Understanding Islamic Finance - Doha Academy of Tertiary Studies

Loan and Debt in Islamic Commercial Law 175On the deposits side, they mobilize some deposits in current accounts that also take theform of loans. Hence, study of the rules pertaining to loans and debt in Islamic finance is ofcrucial importance.Various terms like loan (Qard), debt (Dayn) and commodity loans (‘Āriyah) have beenexplained in the chapter, with the conclusion that only the principal amount of a loan or adebt created by Islamic banks has to be paid and any addition would be Riba.While in trading of goods it is permitted that the credit price of a commodity be differentfrom its cash price, no value can be assigned to the time given for payment of a receivableonce its amount is mutually stipulated.Repaying a loan in excess of the principal and without a precondition is commendableand compatible with the Sunnah of the holy Prophet (pbuh). However, gracious repaymentof debt is a matter of individual discretion and cannot be adopted as a system, because thatwould mean that a loan would necessarily yield a profit, which does not fit in the philosophyof Islamic finance.The instructions of the Sharī´ah to debtors and creditors have also been discussed in detail.The foremost duty of the debtor is to repay his loan in fulfilment of the promise or contractmade with the creditor. While creditors have been advised to be lenient in the recovery ofloans, debtors have been warned that debt has to be repaid and nonpayment carries seriousconsequences in the Hereafter. A lender or a seller on credit can demand any security toensure recovery of the debt if the debtor is not able to pay his liability.Sharī´ah scholars have approved the provision of penalty clauses embedded in the contractualagreements to the effect that, in the case of a default in payment of the debt, theclient will pay a certain amount as a penalty, which will be given to charity. Banks canclaim liquidated damages or compensation for a loss arising from default through the courtsor any arbitration committees that should keep in mind the actual loss suffered by the bankand not the “opportunity cost” in the conventional sense.A rebate on prepayment of a debt per se is not allowed. However, the AAOIFI’s Sharī´ahStandards allow banks to give rebates at their discretion if they are not stipulated in thecontract.Debts can be assigned under the rule of Hawalah, but no obligation of debt should remainunpaid, and if the assignee becomes bankrupt, dies or is unable to pay for any other reason,the original debtor (assignor) is obliged to pay. In the sale of the debt, the purchaser ofthe debt instrument has no recourse to the seller of the debt and, therefore, due to theinvolvement of Gharar and Riba, the sale of debt is prohibited, except in the case where itis subject to the rules of Hawalah.An Islamic bank as a pledgee may derive benefit from a security in return for its servicesfor its maintenance. However, any extra income, i.e. over and above the expenses incurredby the bank, should go to the pledger.Finally, it has been explained that debts have to be repaid without any provision forindexation with any commodity, currency or basket of currencies. However, one can lendin terms of gold or any other currency, which, in one’s perception, is not vulnerable toinflation. In this case also, the debt liability would not increase due to inflation.