Now, let us explain how these two areas of al-Qard al-Hasan and investment loans operate in an interest-free economic system. The end of the accursed system of interest will result in the facilitation of loans, not the end of their availability. The loans will not only be easier to obtain but will be offered on very benign terms and conditions.
For Personal Needs
Firstly, the Islamic system shuts the doors to extravagance and overspending because there can be nobody and no institution around to lend money for unlawful or anti-social activities. Consequently, the entire system of lending and borrowing is automatically restricted to genuine demands, and the amounts of loans obtained and extended will naturally be reduced to a level that is reasonable. Secondly, it will be unlawful for the lender to take any advantage of the borrower and, therefore, the return of the loan will become much easier. If the loan remains unsettled despite these facilities, the Public Treasure (Bayt al-Māl) will come to the borrower’s rescue and help to repay the loan. If a person is unable to get a loan from anywhere, the doors of Bayt al-Māl will be open as a last resort.
The Islamic system of the economy also takes care of personal loans in another way. It is legally binding on commercial and business groups to include, as part of their charter of obligations towards their employees, the provision for offering a loan under extraordinary circumstances. Similarly, the government is also required to be generous towards its employees, which includes the facility of loans in their times of need. By offering employees, wage-earners, and staff members the facility of an interest-free loan, it is not simply performing an act of virtue but is actually instrumental in removing the causes of their mental distress, economic problems, and physical and material hardships.
For Commercial Purposes
Entrepreneurs may rightly ask how banks can offer a loan without a lure of interest. But how can the Bank, which holds in its custody the entire deposits and millions of money of these same entrepreneurs free of interest, refuse to extend them interest-free loans or cash their bills? In the case of its refusal, the Islamic state’s mercantile law can take action and the Bank can be forced to extend this service to its clients. The millions contributed to deposits by entrepreneurs should serve as an incentive for commercial and investment banks to extend interest-free loans. In emergencies, the banks can also draw from their reserve funds for this purpose.
As for the management of interest-free loans, the banks can do this safely through interest-free deposits in their Current Accounts. They can meet the nominal expenses incurred from those deposits. The cost thus payable will be far below the amount of profit earned by the banks. If this is found to be unfeasible, they can levy normal service charges on their deposit-holders on a monthly or quarterly basis.
For Non-Productive Public Sector Needs
The third important category of loans are those obtained by the government to meet national emergencies such as calamities and wars, or for non-productive public needs. Under the Islamic economic system, it will be possible for individuals and institutions to respond generously to a government call for funds because of the abolition of interest and the state-management of Zakāh should have made them self-reliant and affluent enough to inspire them to hand over their savings to their government voluntarily.
In case of a shortfall, the government can seek a loan and the public will willingly extend to it al-Qard al-Hasan. If the short-fall persists, the government can use the revenue generated through Zakāh or Khums, or from compulsory loans obtained from banks or as a last resort, bridge the gap by printing the required amount of currency notes, which will be yet another form of a public loan.