Qard Hasan as A Substitute for Social Loans in Libya: A New Approach

Abstract

The aim of this paper is to introduce Qard Hasan (benevolent loan) as a sound substitute for the low-interest social loans that were abolished since the adoption of the full-fledged Islamic banking system in Libya. The paper reviews the literature for the prevailing practices of Qard Hasan and afterward focuses on the case of Libya in order to propose a new approach that may be more convenient for implementing Qard Hasan in the Libyan banking industry. The paper finds that non- profitability and lack of sufficient funding are mainly the reasons why Qard Hasan is not significantly practiced and therefore took its stereotype characteristic as an ethical subject. Thus, the proposed framework is designed to deal with these issues so that Islamic banks in Libya can significantly substitute Qard Hasan for the interest-based Social Loans. The proposed approach may help bridge the gap between conventional and Islamic banking by providing cash to their customers in the form of Qard Hasan without affecting their loanable fund. Locally, the applicability of the proposed framework is expected to support the transition to an Islamic banking system in Libya and deepens public satisfaction with Islamic banking services. Unlike the prevailing experiences and practices that try to encourage Qard Hasan through public funds and charity, this paper proposes regulatory adjustments to facilitate Qard Hasan provision and hence instrumentalize Qard Hasan as a liquidity management and monetary policy tool as well as compensate Social Loan seekers with a Shariah compliant social loans.