An Islamic bank may set up a qardh fund as a means of serving specific social objectives through providing for local communities’ needs for financing on the basis of interest-free lending (qardh). This fund draws its finances from both external and internal sources.

External sources include contributions made by the Islamic bank (owners’ funds), proceeds of income purification (which the bank may pass on to the fund for a limited period until it can dispose of in a shari’a-permissible manner), and funds provided by the bank from its current accounts. Internal sources encompass repayment of previous loans during a given period in addition to funds contributed by benefactors and well-doers on a temporary or permanent basis. Both external and internal sources of funds reflect the overall increase in funds available for lending during a specific period of time.

The Islamic bank puts the sources of fund into different uses including new loans made during a given period of time, reimbursement of funds made available to the fund by the Islamic bank from current accounts and/ or proceeds of income purification (i.e., prohibited income), and repayment of funds previously supplied to the fund by benefactors and well-doers on a temporary basis. The uses of funds reflect the amount of overall decrease in funds available for lending during a certain period of time.

At any point in time, the qardh fund’s balance consists of any outstanding loans that will be repaid by borrowers in the future and all amounts that have not been loaned so far.