Qard hasan is an interest-free loan that the takaful operator grants, out of its shareholders' funds, to the participants' risk fund when that fund falls into deficit, and under the IFSB-14 standard it can be repaid only from future surpluses.
A benevolent loan
Qard hasan literally means a goodly loan: the lender claims back only the principal, with no increase at all. Any return would be riba, a core prohibition in takaful alongside gharar and maysir, hence the absence of interest and charges.
The definition adopted by the IFSB
IFSB-14, the December 2013 standard on takaful risk management, describes qard as an interest-free loan, usually provided by the shareholders' fund, to support the solvency or liquidity of the participants' risk fund, known as the PRF.
Repayment tied to future surpluses
Under the same standard, a deficit covered in this way can be repaid only out of the fund's future surpluses. Until the loan is cleared, the surplus available for distribution to participants is therefore absorbed by these repayments to shareholders.
Spreading risk over time
The consultancy Actuarial Partners explains that the operator injects a qard when the PRF shows a valuation deficit. The loan thus spreads risk-sharing over several financial years, so the loss from a bad year is offset by better results afterwards.
The Malaysian cap on surplus
In Malaysia, according to Actuarial Partners, the operator may take no more than 50% of a PRF surplus. This limit protects participants, because the surplus is also the source both for repaying the qard and for any distributions to members.
No cross-subsidy between funds
Bank Negara Malaysia's draft operating framework, published on 18 May 2018, requires surpluses and deficits to stay with each takaful fund. A motor fund in surplus cannot therefore cover a health fund's deficit; only the qard can step in.
Why claims keep being paid
The qard ensures that participants who suffer a loss are compensated even when the year's contributions fall short. Without it, the mutual fund might cut benefits, weakening the promise of solidarity built on the tabarru' donation.
The link with the operator's pay
Under the wakala agency model, the operator keeps its fee even when the fund is in deficit. The qard is the counterpart to that position: it supplies interest-free liquidity but cannot demand immediate repayment from the participants' fund.
A solvency requirement
IFSB-11, the standard on solvency requirements for takaful undertakings, deals with the capacity to meet obligations as they fall due. The qard is a practical tool for this purpose, mobilising shareholders' capital in support of the participants' fund.
How the loan is accounted for
AAOIFI's FAS 43, effective from 1 January 2025, covers the recognition and measurement of takaful, including the operator's role. FAS 42 governs presentation in the financial statements, where flows between operator and fund must be clearly shown.
The sharia board's view
The operator's Shariah Board, mandatory in Pakistan under the Takaful Rules 2005, can check that the qard carries no hidden benefit for the lender, such as an inflated fee or priority access to surplus beyond the principal lent.
A signal for participants
An outstanding qard shows that the fund has suffered losses. It does not endanger claim payments, but it does mean that surpluses over the next few years will first go towards repaying shareholders, delaying any refund to participants.
Assessing an operator's use of qard
- Review the operator's financial statements to spot any outstanding qard granted to the participants' fund.
- Check in the contract that the qard is interest-free and repayable only from future surpluses.
- Compare the qard amount with the size of the fund to estimate how long it may take before any surplus is distributed.
- Look for a limit on how much surplus the operator can take, such as the 50% cap in Malaysia.
- Ask the sharia board for its opinion on the qard terms and on the absence of any hidden benefit for shareholders.
- Make sure each fund is managed separately, with no cross-subsidy between product lines.
Financial effects of a qard for participants
| Item | Effect on participants | What makes it vary |
|---|---|---|
| Qard amount | No interest payable | Size of the PRF deficit |
| Repayment from surplus | Distribution postponed | Underwriting results in later years |
| Operator's share of surplus | Reduces the distributable amount | Regulatory cap, 50% in Malaysia |
| Tabarru' revision | Higher future contribution | Participant consent required by BNM |
| Wakala fee | Still payable despite the deficit | Rate set in the contract |
Information to request about the qard
- Latest financial statements separating shareholders' and participants' funds
- Contract clause describing the qard and its repayment terms
- Surplus distribution policy
- Annual report of the sharia board
- Sharia audit report for the financial year
- Solvency report published under the regulator's requirements
Misconceptions about the qard hasan loan
- Believing the qard costs participants interest: any extra charge would be riba and would contradict the IFSB definition.
- Expecting a surplus in the year after a deficit, when any excess first goes towards repaying the shareholders' loan.
- Thinking a fund in surplus on another product line can bail out the fund in deficit, which BNM prohibits.
- Reading an outstanding qard as a risk that claims will go unpaid, when its very purpose is to keep compensation flowing.
- Accepting a tabarru' increase imposed without consultation, when in Malaysia any revision requires participants' agreement.
Common questions on qard in takaful
What happens if the fund never produces a surplus?
Under IFSB-14, the qard can be repaid only out of future surpluses. If there is no excess, shareholders in principle do not recover their loan: they bear that risk, which distinguishes the qard from an ordinary debt that falls due.
Is the operator obliged to provide a qard?
The sources consulted describe qard as the tool generally used by the shareholders' fund to support the PRF. The exact terms depend on the local regulator and on the contract, so they should be confirmed with the operator.
Is qard hasan sharia-compliant?
An interest-free loan is permitted in Islamic law and appears in the IFSB standards for takaful. Each operator's sharia board approves its terms, in particular making sure there is no hidden return for the lender.
Can a deficit push up my contribution?
A persistent deficit may lead to a review of the tabarru'. In Malaysia, the BNM framework then requires participants' consent. The qard itself avoids making participants pay for the deficit straight away.
Takaful operators and organisations
CIBAFI – Conseil général des banques et institutions financières islamiquesInternational body representing Islamic financial institutions, including takaful players, and publishing research and policy positions.AAOIFI – Normes chariaStandard-setting body publishing the Sharia, accounting and governance standards used by many takaful operators.ICIEC – Groupe de la Banque islamique de développementSharia-compliant multilateral insurer covering export credit and investment in Islamic Development Bank member countries.Takaful EmaratUAE takaful operator specialising in health and family protection cover for individuals and businesses.Indicative list: assuranceislamique.com has no commercial link with these organisations. Always check the licence with the local regulator.