Does Islam Permit Paying off a Loan in Another Currency?

Giving loans, in sharia is a form and means of communal solidarity and cooperation that aims at helping others and relieving their difficulty. Therefore, it cannot be a source of gaining profit or exploiting other’s needs. Allah the Almighty has exhorted Muslims to lend goodly loans saying: (Who is it that will lend unto Allah a goodly loan, so that He will multiply it to him manifold ) (Al-Baqarah 2: 245).

Thus, Islam has set strict rules regarding the various forms of loaning money so as to prevent any potential unfairness or exploitation, warning its followers against abominably abhorrent usurious transactions.

In his response to this issue, Sheikh Muhammad bn Salih Al-Munajjid, said:

The basic principle is that loans should be repaid in the same currency that was given to the borrower, unless the two parties agree at the time of repayment to repay it in a different currency. There is nothing wrong in this case, so long as that it is done at the rate of exchange on the day of repayment, not the rate of exchange that existed on the day when the loan was given. This applies to each installment; for it is permissible for the two parties to agree at the time of paying it that it may be paid in a different currency; at the current rate of exchange.

However, you should be aware that there are three forbidden forms of such transactions:

First, when both parties agree at the time of giving the loan to pay it back in a different currency. This is haram, because in this case the transaction is actually selling the present currency for another currency to be paid at a later date, which is classified as Riba al-Nasi’ah. One of the conditions of selling one kind of currency for another is that it should be done hand to hand, as indicated by the words of the Prophet (peace and blessings be upon him): “Gold for gold, silver for silver, like for like, equal for equal, hand to hand… but if these commodities differ, then sell as you wish, if it is hand to hand. ” (Muslim)

The currencies that exist nowadays have taken the place of gold and silver, so they come under the same rulings.

Second, when both parties do not agree in the beginning to do that, but agree at the time of repayment on a different currency and they work it out based on the rate of exchange at the time of the loan, this is also haram, and it coincides with the form mentioned above. Muslim jurists quoted as evidence for this prohibition the well-known hadith that was narrated from Ibn `Umar (may Allah be pleased with him) who said: I used to sell camels for dinars [i.e., to be paid at a later date] but accepted dirhams, and sell them for dirhams but accepted dinars. Then, I asked the Messenger of Allah (peace and blessings be upon him) about that, and he said: “There is nothing wrong with taking it based on the current price, so long as you do not separate with something still outstanding. ” (Ahmad, Abu Dawood, al-Nasa’i, At-Tirmidhi and Ibn Majah)

The other reason for this prohibition is that if you take more than the price on the day of repayment, then you have made a profit on something that is not in your possession, and the Prophet (peace and blessings be upon him) forbade making a profit on anything that is not in one’s possession. (Narrated by the authors of al-Sunan with a sahih isnad)

Third, when they agree, at the time of repayment, to repay it in a different currency, but they part with something still outstanding. For example, if the loan is one thousand dollars, and they agree when the time comes to pay it back in pounds, let’s say 5000, and he takes 4000 but the borrower still owes 1000, this is not permissible, because when selling one currency for another, it is stipulated that it should be done hand to hand, as stated above.

However, if the loan is to be paid off in installments, then there is nothing wrong with agreeing to pay each installment at the rate of exchange on the day it is paid. There are no sharia reservations regarding that, because it does not involve any delay in exchanging the currency.