Word of the week: soft loanApril 17, 2013
Among the hundreds of requests for zakat or other financial assistance that Money Jihad has received from overseas spammers, a couple have involved requests for a “soft loan.”
In June 2011 through our “Contact us” page, Wisnu Wibowo wrote, “Asalamualaikum… I hope someone can help with soft loan” purportedly to keep him out of jail for a $2,000 debt. Borrowing from Peter to pay Paul, it would seem.
In January of this year, somebody named Krisna Busana Karya also contacted Money Jihad demanding “grants or soft loan” with a five year term to help with an oyster cultivation business with an eye toward a growing market in Jakarta. Tempting offer, Krisna, but no thanks.
What is a “soft loan”?
A soft loan is defined as “A loan made on terms lower than or more favourable to the borrower than regular commercial terms”.*
Soft loans are repaid with interest, but it may be at a smaller interest rate or payable over a longer term than conventional loans. Since interest is involved, soft loans are not sharia-compliant.
Nevertheless, extending a soft loan to a borrower who cannot meet conventional terms suggests that the lender is taking on risk in excess of what the capital markets normally bear. Therefore, soft loans are somewhat similar to sharia finance in that both deviate from fair market interest rates. Soft loans, like sharia loans, come with strings attached, such as concessions made by the borrower.
People do not lend for free. Reduce or eliminate interest rates, and lenders will come up with ways of recouping the costs through fees or other methods. Is “ethical finance” truly ethical when the actual cost of borrowing is obscured by fees and special conditions, rather than a transparent, market-based interest rate that is known to both parties?
* Food and Agricultural Organization of the United Nations, Glossary of Terms for Agricultural Insurance and Rural Finance (Rome: FAO, 1992).