Islamic perspectives in P2P lending among muslim folks

September 4, 2018

By Dr Hanudin Amin

TRANSACTIONS pertinent to bank lending are typically based on Bank to Customer or B2C lending from the bank to the customer.

In Islamic banking context, however, the term that can be used is B2C financing to capture Shariah principles.

The term B2C lending used in conventional banks generates interest income that is prohibited out of injustice and unscrupulous means of obtaining other wealth unlawfully.

In contrast, however, B2C financing is based on trade and commerce to help the customer obtains cash for the purposes of marriage, umrah, and house construction, among others.

Despite its significance, there exist muslim folks who are not able to access into the facility due to geographical and qualification constraints. Yet, those folks only need a small sum of money to be repaid in a short period of time.

There exists a case, however, when one person lends money to a needy for the amount ranged between RM10-RM1000, depending on the purpose, relationship degree and duration.

This is called as Peer to Peer or P2P lending that occurs between peers, where one party becomes as a creditor while other as a debtor.

This article considers the term P2P lending instead of P2P financing. Besides, I explain it from an individual perspective rather than an institutional.

Four questions are considered:

Question #1 – What is the Islamic stance on P2P lending?

Question #2 – Are there any merits associated with P2P lending?

Question #3 – Are there any drawbacks pertinent to P2P lending?

Question #4 – What are measures available to polish P2P lending among muslim folks?

In Islam, the debt transaction is allowed if certain conditions are met.

Firstly, the purpose of obtaining a debt is halal like marriage and umrah.

Secondly, there exist intentions of repayment by the debtor and considers it essential.

Thirdly, the debtor treats the debt obtained from the creditor as a trust that needs to be returned to the owner.

Fourthly, there exists no requirement for debtor to repay at higher than the principle amount.

Fifthly, the transacting parties should record any transaction – be it small or big as the impact it can create as a consequence is of greater.

Sixthly, the transacting parties know the timeframe for the repayment period. Lastly, the time extension of repayment given to the debtor is based on a genuine reason.

The need of P2P lending is clearly prescribed in the Quranic verses and one of them is detailed by Surah Al-Maidah (5:2) that illuminates “…Help ye one another in righteousness and piety, but help ye not one another in sin and rancour: fear Allah (SWT), for Allah is strict in punishment”.

The lessons that can be drawn are, helping one another financially is a pillar in Islamic brotherhood to improve well-being of individuals in society at large, the debtor and the creator should recognise their responsibilities and limitations when transacting in P2P lending.

In fact, the debtor must return the debt to the creditor unless it is agreed as a gift by the latter. The creditor should put leniency in collecting and extending the debt to the debtor. 

In particular, P2P lending offers some merits to individuals but are not limited to:

Firstly, P2P lending is convenience to muslim folks as the lending structure is based on the principle of brotherhood, in which the creditor lends money to the debtor who know each other.

Secondly, P2P lending is easy and time-saving to be conducted where the practice of giving help considers usually only a small sum of money and takes seconds to complete.

Thirdly, P2P lending involves no legal fees that may denote that there is no legal documentation involved in the lending deal..

P2P lending has two blessings, firstly, if the creditor intends to lend money to help the debtor, then Allah (SWT) will reward him accordingly, and secondly, if the creditor intends to lend money to the debtor and later he gives it as a sadaqah, then Allah (SWT) will give him another blessing and reward.

P2P lending is in light with this Hadith. The Prophet Muhammad (p.b.u.h) who said that “The night I was taken up to Heaven. I saw written on the Heaven’s gate “Charity is multiplied 10 times and a loan is multiplied 18 times”. O Gabriel why is a loan better than a charity? He said because a beggar may ask while he has wealth and a borrower would not ask for a loan except out of need” (Ibn Majah).

P2P lending, however, comes with some drawbacks.

Firstly, there exist fallacies pertinent to the concept of debt taking and debt giving in Islam.  As the former referred, the debtor views the debt taken from the creditor as trivial compared with the debt taken from a formal institution, resulting in poor effort to repay the debt taken and consequently there exists a hostility between the debtor and the creditor.

Secondly, P2P lending as practiced by muslim folks are poor in terms of recording purposes pertinent to the amount lent and the duration.

Thirdly, there also exists a poor understanding among muslims on financial resources who allocate them firstly to their friends at the expense of their family needs. In actual fact, one should meet his family needs before other needs can follow.

Today, however, the latter, somehow is given priority that disrupts the stability of the family institution where the happiness is the price to pay.  

Fourthly, there is also a situation where the debtor asks extra from the creditor, beyond the latter capacity. This is overtly un-Islamic.

To improve, the following are proposed:

Firstly, qardhul hassan principle is used to govern the transaction for the sake of brotherhood. This loan explains as “I borrow RM100 from Ali, and I return RM100 to Ali, without a promise to give extra, say RM50 (riba). The extra is allowed if it is not promised and determined by the debtor as a token of appreciation.

Secondly, any debt transacted should be recorded regardless the amount – be it small or big, are both central as buttressed by Surah al-Baqarah (282) that prescribes “…When ye deal with each other, in transactions involving future obligations in a fixed period of time, reduce them to writing; let a scribe write down faithfully as between the parties…”.

Thirdly, the problems occur today for P2P lending like killing one another and acute hatred are drawn from the leniency by folks to give a debt to others. It is good to be lenient in many ways, but since today our society becomes more complex and tainted by the social media and bad habit, therefore it is vital to be selective when extending the debt to curb hatred and hostility.

Going forward, with good knowledge and understanding, P2P lending can help muslim folks to prosper where the alternatives of obtaining extra petty cash can be directed among themselves for an improved well-being.

Of course, P2P lending is feasible and beneficial to individuals provided those parties consider these two things seriously, firstly, the responsibilities for the debt transacted and, secondly, the importance of recording and transparency among quarters involved.

*The author is an Associate Professor at the Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance (PG310163). He can be contacted at hanudin@ums.edu.my

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