How do long term halal loans work with inflation in Islam?

Question

I have a series of questions about Islamic loans. My first question is this:

If person 1 loans 100k to person 2 and creates a contract which states that the agreed payback date is 25 years from now. How much does person 2 pay back person 1?

We all know that the value of money reduces due to inflation. For example, 35 years ago, my dad bought a house for 5k, now to buy a similar house you have to pay 200k.

So my question is, should inflation be taken into account according to Islam?

What confuses me is that if person 1 is only entitled to 100k after the 25 years, he will in effect be at a huge disadvantage, i.e. in real terms, he will not get back what he loaned person 2.

At the same time, if person 2 gives back person 1 more than 100k, that is potentially interest which is haraam.

So just to clarify, how do long-term halaal loans work in Islam when it comes to inflation?

Answer 1

It is not permissible for the one who borrows money from anyone to commit himself to repaying the loan based on the value of the currency at the time when the loan is repaid, rather he must repay the loan with the same value as it had at the time he took it.

I thought that was an extremely clear sentence from this fatwa which goes into a lot more detail to answer this question.

Answer 2

There are two main concepts that you need to understand for this question:

• Islam understands the time/value of money (depreciates over time)
• Most economies today are inflationary (the value of your money shrinks over time)

When you put these two concepts together, the answer becomes quite simple: if you make a long-term loan, that ends up being repaid over several years, you need to go to a qadi (judge) to evaluate the amount to pay back.

If you don't live somewhere with a qadi, you might have a problem resolving this. But you need to be very careful, because if you yourself try to assess this, you can fall under the rulings of riba very easily -- loaning out $100k and getting paid back $101k.

Wallahu a'lam.

Source: Weekend intensive course on Islamic Finance

Answer 3

We live in a world with a fiat interest based currency that constantly depreciates. Just use some appropriate inflation index to calculate the amount owed. Maybe agree in advance with the borrower to avoid disagreements in the future