Qard Hassan Agreement (Malaysia)

A Qard Hassan Agreement in Malaysia fixes the respective duties and entitlements of the parties to the arrangement.

In Malaysia, qard hassan is regulated within the Islamic finance framework established by the Islamic Financial Services Act 2013 (IFSA 2013) and the Islamic Banking Act 1983 (IBA 1983). Bank Negara Malaysia (BNM) — the central bank — has published the Shariah Standard on Qard as part of its Shariah Standards and Operational Requirements (SSOR) framework, which sets out the conditions and documentation requirements for qard hassan transactions by licensed Islamic financial institutions. BNM's Shariah Advisory Council (SAC) resolutions on qard have clarified that service charges or administrative fees (not profit-based) are permissible in institutional qard transactions provided they are actual costs, not a disguised form of interest.

Qard hassan is widely used in Malaysian Islamic banking as the Shariah basis for products such as current accounts (wadiah yad dhamanah), benevolent loan facilities from EPF (Kumpulan Wang Simpanan Pekerja, KWSP) to contributors, and employee welfare loans by employers. The Employees Provident Fund Act 1991 authorises certain withdrawal facilities structured on qard hassan principles. Credit cooperatives (koperasi) registered with the Registrar of Co-operative Societies (RCS) under the Co-operative Societies Act 1993 also use qard hassan as the basis for welfare loan schemes for members.

A qard hassan agreement must be distinguished from a murabahah facility — a cost-plus-profit sale — and from an ijarah facility — a lease-based financing structure — both of which are permissible Islamic finance structures that involve a lawful profit element. Qard hassan is also distinct from a hibah (gift), which requires no repayment, and from a conventional interest-bearing loan, which is prohibited by Shariah in its entirety.

For private party qard hassan agreements between individuals or non-licensed entities, the Contracts Act 1950 provides the general framework of contract law — offer, acceptance, consideration (though Islamic law treats qard as a gratuity, Malaysian courts apply the Contracts Act to the repayment obligation) — while Shariah compliance is achieved by omitting any interest or profit element from the agreement.

A Qard Hassan Agreement in Malaysia is needed whenever a lender and borrower wish to document an interest-free loan that complies with Shariah principles.

A Qard Hassan Agreement is needed when an employer extends a welfare loan or salary advance to an employee without charging interest, and the parties wish to document the principal amount, repayment schedule, and the Shariah basis of the transaction for record-keeping purposes.

A Qard Hassan Agreement is needed when a family member or friend lends money to another person in the spirit of mutual assistance (ta'awun) and wishes to create a written record of the principal amount and repayment terms to avoid future disputes, while confirming that no interest is charged.

A Qard Hassan Agreement is needed when a mosque (masjid), Islamic welfare organisation, or registered charity (pertubuhan) under the Societies Act 1966 extends an interest-free loan to a recipient from its zakat or sadaqah fund, requiring documentation for accountability to the management committee and relevant authorities.

A Qard Hassan Agreement is needed when a co-operative society (koperasi) registered under the Co-operative Societies Act 1993 provides a welfare loan to a member from a qard hassan fund, and the co-operative requires a signed agreement for its records and to enable recovery of the principal if the member defaults.

A Qard Hassan Agreement is needed when a Malaysian company provides short-term interest-free funding to a related company within the same group for temporary liquidity purposes, and the group wishes to document the transaction as a proper qard hassan on Shariah-compliant terms rather than an informal cash advance.

Parties in Malaysia should prepare a Qard Hassan Agreement (Malaysia) proactively rather than waiting for a dispute to arise. Courts interpret agreements based on the written terms rather than oral representations. Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Where the transaction involves regulated activities, prior approval from the relevant authority may be required before execution.

A valid Qard Hassan Agreement in Malaysia must contain the following essential elements consistent with BNM Shariah Standards and the Contracts Act 1950.

Parties: The agreement must identify the lender (al-muqridh) and borrower (al-muqtaridh) by full legal names, NRIC or company registration number with SSM under the Companies Act 2016, and addresses. For institutional lenders, the agreement must confirm that the institution holds the appropriate licence under the Islamic Financial Services Act 2013 or is otherwise authorised to engage in Islamic financial transactions.

Shariah Declaration: The agreement must contain a declaration that the transaction is structured as qard hassan in accordance with Shariah principles, that no riba (interest or usury) is charged, and that the agreement is subject to BNM Shariah Advisory Council resolutions on qard.

Loan Amount and Currency: The agreement must state the principal amount in Malaysian Ringgit (RM) in both figures and words. The BNM Shariah Standard on Qard requires that the repayable amount is exactly the principal disbursed — no addition for time value of money.

Disbursement Date and Method: The agreement must state when and how the loan is disbursed — whether by cash, cheque, or bank transfer to an account held at a licensed bank under the Financial Services Act 2013 or the Islamic Financial Services Act 2013.

Repayment Schedule: The agreement must specify the repayment date or schedule — whether in a single lump sum or in instalments. For instalment repayments, each payment date and amount must be set out. Under BNM guidelines, any payment exceeding the principal constitutes riba and must not appear in the repayment schedule.

Permitted Administrative Charges: If actual administrative costs are charged (permissible under BNM SAC resolution), these must be documented as cost-recovery charges, not profit, and must not increase with the loan duration.

Consequences of Non-Payment: The agreement may include provision for ta'widh (actual loss compensation) where the borrower defaults, consistent with BNM's Shariah Standard on Ta'widh — which permits recovery of actual losses proven by the lender but prohibits penalty interest. Debt restructuring provisions may be included.

Governing Law and Dispute Resolution: The agreement must state that it is governed by the laws of Malaysia including the Islamic Financial Services Act 2013, and that Shariah disputes may be referred to the BNM Shariah Advisory Council under Section 56 of the Central Bank of Malaysia Act 2009.

Additional compliance elements for a Qard Hassan Agreement (Malaysia) used in Malaysia include: Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Forms-legal.com provides this template as a starting point for Malaysia-compliant documentation.