A New Perspective of Benevolent Loan, QARD Al-Hassan, Using Upfront Payment ‘Mesbah Point’

Bound by religious or moral beliefs of the participants, benevolent loan, Qard al-hasan, is an interest free loan in which only the return of the capital is required during the term of the loan. Lack of institutional investor participation, as well as high administrative fees, are some of the major obstacles that have kept Qard al-hasan from gaining popularity in financial lending. This study has demonstrated a new method in Qard al-hasan lending using Mesbah Point to promote Qard al-hasan as a viable lending transaction. Based on this method the borrower initially makes an optimum amount of upfront payment to receive a zero percent interest rate, no fee loan. The distribution of remaining principal has been studied under two scenarios; Standard MP and Accelerated MP. Based on Mesbah Finance platform the Qard al-hasan lenders and the financial institutions can gain sufficient returns which may help them to cope with their accruing costs as well as earn some profit by providing Qard al-hasan. Although the rate of return in this method unsurprisingly remains below the conventional method, accelerating the monthly payments to the level of conventional monthly payments significantly improves these shortfalls and offsets the gap of return. Accelerated MP shortens the payback period especially in longer loan terms as well as increases the earnings to the level that the participation of institutional investors are possible. The institutionalization of Qard al-hasan is the ultimate aspiration in the Islamic banking system and this study meets the most challenging Islamic lending practice which is Qard al-hasan.