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Is repaying a loan at rate of inflation (i.e. index linked) halal or is that same as paying interest (riba)

Answered according to Hanafi Fiqh by Askimam.org

I am going to university this year. The state has stopped giving out grants for students but do give a loan, which is interest free but is paid back at the rate of inflation. In real terms the repayment I make is not worth more than I borrowed as you can only buy the same amount of goods with it. Although in physical terms I would be paying back more. For example In 2000 I borrowed 100 pounds which buy me one weeks food. Rate of inflation is 2% In 2001 I repay 102 pounds (due to inflation) but I can still only buy the same amount of food with it. I would like to know if this is halal for me or same as paying interest (riba)? Jazakallah

Answer

Yes, it will be riba. Any loan that is borrowed before inflation, must be
repaid in the same amount, regardless of the effect of inflation upon it. In
your case, since the repayment of your loan was index-linked, you, the
borrower, will be harmed. Therefore, this transaction tantamounts to riba.
(Contemporary Fataawa, pg.155; Fataawa- Mahmoodiyah p.g 341, vol 17)

and Allah Ta’ala Knows Best

Mufti Ebrahim Desai
FATWA DEPT.

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