What is the Islamic ruling on lending money from a charitable project's proceeds to someone experiencing financial hardship, and does the lender bear sin if the money is not repaid?

If lending the amount to the head of the association is considered an encroachment on the association's funds, then you must seek Allah's forgiveness and guarantee the amount to the association from your own money. Then, you may reclaim this amount from the head of the association, and she, in turn, may reclaim it from whomever she lent it to. Encroachment is one of the causes necessitating guarantee; it is exceeding what is permissible by Sharia or custom, and violating what Sharia or custom has defined. Whoever encroaches on another's money incurs a sin in the afterlife, and a worldly punishment or discretionary penalty, along with the obligation of guaranteeing it, for the Prophet, peace be upon him, said: "The hand is responsible for what it takes until it returns it."