Qarḍ ḥasan—commonly defi ned as an interest-free loan—is a benevolent economic behaviour, an outlet for the placement of savings, an instrument of fi nance and an institution for bona fi de lending. Having such versatile attributes, it is distinguishable from other charitable fi nancial activities such as waqf (endowments) and infāq (spending in the way of Allah) as well as other modes of fi nance used in Islamic fi nancial institutions. The purpose of this paper is to present the alternative prospects of this Islamic instrument and to provide an explanation for each form of its application. Applying Tobin’s (1958) Portfolio Theorem, the paper explains why people extend loans to others without the expectation of return and position this bona fi de loan among the other recommended fi nancial activities in Islam. Furthermore, the paper investigates why Islamic banks continue to make use of this fi nancial instrument despite the fact that they gain no fi nancial return from it. Data on Islamic banks’ application of qarḍ ḥasan fi nancing and its share compared to other banks’ assets portfolio are presented. It is further argued that qarḍ ḥasan is an act of worship and benevolence and should be distinguished from the qarḍ (loan) contract, which is simply a permissible type of exchange and a mode of saving deposits in Islamic banks. The paper concludes with recommendations to the fi nancial community for more extensive and eff ective use of this interest-free loan