By
Nikita Bundzen Head of North America Fixed Income Department
Updated January 20, 2025
What is a Qard Al-Hassan Sukuk?
A Qard Al-Hassan Sukuk represents a financial instrument in Islamic finance, where equal-share documents are issued to collect a specific amount of money or to finance a development project in a non-profit manner. These sukuk operate under the principles of Shariah law, emphasizing ethical and interest-free financing.

Qard Al-Hassan Sukuk Explained
Qard Al-Hassan Sukuk are financial instruments in Islamic finance represented by documents with equal shares intended to collect a specific amount of money or to finance a development project non-profitably. They are designed to provide charity to those in need and to support developmental goals, aligning with Islamic finance's ethical principles.
The issuance of Qard Al-Hassan Sukuk is for non-profit purposes, aiming to offer financial assistance to those in need while achieving broader developmental objectives. Unlike conventional bonds, Qard Al-Hassan Sukuk do not offer coupons or interest payments, as Islam prohibits Riba (interest). Instead, the return is provided as a gift, based on the borrower's estimates, emphasizing the ethical and charitable nature of these instruments.
The issuance of Qard Al-Hassan Sukuk supports financial inclusivity and ethical investment. By offering a non-profit financing option, these sukuk provide opportunities for individuals and institutions to participate in developmental projects without relying on interest-based finance. This aligns with the goals of many central banks and financial institutions to promote sustainable economic growth and social development.
Types
Qard Al-Hassan Sukuk are divided into two main types: Iqrad (Lending) Sukuk and Sukuk for financing development projects. Each type serves distinct purposes while adhering to the principles of non-profit, ethical investment, and financial inclusivity.
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Iqrad (Lending) Sukuk. Iqrad Sukuk are designed to collect a sum of money aimed at providing loans to finance small or medium projects or to lend to the needy. These sukuk operate on the principle of providing financial assistance without interest, ensuring that the funds are utilized for productive and charitable purposes. The funds collected through Iqrad Sukuk are used to lend money to individuals or businesses, often requiring sufficient guarantees to mitigate risks. This type of sukuk supports economic development by enabling access to capital for small and medium enterprises, which might otherwise struggle to secure financing from traditional banking institutions. The amount collected from these sukuk contributes to the funds banks can use for investment purposes, while adhering to the principles of Islamic finance.
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Sukuk for Financing Development Projects. Sukuk for financing development projects are intended to fund charitable development initiatives in the form of Qard Al-Hassan loans. These sukuk are typically used to establish infrastructure such as hospitals, universities, or research centers. The financing provided through these sukuk can support large or medium-sized projects that have significant social and economic impacts. By issuing Sukuk for financing development projects, central banks and financial institutions can channel funds into essential sectors, promoting sustainable development and improving public welfare. The involvement of scheduled commercial banks ensures banks can manage the collected funds effectively, adhering to reserve requirements and maintaining liquidity.
Characteristics
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Non-Profit Purpose. The issuance of Qard Al-Hassan Sukuk is primarily for non-profit purposes. These sukuk are designed to provide charity to the needy and support developmental goals. This characteristic differentiates them from conventional financial instruments that aim to generate profits. The funds raised through Qard Al-Hassan Sukuk are used to finance small or medium projects or to lend to individuals in need, fostering social and economic development.
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No Interest Payments. Unlike conventional bonds, Qard Al-Hassan Sukuk do not promise coupons or interest payments, as Islam prohibits Riba (interest). Instead, these sukuk offer returns based on the estimates of the borrower under the concept of a gift. This feature ensures that the financing provided through Qard Al-Hassan Sukuk adheres to Islamic principles, promoting ethical and interest-free investments.
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Tradability in the Secondary Market. Qard Al-Hassan Sukuk are tradable in the secondary market, enhancing their liquidity and attractiveness to investors. The ability to trade these sukuk allows for greater flexibility and access to funds, making them a viable alternative to conventional bonds. The involvement of scheduled commercial banks and depository institutions in managing these sukuk ensures that they comply with regulatory requirements, such as the cash reserve ratio definition and reserve requirements set by most central banks.
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Impact on Monetary Policy and Financial Stability. The issuance and management of Qard Al-Hassan Sukuk involve strict adherence to monetary policy and reserve requirements set by central banks. By controlling the cash reserve ratio and implementing measures like quantitative easing, central banks ensure that financial institutions have sufficient reserves to support the issuance of these sukuk. This helps maintain financial stability and proper money flow within the banking system.
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Influence on the Credit Market. Qard Al-Hassan Sukuk contribute to the credit market by providing more funds for development projects and charitable initiatives. The increased availability of funds can stimulate economic growth and support the money multiplier effect, where the initial amount of money leads to a greater increase in the overall money supply. Central banks manage this effect by adjusting interest rates, bank rates, and government securities to control inflation and ensure financial stability.
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Ensuring Liquidity and Compliance. Central banks, such as the Federal Reserve Board, play a crucial role in ensuring that banks maintain adequate vault cash and other liquid assets to meet their obligations. By regulating the reserve requirement and monitoring the bank's total deposits, net transaction accounts, and other liabilities, central banks help mitigate liquidity risks and ensure the smooth operation of the financial system.
Challenges and Risks
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Potential Liquidity Problems. Qard Al-Hassan Sukuk, despite its numerous benefits, faces significant challenges, particularly concerning liquidity. Liquidity problems can arise due to the nature of Qard Al-Hassan Sukuk, which are essentially interest-free loans. Unlike conventional bonds, they do not generate regular interest income, which can create challenges in ensuring a steady cash flow. This can lead to difficulties in meeting short-term financial obligations, affecting the overall stability of financial institutions involved in issuing these sukuk.
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Mitigating Such Risks Through Reserve Requirements. To mitigate these liquidity risks, the role of central banks and regulatory bodies becomes crucial. Many central banks impose reserve requirements on financial institutions to ensure they maintain a minimum amount of liquid assets. By setting a cash reserve ratio (CRR), central banks can control the amount of money commercial banks can lend out, thereby managing liquidity in the banking system. The reserve ratio helps in ensuring banks have enough cash reserves to meet withdrawal demands and other short-term obligations.