Chapter 12: Fundamentals of Islamic Economic System by Dr. Muhammad Sharif Chaudhry

 

 

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Fundamentals of Islamic Economic System

By Dr. Muhammad Sharif Chaudhry

CHAPTER 12

LOAN

  1. The Qur'an and the Sunnah on Loan

  2. General Rules in the Light of the Qur'an and the Sunnah

  3. Duties of Debtors

  4. Duties of Creditors

I- The Qur’an and the Sunnah

Before dealing with the subject of loan in detail and discussing its various aspects, we shall reproduce the verses of al-Qur’an and traditions of Prophet Muhammad (PBUH) relating to this subject.

Verses of the Qur’an :

1. O ye who believe ! Observe your duty to Allah, and give up what remaineth due to you) from usury, if ye are (in truth) believers. And if ye do not, then be warned of war (against you) from Allah and His Messenger. And if ye repent, then ye have your principal (without interest). Wrong not, and ye shall not be wronged.

-(2:278-279)

2. And if the debtor is in straitened circumstances, then (let there be) postponement to (the time of) ease; and that ye remit the debt as almsgiving would be better for you if ye did but know.

-(2:280)

3. O ye who believe! When ye contract a debt for a fixed term, record it in writing. Let a scribe record it in writing between you in (terms of) equity. No scribe should refuse to write as Allah hath taught him, so let him write, and let him who incurreth the debt dictate, and let him observe his duty to Allah his Lord, and diminish naught thereof. But if he who oweth the debt is of low understanding, or weak, or unable himself to dictate, then let the guardian of his interests dictate in (terms of) equity. And call to witness, from among your men, two witnesses. And if two men be not (at hand) then a man and two women, of such as ye approve as witnesses, so that if the one erreth (through forgetfulness) the other will cause her to recollect. And the witnesses must not refuse when they are summoned. Be not averse to writing down (the contract) whether it be small or great, with (record of) the term thereof. That is more equitable in the sight of Allah and more sure for testimony, and the best way of avoiding doubt between you; save only in the case when it is actual merchandise which ye transfer among yourselves from hand to hand. In that case it is no sin for you if ye write it not. And have witnesses when ye sell one to another, and let no harm be done to scribe or witness. If ye do (harm to them) lo! it is a sin in you. Observe your duty to Allah. Allah is teaching you. And Allah is Knower of all things.

-(2:282)

4. If ye be on a journey and cannot find a scribe, then a pledge in hand (shall suffice). And if one of you entrusteth to another let him who is trusted deliver up that which is entrusted to him (according to the pact between them) and let him observe his duty to Allah. Hide not testimony. He who hideth it, verily his heart is sinful. Allah is Aware of what ye do.

-(2:283)

5. Allah chargeth you concerning (the provision for) your children: to the male the equivalent of the portion of two females, and if there be women more than two, then theirs is two-thirds of the inheritance, and if there be one (only) then the half. And to his parents a sixth of the inheritance, if he have a son; and if he have no son and his parents are his heirs, then to his mother appertaineth the third; and if he have brethren, then to his mother appertaineth the sixth, after any legacy he may have bequeathed, or debt (hath been paid).

-(4:11)

6. The alms are only for the poor and the needy, and those who collect them, and those whose hearts are to be reconciled and to free the captives and the debtors, and for the cause of Allah, and (for) the wayfarers; a duty imposed by Allah. Allah is Knower, Wise.

-(9:60)

Ahadith of Prophet Muhammad (PBUH) :

1. Abu Qatadah reported: I heard the Holy Prophet say: Whoso gives respite to a debtor or grants him remission, Allah will save him from the calamities of the Resurrection Day.

-(Muslim)

2. Abu Hurairah reported that the Messenger of Allah said: Whoso takes loan of the properties of men intending to pay it back, Allah gives him means to pay it, and whoso takes loan intending to destroy it, Allah will destroy him on its account.

-(Bukhari)

3. Abu Qatadah reported that a man enquired: O Messenger of Allah inform me that if I be killed in the way of Allah, patient, hopeful of reward, advancing forward without retreating, whether Allah will forgive my sins, “Yes” replied the Apostle of Allah. When he retraced his steps, he called him and said: Yes, except debt. Thus said Gabriel.

-(Muslim)

4. Abu Hurairah reported: If any dead body with debts due was brought before the Messenger of Allah, he used to ask: Has he left any source of payment for his debt? If he was informed that he left means for payment, he used to say his funeral prayer, but of not, he used to address the Muslims: Say prayer for your companion. When Allah granted him victories, he stood and said: I am an object of love of the Muslims more than their ownselves. So whoso among the believers dies and leaves debt, its payment devolves on me, and whoso leaves property, it is for his heirs.

-(Bukhari and Muslim)

5. Osamah bin Zaid reported that the Messenger of Allah said: Usury is in promise. And in another narration he said: There is no usury in what is hand to hand.

-(Bukhari and Muslim)

6. Abdullah bin Hanjalah reported that the Messenger of Allah said: A dirham of usury a man devours with knowledge is greater than thirty six fornications.

-(Ahmad, Darqutni)

7. Abu Musa reported from the Prophet who said: Verily the greatest of sins to Allah with which a man shall meet Him after the great sins which Allah prohibited is his debt outstanding at death but leaving nothing for its payment.

-(Ahmad, Abu Daud)

8. Anas reported that the Messenger of Allah said: When someone of you gives a loan, and then he (debtor) sends present to him or carries him upon a beast – don’t ride on it, nor accept it unless it was prevalent between them previous to it.

-(Ibn Majah, Baihaqi)

9. Imran-b-Hussain reported that the Messenger of Allah said: Whoso has his dues from a man and then gives time to him (for payment), he will get his reward of charity every day.

-(Ahmad)

10. Muhammad-b-Abdullah reported that the Prophet of Allah said: “And by One in Whose Hand there is the life of Muhammad, if a man be killed in the way of Allah and then raised to life, and again be killed in the way of Allah and again raised to life, and again be killed in the way of Allah and again raised to life with debt due from him, he shall not enter Paradise till his debt is satisfied.

-(Ahmad, Sharhi-Sunnat)

11. Abu Hurairah reported that the Messenger of Allah said: There was a man who used to give loan to the people. He used often to say to his son: When you come to a needy man, grant him remission, so that Allah may remit us (of sins). He said that he then met Allah and He granted him pardon.

-(Bukhari and Muslim)

12. Abul-Yasar reported: I heard the Messenger of Allah say: Whoso gives respite to a debtor or grants him remission, Allah will give him shade under His shade.

-(Muslim)

13. Abu Hurairah reported that a man demanded of the Holy Prophet for repayment of a loan and was greatly harsh to him. His companions were about to attack him, but he said: Leave him, as the creditor has got a demand. Buy a camel for him and give it to him. They said: We don’t but find senior to it in years. He said: Then buy it and give it to him, and verily the best of you is he who is the best of you in repayment of loan.

-(Bukhari, Muslim)

14. Abu-Omamah reported : I heard the Messenger of Allah say: Areeat loan must be paid back, and Minha present must be returned, and debt must be paid, and the surety is a debtor.

-(Abu Daud, Tirmizi)

15. Ka’b-b-Malek reported that he made demand to Ibn Abi Hadrad within the mosque of a loan which he owed to him at the time of the Holy Prophet. Their voices were so loud that the Prophet heard it while he was within the mosque. The Holy Prophet came out to him till the screen of his room was exposed. He called Ka’ab-b-Malek. He asked : O Ka’ab ! ‘present’ replied he ‘O Messenger of Allah! Then he hinted with his finger : Remit half of your debt. Ka’ab said: O Prophet of Allah ! I have just done,’ He said (to debtor) : Get up and pay it (remaining half).

-(Bukhari, Muslim)

16. Abdullah-b-Amr reported that the Apostle of Allah said: Every sin of a martyr shall be forgiven except debt.

-(Muslim)

17. Abu Hurairah reported that the Messenger of Allah said: The soul of the believer remains hanging with his debt till it is paid.

-(Ahmad, Tirmizi, Ibn Majah)

18. Jaber reported: I had a debt due from the Apostle of Allah. He paid it back and paid me excess.

-(Abu Daud)

19. Abu Burdah-b-Musa reported : I came to Medina and met Abdullah-b-Salam. He said : Verily you are in a land wherein usury is prevalent. So when you have got dues from a man, and the latter gives you present of wheat or a load of grass, don’t accept it as it is usury.

-(Bukhari)

20. And it has been narrated by Bara’a bin Arib that Mu’az was indebted, and his creditor came to the Holy Prophet. So the Prophet purchased all his properties in exchange of his debt till Mu’az stood penniless.

-(Mishkat)

21. Abu Sayeed al-Khudri reported that a dead body was brought to the Messenger of Allah for his funeral prayer. He enquired : Is there any debt due from your companion? ‘Yes’ said they. He asked: Has he left anything for payment? ‘No’ said they. He then said: Pray for your companion. Ali-b-Abi Taleb said: O Messenger of Allah ! his debt is upon me. Then he stepped forward and offered his funeral prayer. In a narration of the same meaning he said: May Allah save your surety from Hell as you saved the loan of your brother Muslim. There is no Muslim who pays off the debts of his brother but Allah will save his surety on the Resurrection Day.

-(Sharhi-Sunnat)

22. Sa’ad-b-al-Atwal reported: My brother died and left one third of one hundred dinars and left behind minor children. I wished to spend (it) for them. The Messenger of Allah said to me : Your brother is confined for his debt, so pay it off. He said: Then I went, paid it, returned and said: O Messenger of Allah ! I have paid  it, and there remains none except a woman who claims two dinars without any proof. He said : Pay her, as she is truthful.

-(Ahmad)

23. Abu Hurairah reported that the Messenger of Allah said: Whoso becomes insolvent and afterwards a man (creditor) takes hold of his exact property, he is more entitled to it than others.

-(Bukhari, Muslim)

24. Abu Sayeed reported that a man suffered damage during the time of the Holy Prophet in respect of fruits which he had purchased. His debt became heavy. The Messenger of Allah addressed: Give alms to him. So the people paid him alms but that did not come up towards satisfaction of his (entire) debt. Then the Apostle of Allah said to his creditors: Take what you find, and there is nothing besides that for you.

‑(Muslim)

25. Sharid reported that the Messenger of Allah said: For a solvent man, his honour and punishment become lawful. Ibnul Mubarik said: “His honour is lawful” – means to treat him harshly is lawful and his punishment by confining him is lawful.

-(Abu Daud, Nisai)

26. The Messenger of Allah is reported to have said: “Three kinds of people cry out to Allah for help but are not answered : first, those who have ill-tempered wives but do not divorce them; second, those who are entrusted with the property of orphans but return it to them before they attain maturity; third, those who lend money to others without any document or evidence.”

-(Mishkat-ul-Masabih)

27. Anas reported that the Messenger of Allah said: when someone of you gives a loan and then he (debtor) sends present to him or carries him upon a beast do not ride on it, nor accept it unless it was prevalent between them previous to it.

-(Ibn Majah)

28. Ayesha reported that the Holy Prophet died while his coat of mail was in pledge to a Jew for thirty Sa’as of barley.

-(Bukhari)

29. Abu Hurairah reported that the Messenger of Allah said: A back may be ridden upon with his expense when it is a pledge, and the milk of the udder may be drunk with his expense when it is a pledge. And on one who rides on or drinks is the expense.

-(Bukhari)

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II- General Rules in the Light of the

Qur’an and the Sunnah

Following principles flow from the verses of the Qur’an and Ahadith of the Prophet of Islam:

1.       Islam recognises Qard Hasanah (gratuitous loan) only. Loan may be in any form i.e. in cash or in commodity, it may be big or small, it may be for personal needs of the debtor or for purpose of business, the loan shall be given without interest. Interest has been prohibited by Islam and so it cannot be charged on any loan in any form. The Prophet (PBUH) has even forbidden the creditor to accept any gift or any favour from the debtor after giving him loan as it would be considered usury unless the practice of exchanging gifts or accepting favours was prevalent between them previously.

2.       No loan should be contracted except in case of extreme necessity. Borrowing for purpose of luxurious and extravagant living is not permitted. It can only be resorted to if one’s basic needs are not being fulfilled. indebtedness has been discouraged by Islam as it ruins the individuals as well as nations. This can be easily known from the severe warnings that have been given in case of debts left unsatisfied. All the sins of a martyr are forgiven except debt. The Prophet did not offer funeral prayer of a debtor who did not leave behind provision for payment of his debts. The greatest of sins with which a man shall meet Allah on the Day of Judgement is his debt outstanding at death for payment of which he leaves nothing. Keeping in view these warnings, great precaution should be taken in contracting debt.

3.       Since the verbal agreements regarding loans lead to disputes, feuds and litigations, the revealed book of Islam has made it obligatory on both the parties, creditor as well as debtor, to reduce the contract of debt into writing in the presence of two witnesses and settle terms and conditions regarding its repayment. The scribe is to write the contract according to the dictation of the debtor and in case the debtor is of unsound mind or minor, according to the dictation of his guardian. But in case a debt is contracted during a journey and no scribe is available, then the debtor should give some of his property in pledge to the creditor. The scribe and the witnesses owe duty to be fair in writing and giving evidence, while the creditor and debtor owe duty not to harm them in any way. Writing down of contracts of loan is so much important that the Prophet of Islam is reported to have said that those who lend money to others without any document or evidence are not helped by Allah when they cry for help in case of non-recovery of such loan.

4.       The lender can ask for some security in the shape of any asset or property from the debtor as a guarantee of repayment of loan. It is technically called mortgage or ‘Rahn’. The creditor is, however, strictly prohibited to make any profit out of mortgaged property because it would be usury. But he is allowed to drink the milk of or ride on the animal which is a pledge if he incurs expenses of its fodder.

5.       Payment of debt is a first charge upon the estate of deceased before the estate is divided among its legal heirs.

6.       In the absence of any such contract, the repayment of debt voluntarily with excess amount is lawful. It is not riba. According to Jaber, the Prophet owed him some debt and when he paid it back he paid excess.

7.       Loan should be contracted with an intention of repaying it. According to a Hadith, whoever takes a loan with an intention of not returning it is a thief.

8.       Creditor has right to use harsh words against a debtor who does not pay back his loan. Even a debtor can be imprisoned for non-payment of loan by a court when suit for recovery is filed by the creditor before such court.

9.       If a debtor is in straitened circumstances and is not in a financial position of repaying his debt, then the creditor should postpone his demand to the time when the financial position of the debtor improves and he is able to repay it. However, if the creditor remits the debt as almsgiving, it would earn him high rewards from God.

10.   A debtor is eligible for Zakat for discharging burden of his debt. Islamic state is obliged to help the debtors out of its Zakat revenues as freeing the debtors of their debt liabilities is one of the heads prescribed by the Qur’an on which Zakat collected by the state should be spent.

11.   When there is dispute between the creditor and the debtor regarding repayment of loan and the debtor is unable to satisfy the demand of the creditor, the ruler or the judge should try to make settlement between them. The creditor should be asked to remit part of the debt while the debtor should be asked to make prompt payment of the remaining debt.

12.   To free the neck of a poor debtor is very virtuous act which carries great reward. The Prophet of Islam is reported to have said: There is no Muslim who pays off the debt of his brother but Allah will save his surety on the Resurrection Day.

13.   If a poor person dies with unpaid debt leaving no property for its discharge, Islamic state is responsible for its payment provided the debt is genuine and the Islamic state is financially in a position to do so. It can repay such debts from its Zakat funds also. The Prophet, as first head of the Islami state accepted this responsibility when the state under him attained sound financial position.

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III- Duties of Debtors

1.       A person should avoid indebtedness because debt is a great burden and responsibility. Debt destroys peace of mind and in case of non-payment it destroys one’s prospects of salvation in the Hereafter. One must try to refrain from incurring debt and should always pray: “Allah ! I seek refuge to thee from overwhelming debt and oppression of men’’. The Prophet himself used to pray like that so often.

2.       Debt should be incurred only when it is unavoidable. It may be incurred to satisfy basic needs or to discharge an essential responsibility such as marriage or education of children, medical treatment of a member of
family or building a house. In no case debts should be contracted for unlawful purposes or for luxurious living.

3.       Debt should be taken with a clear intention to pay it back. If one takes loan intending to repay it, God gives him means to do so, but if he takes it with the intention to destroy it, God will destroy him on its account.

4.       It a creditor demands for some security in shape of property or asset, the debtor is bound to provide him the same. In case the creditor asks for some surety or guarantee of a third person, the debtor should provide such surety or guarantee. However, the debtor is duty-bound to honour his promise of repayment of loan and in no case he should place the dignity of his surety at stake.

5.       Debtor should pay back the debt promptly on the promised date or earlier. In any case debt should be discharged even if he has to sell all his property and he is left with nothing. Repayment of loan is so much stressed in Islam that the debtor has been given permission to beg for alms or seek Zakat in order to discharge his burden.

6.       If the debtor does not honour his pledge and does not make the payment of loan despite persistent demand of the creditor, the creditor has the right to use harsh words and sue him in a court. Confinement of the debtor in a prison or auction of his properties is lawful for satisfying his debt.

7.       Non-payment of debt is a great sin. If a man is killed in the way of Allah many times but dies without paying his debt, he shall not enter paradise till his debt is satisfied. All the sins of a martyr are forgiven except his debt. Therefore, the debtor is duty-bound to clear his debts before his death. Otherwise his legal heirs should clear his debts.

8.       Contract of loan should be reduced in writing in the presence of two witnesses. The debtor has the right to give dictation to the scribe when the contract of loan is being written. He should, however, give dictation according to the terms settled and should not diminish anything.

[Back to the start of this chapter]

IV- Duties of the Creditors

1.       A Muslim who advances loan should know that interest is forbidden in Islam. So he should help his brother is need with a gratuitous loan (Qard-e-Hasan). He should not charge any interest, neither he should expect any gift or any other unusual favour from his debtor. Acceptance of present or even riding upon the beast of debtor amounts to ‘Riba’ (interest) according to a tradition. Qard-e-Hasan (loan without interest) in itself is an act of great virtue and Allah rewards the lender out of His infinite bounty who helps Allah’s creatures. A well-to-do Muslim, therefore, should not hesitate to give Qard-e-Hasanah to another needy Muslim.

2.       Loan should be advanced to a genuinely needy person who requires the loan for his genuine needs and not for the purpose of luxuries or extravagant expenses on marriages and festivities or for unlawful activities like drinking and gambling. If a non-genuine person requests for loan, you have every right to turn down such request because you have no social responsibility under Islamic Shariah to help those who indulge in extravagance and illegal activities.

3.       When a creditor lends money to someone, he should make a contract in writing with the debtor settling terms and conditions of loan and the time for its return. Such contract or document should be executed in the presence of two witnesses. According to a Hadith of the Holy Prophet, a person who lends money without any document or evidence is not helped by Allah when he cries for such help in case of non-recovery of loan.

4.       The creditor should be generous enough in extending the time of repayment of loan if the debtor is in straitened circumstance and is unable to meet his demand. Giving respite to a debtor or postponing recovery of loan till the debtor is in easy circumstances is an act of great virtue which gets reward of charity from Allah every day till the date of final recovery.

5.       If the debtor has become insolvent and is not in a position to pay back the loan, the creditor is enjoined upon to remit the debt. Remission of loan amounts to almsgiving and is an act of great virtue which carries many rewards. According to Prophet Muhammad (PBUH), whoso gives respite to a debtor or grants him remission, Allah will protect him from the calamities of the Resurrection Day and will give him shade under His shade. According to another Hadith, a man was given pardon by Allah as he used to say to his son : “When you come to a needy person, grant him remission so that Allah may remit us of our sins.”

6.       If the debtor is not able to make full payment, the creditor shall accept partial payment and remit the balance or accept payment in installments. In case debtor’s property is sold and the sale proceeds thereof are not able to fully satisfy the claim of the creditor, the creditor should content himself with the sale-proceeds and remit the remaining debt.

7.       Although a creditor is allowed to use harsh words in case of a solvent debtor who does not repay the loan despite persistent demand, but still he is instructed not to lose his cool. He should kindly treat his debtor and should not injure dignity of the debtor by indecent course of recovery. Allah enjoins justice and kindness in mutual dealings.

If the debtor has surrendered some property or asset as security to the creditor, the creditor is not entitled to take any undue profit or benefit out of that because, according to jurists, it would amount to usury. However, he can ride the animal or get its milk if it is in pledge and he maintains it on his own expense.

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