Is it permitted to take inflation-adjusted loans?

Answered according to Hanafi Fiqh by

Answered by Shaykh Muhammad ibn Adam al-Kawthari

When starting University in the UK, you can take out a student loan from the Local Education Authority (LEA).  The LEA claim the student loan has zero percent interest.  However, due to the fact that the loan may be paid back over a long period of time, the LEA take inflation into consideration and charge a tiny bit more when you are paying back the loan.  This type of loan from the LEA is different to a standard student loan from a bank. Some brothers say this student loan is halal, since on the contract it says zero percent interest, and we should be concerned with the contract.  They also say inflation is not interest, rather, inflation is paying back the same value as you borrowed, which is the correct thing to do from Islam. Other brothers say, inflation is still making money on money, which is Riba and therefore, haram. Please could you clarify this issue.  The answer to this question, will determine whether some brothers will be able to continue further education or not, because they are not prepared to declare war on Allah (SWT) and His Rasool (SAW).  At the same time, their families can not support them at University.

In the Name of Allah, Most Gracious, Most Merciful

In the name of Allah, Most Compassionate, Most Merciful,

It should be kept in mind that, according to Shariah, giving a loan is considered an act of worship and good towards those who are in need. Merely lending money is not, however, a permitted means of seeking financial benefit.

The great reward of lending those in need has been mentioned in many hadiths of the Messenger of Allah (Allah bless him & give him peace). A person is not obliged to give a loan, however, as it is a total voluntary act, as the scholars of the Sunni path have explained. [Sarakhsi, al-Mabsut, 14.36; Ibn Qudama,al-Mughni, 4.207-208; Nawawi/Shirbini, Mughni al-Muhtaj Sharh al-Minhaj, 3.29-30; Dardir/Dasuqi,Hashiyat al-Dasuqi `ala al-Sharh al-Kabir, 3.222-223]

Therefore, according to the Noble Shariah, if one wishes to reap the rewards promised upon giving a loan, it must be givenwithout asking for any profit upon what is loaned out.

However, if one wishes to also acquire some financial gain, it can be done by entering in to a financial contract involving risk-sharing, such as enterprise (shirkah or mudarabah, for example).

In this case one will have to also bear the loss incurred (if any) by the debtor.

How must a loan be re-paid?

If one gives a loan to another, it must be re-paid in the same manner and equally (mithl). This is a ruling agreed upon by all the scholars.

The question arises here that, what is meant by ‘Mithl’? Does being equal mean: similarity in weight, measurement and quantity or in value and worth?

By looking into the evidences of the Qur’an, Sunnah and discussions of the great jurists of Islam, it becomes clear that the similarity which is required here is in quantity and magnitude, not in value.

There are many evidences for this. Some are mentioned below:

1) Abu Sa`id al-Khudri and Abu Huraira (Allah be pleased with them) narrate that the Messenger of Allah (Allah bless him & give him peace) appointed a person as a governor of Khaybar. This governor brought to the Prophet (Allah bless him & give him peace) high quality dates of Khaybar. The Messenger of Allah (Sallallahu Alayhi Wasallam) asked: “Are all the dates of Khaybar like this?” He replied: “By Allah, no, O Messenger of Allah! We barter one measures (sa`) of this type of dates for two measures (sa`) of our own (normal & inferior quality) dates, and two measures (sa`)s for three of ours. The Messenger of Allah said: “Do not do so (as this will be considered usury). Rather, sell the dates of inferior quality, and then buy the good quality dates with that money.” (Recorded by Imam al-Bukhari and Imam Muslim)

Both the fuqaha and hadith commentators have explained that the above narration is clear evidence on the fact that when dealing in usurious goods, the similarity which is required is in quantity and not value

The Messenger of Allah (Allah bless him & give him peace) did not differentiate between the two types of dates and did not permit for them to be exchanged unless if they were equal in weight, despite the fact that one was of a better quality than the other

2) The Messenger of Allah (Allah bless him & give him peace) said: “Do not sell gold for gold unless equal in weight and do not sell silver for silver unless equal in weight. Whosoever gives or demands more, then this is interest” (Recorded by al-Bukhari, Muslim and others).

This and many other similar narrations imply that, when exchanging, there should be total equality in quantity and measurement. If it is a loan, then this becomes more necessary.

3) If a person was to give one kilo of wheat as a loan, the value of which was, for example: two pounds. Now at the time of repaying this loan, the price of one kilo wheat fell to one pound. In this case all the fuqaha (jurists) are unanimous that he will still give one kilo back and not half kilo due to the fall and decreasing in the value of wheat. [Ibn Hazm, al-Muhalla,6.347; Ibn Qudama, al-Mughni, 4.207; Dardir, al-Sharh al-Saghir; 3.290-291; Haskafi, al-Durr al-Mukhtar, 5.161]

The above and other evidences prove that when a loan is paid back then the rate of inflation is not considered according to Shariah. One can only claim back exactly the amount which was given as loan. Anything other than this will be considered as Riba and thus unlawful (Haram) and sinful

It is akin to the situation where one places his money in a safe or money box and thereafter takes the money out after few years. It is obvious that the money which he will take out will be exactly the same as he put in. It will not increase or decrease due to inflation or deflation!

So what about inflation?

As far as the using of the term ‘inflation’ is concerned, it should be noted that there is a principle in Islamic Jurisprudence which says:

“Consideration is given to the substance of the transaction and not the terms used.” [Kasani, Bada’i` al-Sana’i`5.3; Marghinani, al-Hidaya, [with Ibn al-Humam’sFath al-Qadir], 7.132; Zayla`i, Tabyin al-Haqa’iq, 4.112; Majallat al-Ahkam al-`Adliyya, item #3 [explained in detail by Ali Haydar in Durrar al-Hukkam Sharh Majallat al-Ahkam, 1.21]

Whether we call it inflation or something else, the reality is that it is exchanging money for money with more from one side which is Riba and unlawful.

In conclusion, to take out the type of student loan mentioned in the question is considered Riba and not permissible. Those students who do not have anybody to support them should consider and look at other possible alternatives. One may look for a part time job or even consider finding a relative or friend who will assist by giving a interest free, even loan (without accounting for inflation).

And Allah knows best

Muhammad ibn Adam al-Kawthari

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