The question of lending money and inflation is a pressing issue in modern finance, particularly when significant time elapses between the loan and its repayment. A common scenario involves a lender who provides a substantial sum (e.g., $100,000) that could purchase a house at the time, only to find that five years later, due to inflation or market spikes, the same amount is insufficient to buy that same property.

This article addresses whether it is permissible in Islam to ask for an increased amount to match the purchasing power of the original loan.

The Nature of a Loan (Qard) in Islam

To understand the ruling, one must first understand the definition of a loan in Islam. A loan (Qard) is a voluntary, benevolent act of helping another, not a business transaction intended for profit.

The fundamental rule is: What you lend is what you get back.

  • If you lent money, you get the same amount of money back.
  • If you lent a commodity (like gold or wheat), you get the same quantity of that commodity back.

This ensures fairness and justice based on the actual contract. Since no one can truly know another’s inner intentions (e.g., “I intended to buy a house”), the contract relies on the explicit item exchanged.

The Problem with Hypotheses and Market Fluctuations

Basing repayment on the value of a specific commodity (like real estate) leads to unreasonable outcomes.

Consider the real estate market in Southern California between 2000-2005. Prices shot up nearly 340%. It would be unjust to ask a borrower who took $100,000 to repay $340,000 simply because the lender might have bought a house.

Conversely, consider technology prices. If the lender had intended to buy computers, the price might have dropped by 30%. Would the lender accept receiving only $70,000 back? Likely not. This inconsistency highlights why tying loans to specific commodities is problematic.

Addressing Inflation: Indexation vs. Arbitration

However, general inflation (a decrease in the currency’s purchasing power) is a valid economic concern. How does Shari’ah address this?

1. Interest (Riba): Conventional lenders charge interest to cover anticipated inflation. This is strictly prohibited (Haram) in Islam.

2. Indexation: Some economists suggest linking the loan repayment to a price index (adjusting for inflation). This method is highly controversial from both economic and Shari’ah perspectives and is generally not accepted as a standard rule for personal loans.

3. Arbitration (The Best Solution): The most balanced approach, as suggested by classical scholars like Ibn ‘Abidin in his Hashiyah, is that significant cases of loss due to currency devaluation should be settled through fair arbitration or in court on a case-by-case basis.

If the inflation was catastrophic (e.g., hyperinflation where money loses almost all value), a judge or arbitrator might rule that the borrower should compensate the lender to ensure justice. However, for standard market fluctuations, the general rule remains that the same amount should be returned.