. Qard hasan is loan which is recoverable from the borrower. The Shari‘ah has preferred qard hasan over infaq as the former inculcates self-respect in the borrower and leaves an urge in him to re-generate struggle and enterprise. Infaq is required in those cases where taking back the money is either not possible (as in case of widows, orphans, invalids) or not desirable (as dependent parents, wife, children etc.)
The theory of qard hasan has been couched in an elaborate code of conduct for the debtor and the creditor. Firstly, no loan may be sought until it is extremely urgent. Borrowing for the purpose of acquiring comforts and luxuries is simply unthinkable in an Islamic economy. One can resort to borrowing if the basic necessities of life are not available. Similarly, none has a social responsibility to extend qard hasan if the borrower wants to indulge in a life of israf or tana‘um. Instead in the general framework of the Shari‘ah it seems desirable that such requests should not be encouraged. Secondly, it is desirable to record the transaction in the presence of witnesses (except the day-to-day short term transactions). Thirdly, the lender can ask for a mortgage, technically known as rahn. There are detailed regulations for rahn in the fiqh which may be referred to by the interested reader. Fourth, the debtor has been instructed to make prompt payment on due date. Fifth, a person who affords to repay the loan before the due date should do so. He should not necessarily wait for the due date. Sixth, the creditor has been instructed to treat the debtor kindly. He should not, in normal circumstances, chase the debtor for his money. The dignity of the debtor should not be injured by an indecent course of recovery. Seventh, in case a debtor seeks extension he may be granted generously. Eighth, the creditor should grant remission to the debtor in case he is unable to repay in part or in full. Nineth, in case the creditor is not willing to grant remission, and the debtor is unable to repay, the state may help the debtor from zakah funds.[4] Thus qard hasan is an element of the overall scheme of social insurance visualised by the Shari‘ah through infaq and zakah.
[1] A barter transaction in which two commodities of the same kind are exchanged in unequal quantities or the possession of the one is not transferred immediately is known as riba-ul-fadl.
[2] See al-Qur’an (2:275, 279).
[3] An increment on the principal sum lent is known as Riba-un-Nasiyy‘a.
[4] See al-Qur’an (9:60).
Source: Economic Teachings of Prophet Muhammad (peace be upon him): A Select Anthology of Hadith Literature on Economics, Muhammad Akram Khan. Republished with permission.
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