Interest and the Value of Money
Adil Salahi, July 16, 2007
Q. Islam forbids riba, or interest. In the past when Muslims borrowed from each other, they would return the same amount of gold or silver currency, without increase. Today, if one borrows the equivalent of, say, 100 grams of gold and returns it after one year, he will have to pay to the lender a greater amount of the local currency than the one he actually borrowed, because the value of gold would have considerably changed. Does this come under the riba heading, or is it allowed in Islam?
A. Let us first clear some basic concepts. Islam forbids riba, which means usury. Usury is looked upon as immoral because it exploits the need of the poor, charging them exorbitant rates for advancing some money. The moneylender often deprives the borrower of much of his assets as a result of the latter being unable to repay usurious rates in addition to the principal amount. In Western circles, interest is viewed as a fair rate, regulated by the government, in order to facilitate business deals. I prefer the word “usury” as equivalent to riba, because Islam declares a very stringent prohibition on riba because of its exploitation of the poor.
Today all dealings are in paper currency, which has only a nominal value. A banknote of 500 riyals is different from one worth one riyal only in color and size, as well as the writing on them. They could have been switched around, with the smaller note being worth the larger amount, with no complaints from anyone. When a government decides to change its currency notes, the old banknotes become valueless when they are withdrawn from circulation.
Inflation is a reality in our modern world. If your salary remains the same for five years, you are so much poorer. You cannot afford to buy half of what you used to buy earlier. Yet the nominal value of the currency remains the same. If you borrow 1,000 riyals and repay it in the same number of riyals after five years, you actually give the lender much less in value than what he gave you. If you pay him more, can he accept it, or will it be usury? This is a very tricky question, but the answer should be based on the Qur’anic principle elucidated in the verses that say: “Believers, fear God and give up what remains outstanding of usury gains, if you are true believers. If you do not, then war is declared against you by God and His Messenger. If you repent, however, you shall remain entitled to your principal. Thus, you shall commit no wrong, nor suffer any wrong yourselves.” (2: 278-279)
We note how the Qur’an makes clear that neither party should be wronged in a loan deal. If the lender charges usury, then he is wronging the borrower, and if the borrower pays back less in value then he is wronging the lender. Therefore, the borrower should pay back an amount equivalent in value to the one he borrowed. The reader suggests that he should pay the equivalent in gold, considering that gold was the base of all currencies in the past. Today, gold is a commodity that is subject to market forces. What if the price of gold drops considerably, as happened not so long ago? What if it records a sharp rise? There will still be a wrong done to one party or the other. Can we take a different thing as the base for our dealings? One of the main indicators of national economy is house prices, because many industries are involved in house building. Should we take house prices as the indicator in this case, and decide the amount returned to the lender on the rate of increase in house prices? I do not think that this is right because experience shows that house prices move in cycles of boom and depression. This makes them unsuitable as a basis for money value. It may be that we should consider the rate of inflation as the basis. This means that a borrower should return to the lender the amount he borrowed adding to it a sum equivalent to the rate of inflation in their country. However, this should remain subject to a fatwa, or ruling, by a competent authority that seeks the views of Muslim economists and Islamic scholars.
From the Islamic point of view, could a borrower give back more than the amount he borrowed? Could the lender accept such an increase? Authentic Hadiths make clear that the Prophet (peace be upon him) returned the amount he borrowed and gave the lender more. However, this was a gift he gave as a gesture of gratitude. There was no agreement, explicit or implicit, that such a gift would be given or expected. Therefore, if someone gives you a loan on Islamic terms, expecting only to be paid back the same amount, and you give him a gift after you have repaid your loan, you will be doing a Sunnah. He is free to take it, provided that he did not give you any implied suggestion that he expected such a gift.