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Society Religion & Philosophy
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The Supreme Court of Pakistan, in determining the applications and implications of the term “Riba” asked for assistance of religious scholars and other interested people of the country. For this purpose, answers to ten questions were sought. The sixth among these questions was:

It is evident that the value of the paper-currency has a trend of decrease in the inflationary situation. If a debtor who has borrowed a particular amount of paper currency repays the same amount to his credit[or] after a substantial time, the creditor can suffer the effects of inflation. If he demands his debtor to pay more in order to compensate him for loss of value he has suffered, can this demand be treated as a demand of Riba?

The Learner’s](http://www.understanding-islam.com) to the question was as follows:

Any inflationary adjustment, in which the rate of such adjustment is based on the actual rate of inflation cannot be brought under the ambit of “Riba”, because it is neither a gain on a loan and nor is given (to the lender) at a predetermined rate related to time (i.e. percent per annum).

Any equitable method for such inflationary adjustment may be adopted. Such adjustment may be:

  • based on the rate of inflation declared by the state of Pakistan; or

  • based on the average price index of a particular number of the most consumed items in the country; or

  • based on the price fluctuation of gold in the country (although I do not believe a system of gold standard to be beneficial but that is another issue altogether). For example, at the time of securing a loan the lender and the borrower mutually agree on relating the loan with the prevalent market price of gold and also agree on retiring the loan by relating the loan with the market price of gold at that time. Suppose A lends Rs. 100/= to B. the market price of gold at the time of the transaction is Rs. 100/= per gram. Thus, it shall be agreed that A has lent one gram of gold to B. If the market price of one gram of gold, at the time of the retirement of the loan is Rs. 150/=, B shall have to pay Rs. 150/= to fulfill his obligation. By the same token, if due to any reason, the market price of gold falls to Rs. 90/= at the time of retirement of the loan, B shall be considered to have cleared his obligation by paying Rs. 90/= to A.

It may be added here that such inflationary adjustments are not only allowed but also desirable. Just like the concept of “Riba” exploits the borrower and is an injustice done to the him, avoiding inflationary adjustments in times of inflation or in other words avoiding to pay back the loans by relating these loans to the real value of paper money exploits the lender and is an injustice done to him. Islam allows neither of these exploitations and injustices.

Thus, Riba’ refers to a fixed increment, related to time, on a lent amount. If this is what modern day interest is, which I think it is, then obviously there is no difference between the two.

Another example: If a person demands his principal amount in real terms, that is if he demands the same purchasing power which he had initially lent, such adjustment shall not fall under the head of riba’, and would therefore, not be prohibited. It would be fully justified and allowed to make inflationary adjustments to the amount lent. Thus, if I have lent $100 at a time when 5 bags of “A” quality rice could be purchased by this amount, I shall be fully justified in demanding $115 if the price of 5 bags of the same quality of rice has risen to $115. Such an adjustment, as stated earlier, does not come under the folds of riba’.

I hope this helps.

The Learner](http://www.understanding-islam.com)

They shoot partypoopers, don’t they?

42

[quote]
Originally posted by khan_sahib:
Riba is defined as Interest.
[/quote]

With all due respect, your statement does not make sense. If all interest is forbidden, why does the Quran not say so when it says;

30:39 And that which you give in gift, in order that it may increase (your wealth by expecting to get a better one in return) from other people's property, has no increase with Allâh, but that which you give in Zakât seeking Allâh's Countenance then those, they shall have manifold increase.

The simple fact is that not all interest is haraam. Only unfairly high interest is.

Riba translates to usury, which as I posted earlier, means "high interest". Riba does not translate to "interest".

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Partypooper so usual interest bearing accounts which do not keep pace with inflation do not fall under riba classification because the bank is holding my money and the value of this is decreasing due to inflation and bank is paying this interest or use-fee on the money since the bank in turn invests this money and makes a profit..part of which is forwarded to you. Its also an incentiver for u to keep money there so you can get this use-fee so the bank can make money by inventments for itself.

Its an interesting argument..

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Fraudz

http://www3.pak.org/gupshup/smilies/smile.gif

I must’ve misunderstood your question then. As I understand it, fixing the rate of profit on a loan prior to the accrual of profits is the very essence of “Riba”. Inflationary adjustments, in themselves, do not constitute Riba since they do not fall under its scope or definition. Is that what your question was about?

They shoot partypoopers, don’t they?

[This message has been edited by Mr Partypooper (edited June 11, 2001).]

45

The learner’s response to this question is now talking about commodity lending, which if it was the case may be correct. But as for the purchasing power argument, I would say that it would have to be made clear at the time of the loan that it is this that is being lent, which actually in practical terms comes back to commodity lending.

http://www3.pak.org/gupshup/smilies/smile.gif

Without that the borrower will only be obliged to repay the currency amount and not the amount to equal the purchasing power.

The qestion in this regard would then be what forms of loan does Islam allow? I am sure work has been done by economists in this regard and I would like to know about other opinions in this matter.
For example the response of others to the supreme court.

As for the ‘use fee’ mentioned by Mr. Fraudia I am afraid that falls in the category of what forms of businesses does Islam allow? And as Mr. Partypooper points out fixed rate of profit falls under riba, I would like to expand on that and say that the very assurance of profit is riba.
One of the basic principles of Islam in this regard is ‘risk sharing’ and without you sharing the loss that the bank might make you can’t accept any payment.
In islam you are either giving a loan to a person to use at his pleasure, or you are giving it as an investment or you are giving it for safe keeping, i.e. as Amanah.

You cannot combine these, and so ‘use fees’ are out.