I know that taking interest is haraam,but I would like to know what does islaam say about taking interest based on inflation.For example,if you borrow 50 pounds and you want to return the 50 pounds in 5 years time,the value of the 50 pounds that you borrowed would be higher in 5 years time.Therefore you payback the equivalent amount to the 50 pounds that you borrowed.I ask this question because I want to know if it is allowed for me to take out a student loan which has interest based on inflation.
Praise be to Allaah.
Firstly:
If you borrow 50 pounds from a person or an institution for a
period of five years, you have to pay back this amount in the same currency,
even if its value goes down (because of inflation), so long as transactions
in this currency are still valid.
We have already explained in Question no.
12541 that
paying extra on a loan because of devaluation of the currency is haraam and
is regarded as a kind of interest. This is the view of the majority of
fuqaha’.
Secondly:
Whoever takes a loan in one currency and agrees to pay back
in another, has fallen into riba, because what he has really done is to sell
one kind of currency now in return for another currency to be paid later on.
This is haraam and is one of the two kinds of riba which is called riba
al-nasi’ah.
But the borrower may agree with the lender – at the time of
repaying the loan – to hand over the money in a different currency. In the
example referred to above, when five years have passed and you have to pay
back 50 pounds, you can agree with the lender – on the day of paying back –
to give him the equivalent in another currency, such as dollars, but that is
subject to the condition that it be at the exchange rate that is current on
the day you pay it back.
Thirdly:
With regard to taking a loan with interest based on
inflation. We have already stated that paying interest on a loan to make up
for inflation is haraam, and that it is a kind of riba. Based on this, it is
not permissible for you to take this loan, because the Prophet (peace
and blessings of Allaah be upon him) cursed the one who consumes riba, the
one who pays it, the one who writes it down and the two who witness it. He
said: “They are all the same.” Narrated by Muslim, 1598.
And Allaah knows best.
