Question
I am a student in ______, and have recently finished my Higher School Certificate.
I have come across the notion that student loans are not permissible, as they include interest according to Islamic finance. The reason I have been given, is that student loans require the amount + inflation to be paid back, so the value is the same, whereas in Islamic finance, the amount is the main concern.
So the question at hand: Are inflation-adjusted loans permissible in Islam. In Islamic finance, when returning a loan, do we return the value or actual quantity (regardless of the loss incurred to either party) and what is the evidence in terms of Quran/Hadith?
Answer
It is a reality that in present times due to the value of money and currencies being dependent upon certain fiscal benchmarks, the unwary masses have to contend with financial challenges such as the rising rate of inflation etc. Due to the speed of inflation (as is being experienced at present), money loses its value very quickly. However, in spite of this, Islam does not consider time as value of money. If a person obtains a certain amount as a loan then even if that amount loses some of its value as a result of rising inflation, in terms of Shari’ah he is only liable to pay back the same amount that he took as a loan.
In the authentic books of Islamic jurisprudence, the term “Mithl” is used to expound the method of repayment of a loan. i.e. a debtor is required to return the “Mithl” (the like thereof) of the loaned amount when repaying his creditor.
The question arises here that, what is meant by ‘Mithl’? Does being equal mean: similarity in weight,
measurement and quantity or in value and worth? By looking into the evidences of the Qur’an, Sunnah and discussions of the great jurists of Islam, it becomes clear that the similarity which is required here is in weight, measurement and quantity, not in terms of value and worth.
There are many evidences for this. Some are mentioned below:
1). Abu Sa`id al-Khudri and Abu Huraira (Radhiyallahu Anhu) narrates that the Messenger of Allah (Sallallahu Alayhi wasallam) appointed a person as a governor of Khaybar. This governor brought to the Prophet (Allah bless him & give him peace) high quality dates of Khaybar. The Messenger of Allah (Sallallahu Alayhi Wasallam) asked: “Are all the dates of Khaybar like this?” He replied: “By Allah, no, O Messenger of Allah! We barter one measure (sa`) of this type of dates for two measures (sa`) of our own (normal & inferior quality) dates, and two measures (sa`) for three of ours. The Messenger of Allah said: “Do not do so (as this will be considered usury). Rather, sell the dates of inferior quality, and then buy the good quality dates with that money.”
(Recorded by Imam al-Bukhari and Imam Muslim)
Both the Fuqaha and commentators of Hadith have explained that the above narration is clear evidence on the fact that when dealing in usurious goods, the similarity which is required is in quantity and not value. The Messenger of Allah (Sallallahu Alayhi Wasallam) did not differentiate between the two types of dates and did not permit for them to be exchanged unless if they were equal in weight, despite the fact that one was of a better quality than the other.
2). The Messenger of Allah (Sallallahu Alayhi Wasallam) said: “Do not sell gold for gold unless equal in weight and do not sell silver for silver unless equal in weight. Whosoever gives or demands more, then this is interest”
(Recorded by al-Bukhari, Muslim and others).
This and many other similar narrations imply that, when exchanging, there should be total equality in quantity and measurement. If it is a loan, then this becomes more necessary.
3). If a person was to give one kilo of wheat as a loan, the value of which was, for example: two Dollars. Now at the time of repaying this loan, the price of one kilo wheat fell to one Dollar. In this case all the fuqaha (jurists) are unanimous that he will still give one kilo back and not half kilo due to the fall and decrease in the value of wheat.
The above and other evidences prove that when a loan is paid back then the rate of inflation is not considered according to Shariah. One is required to return the actual quantity/amount when repaying the creditor and not the value thereof. Anything other than this will be considered as Riba and thus unlawful (Haram) and sinful. In conclusion, to take out the type of student loan mentioned in the question is considered Riba and not permissible.
For more details refer to Fiqhi Maqaalaat by Mufti Taqi Usmani (D.B), Pg. 51 Vol.1
Checked and Approved By:
Mufti Muhammed Saeed Motara Saheb D.B.
References
Al-Durr al-Mukhtar, 5.161, Al Hindiyyah