Qardh Financing in Islamic Rural Banks: Misalignment, Risks, and Opportunities for Sharia-Based Inclusion

Abstract

This study investigates the extent to which qardh contracts align with their normative role as benevolent financing instruments within Indonesia’s Islamic Rural Banks (Bank Pembiayaan Rakyat Syariah -BPRS). Although BPRS are mandated to promote social welfare, qardh practices often intersect with commercial objectives, prompting questions about their genuine social performance. Using a critical realism perspective, this study interprets social reality as an interaction between institutional structures and individual agency, providing a nuanced understanding of the gap between normative ideals and empirical practices. A simple mixed-methods design was applied. Quantitatively, data from 130 BPRS between 2010 and 2022 were analysed to assess the proportion and value of qardh financing and the Average Loan per Borrower (ALB) as an indicator of social depth. Qualitatively, triangulation employed annual reports, OJK Islamic Banking Statistics, fifteen Supreme Court decisions on qardh, and interviews with seven BPRS practitioners. Thematic analysis identified patterns, deviations, and institutional constraints. Results show that qardh financing accounts for a small share of total BPRS portfolios, with highly fluctuating and inconsistent disbursements over time. Nevertheless, despite the generally high ALB in qardh financing, some BPRS demonstrate relatively low ALB values, indicating that certain institutions still uphold qardh practices serving low-income clients. Qualitative evidence reveals a continuum of practices—from purely social qardh aimed at community welfare to quasi-commercial adaptations driven by liquidity pressures and profit motives—while legal case analyses expose weaknesses in contract clarity and governance. The study concludes that the ideal social performance of BPRS should reflect their foundational mission to empower rural and microenterprises and protect vulnerable groups from exploitative lending. It emphasizes the need to realign qardh implementation with its ethical and welfare-oriented essence to strengthen its role as a genuine instrument of Islamic financial inclusion.