Developing Qard financing as a socially responsible instrument : a study of selected Islamic banks

Abstract

Islamic banks seek to achieve multiple goals, including increasing economic growth towards a better and just society. The study identifies several problems related to Qard financing in Islamic banks, including the lack of financing for SMEs, risk concerns, limited use of financing sources, and insufficient transparency in data on the implementation and impact of Qard as a socially responsible instrument. This research aims to develop Qard as a socially responsible instrument in the selected Islamic banks in Organisation of Islamic Cooperation (OIC) countries. By utilizing a qualitative methodology, the study adopts multiple approaches to achieve its objectives. It employs an analytical approach to analyse and compare annual financial and social responsibility reports issued by the selected Islamic banks in OIC countries. The researcher also interviews experts to verify the observations and ensure the research analysis remains firmly tied to industry practices. As a result of the study, there are five models in Qard financing in the selected Islamic Banks. The significant findings reveal that Islamic banks employ various funding sources, encompassing Qard al-Hasan accounts initiated by customers, portions of current accounts (demand deposits), shareholders' profits, and non-permissible earnings for disposal, which do not align with Shari’ah principles. Among the most pressing challenges identified are the scarcity of financing sources and the correlated credit risks. Moreover, the financing purposes are to disburse to four main categories for those needing medical treatment, education and marriage, and commercial financing for customers with extended outstanding obligations to repay their late instalments, called the overdrawn account, and disburse to the SME and employees. The researcher develops Qar? financing, with the purpose name Qar? Taysir Financing. It also addresses financing sources and hedging of the repayment risks, moving to the disbursement mechanism, and concludes with the purposes for which the finances should be granted. The Qar? Tays?r financing model has been designed to provide financing sources for microenterprises, commercial and Ighathah (Relief) purposes, and to address the operating costs and risk of default of Qar? Tays?r Financing through guarantees and repayment sources for defaulted Qard. The mechanism of the Qard Taysir financing model involves the establishment of a Qard Taysir Financing Fund and funding sources of operating costs, as well as a mechanism for disbursement. Furthermore, the Qard Taysir Financing model has been developed to align with Maqasid al-Shari’ah and includes a transparency report to ensure stakeholders are fully informed. Overall, the Qard Taysir financing model represents an innovative approach to Islamic finance, providing greater flexibility and risk management.