Interest/Riba Dilemma! - Economics

ps: i understand that the problem above is the fault of the system, not Islam's fault, because in an islamci state they'd be running on a gold standard which means inflation would be naturally solved... but im wondering what Islam's stance is regarding dealing with paper money as far as lending and borrowing is concenred. salams

Wage power also increases. Trade Unions make sure of it.

format_quote Originally Posted by lolwatever

Soo.. the big question is.. if i lend money to someone, and charge them for the cost of inflation, (i.e. nominal but not real interest), is that halal?

If one gives a loan to another, it must be re-paid in the same manner and equally (mithl). This is a ruling agreed upon by all the scholars.
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 quantity and magnitude, not in value.

There are many evidences for this. Some are mentioned below:

1) Sayyiduna Abu Sa’id al-Khudri and Abu Huraira (Allah be pleased with them) narrate that the Messenger of Allah (Allah bless him & give him peace) 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 (Allah be pleased with them) asked: “Are all the dates of Khaybar like this?” He replied: “By Allah, no, O Messenger of Allah! We barter one measures (sa`) of this type of dates for two measures (sa`) of our own (normal & inferior quality) dates, and two measures (sa`)’s 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 Hadith commentators 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 (Allah bless him & give him peace) 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 (Allah bless him & give him peace) 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 pounds. Now at the time of repaying this loan, the price of one kilo wheat fell to one pound. 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 decreasing in the value of wheat. (Ibn Hazm, al-Muhalla, 6.347; Ibn Qudama, al-Mughni, 4.207; Dardir, al-Sharh al-Saghir; 3.290-291; Haskafi, al-Durr al-Mukhtar, 5.161)

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 can only claim back exactly the amount which was given as loan. Anything other than that will be considered Riba, thus unlawful (Haram) and sinful.
It is akin to the situation where one places his money in a safe or money box and thereafter takes the money out after few years. It is obvious that the money which he will take out will be exactly the same as he put in. It will not increase or decrease due to inflation or deflation!

So what about inflation?

As far as the using of the term ‘inflation’ is concerned, it should be noted that there is a principle in Islamic Jurisprudence which says:

“Consideration is given to the substance of the transaction and not the terms used.” (See: al-Kasani, Bada’i` al-Sana’i` 5.3; Marghinani, al-Hidaya, [with Ibn al-Humam’s Fath al-Qadir], 7.132; Zayla`i, Tabyin al-Haqa’iq, 4.112; Majallat al-Ahkam al-`Adliyya, item #3 [explained in detail by Ali Haydar in Durrar al-Hukkam Sharh Majallat al-Ahkam, 1.21]

Whether we call it inflation or something else, the reality is that it is exchanging money for money with more from one side which is Riba and unlawful.

...

And Allah Knows Best

Muhammad ibn Adam al-Kawthari
Darul Iftaa, Leicester, UK
www.daruliftaa.org

format_quote Originally Posted by lolwatever

keeping in midn that not all interest is riba....

Evidence?



A.

um, i dont know if this helps, but the way i saw it was, for example, i borrow two kilos of bananas from you, and one month later im going to pay you back with two kilos of banana, but by the time one month comes, the hurricane in queensland made the price of banana go through the roof so now two kilos of banana are worth like 10 times what they used to be.. but i still owe u two kilos of banana, if i pay u back with less than two kilos of banana so that the amount i give u is worth the same as the amount i borrowed, then u actually end up with less than what u stated off with, even though they are worth the same now. becuase if i never borrowed from u in the first place u would have still have had two kilos of banana that were worth a lot more than the 200 grams or so of banana that i gave u...

i wonder if that makes sense, im not saying thats some official answer but it something that must be considered isnt it?

but how about this example... (maybe ppl who dont come from cheese country wont understand)

if i lent you 50 cents 30 years ago, you can buy alott with it (hence why they had 1 cent adn 2cents coins even)

but if u pay me back 50 cents today, i'd tell u 2 keep it coz it probably requiers more than 50 cents of energy to collect it from you.. lol...

u get where im coming from? i.e. the value of 50cents decreased, so by charging you inflation, i'm not charging real interest, i'm just preserving the value of what i gave you... (that's what they mean when they say they're not charging you real interst with regards to hecs btw..)

salams

ps: jazak so much bro akhirah, im gonna read it now inshalah.

pps: cheese icnase my 30 year odl xample dont make sense, just remember the good old days in grade prep and 1 when kids use 2make big deal over 50cents pocket money ... too bad that's not the case now anymore - coz of money devaluation/price inflation- ffended:

So what about inflation?

As far as the using of the term ‘inflation’ is concerned, it should be noted that there is a principle in Islamic Jurisprudence which says:

“Consideration is given to the substance of the transaction and not the terms used.” (See: al-Kasani, Bada’i` al-Sana’i` 5.3; Marghinani, al-Hidaya, [with Ibn al-Humam’s Fath al-Qadir], 7.132; Zayla`i, Tabyin al-Haqa’iq, 4.112; Majallat al-Ahkam al-`Adliyya, item #3 [explained in detail by Ali Haydar in Durrar al-Hukkam Sharh Majallat al-Ahkam, 1.21]

Whether we call it inflation or something else, the reality is that it is exchanging money for money with more from one side which is Riba and unlawful.

but that means, say u give me a 100 pound note, i can cut out a piece of paper that's the size of 100 pound note and give that to you and hence pay-off my debt because it's the same 'substance for substance'?

i guess it's just a limitation of the paper-economy we're living in.. if there's ne other convincing response that would be cool.. but i must say.. mashalah this hadith SERIOUSLY blew me away.. i was like 'woa'... perfect economic efficiency MASHALAH!!:

Sayyiduna Abu Sa’id al-Khudri and Abu Huraira (Allah be pleased with them) narrate that the Messenger of Allah (Allah bless him & give him peace) 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 (Allah be pleased with them) asked: “Are all the dates of Khaybar like this?” He replied: “By Allah, no, O Messenger of Allah! We barter one measures (sa`) of this type of dates for two measures (sa`) of our own (normal & inferior quality) dates, and two measures (sa`)’s 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)

that's like full onnn mashalah.. but i also think that kinda supports my idea, because that way you're exchanging true value of dates for another quality..

format_quote Originally Posted by lolwatever

but i also think that kinda supports my idea, because that way you're exchanging true value of dates for another quality..

I'm sorry, but you don't seem to have understood the article written by the learned scholar. Please read it in its entirety. When you are exchanging money with money, which is what a loan is, it HAS to be the same in amount/quantity! If you were to put £100 in your local bank today and expect to get more in return when withdrawing 2 years down the line due to inflation, wouldn't that be classed as interest?



A.

format_quote Originally Posted by aakhirah

I'm sorry, but you don't seem to have understood the article written by the learned scholar. Please read it in its entirety. When you are exchanging money with money, which is what a loan is, it HAS to be the same in amount/quantity! If you were to put £100 in your local bank today and expect to get more in return when withdrawing 2 years down the line due to inflation, wouldn't that be classed as interest?



A.

salams bro, i did read it all jazak allah khayr..

yes that's because banks are paying you real interst.. ok how about we'll explain using simple equation:

n = r + i

n = nominal interest
r = real interest (the interest that results in you making an actual profit)
i = inflation

CASE 1:

ok... say the inflation was zero percent... i.e. the money isnt losing value.. therefore if we tell teh personw ho lent money to pay us back more, that's defiantely HARAM interest, we call that REAL interest (r) (in economics), because we're making a 'profit on money'.

so mathematically and islamically, this has to always be the case.

r = 0

i.e. since inflation = 0 (i=0), we dont want to make any gain on the loan because that's definately haram, therefore real interst=0 (r = 0), therefore, the nominal interest we charge will be:

n = i + r = 0 + 0 = 0%

In other words, because there's no inflation (no loss in value of our money) we don't charge anything extra on top of what we lend. i.e. nominal interest rate is ZERO.

^^ all Halal right?

but unfortunately zero percent inflation is rarely seen... so...

----

now..

CASE 2:

Suppose inflation is 2% (in simpel terms, at teh end fo the year, my money will be worth 2% less).

becasue when we lend money to someone.. we want to recieve teh same money we gave them... therefore:

i = 2 (becasue inflation is 2%)
r = 0 (becasue it's haram to make actual profit on the loan)

therefore:

n = i + r = 2 + 0 = 2%

therefore i am giong to charge 2% to offset the effect of value loss... but i'm not making any net gain, i'm just ofsetting the effect of value loss... hence i'm nto charging "real interest".

------

PAUSE: now.. the question is, is that ok? because.. if u look at my last post where i gave the example to cheese.. its obvious it does become a problem especially if i lend someone money for long period of time...

that's the point im making..

ill giv u a case with -ve inflation if u want.. and you'll be quite shocked 2 c the results. but ill put that in seperate post.

salams

CASE 3:

This case will explain why i want an answer.. becaue if the asnwer is no.. that means this is not interest:


Let's assume there's DEFLATION (negative inflation).... I.E. in simple terms, the value of money is RISING in an economy... so lets plug some numbers

lets assume inflation is -2%, (i=-2%) and real interst is zero (coz that's haram), therefore... nominal interst :

n = i + r = -2%

now.. based on that, in order for me to not be making any 'real interest', i should pay back the borrower 2% of what he returns coz the value of money has increased...

but lets say i don't... i.e. we'll set n=0

n = i + r = -2 + r = 0

r = 2

therefore if i dont pay him back, i'm making a profit of 2%

doesn't that ring any bells?:confused:

As a techer of Economics I used to toy with the idea lolwhatever put forward in this thread. Real value is a new concept that did not exist in Prophet (S.A.W) time.

Is charging the real interest considered as riba or not? How do we answer this? I wonder if any present-day scholars looked into this matter.

Consider this example:
I have 100 pounds with me which I am hoping to buy a piece of furntiture with. But My sister borrowed 100 pounds. 2 months later, the price of the item has increased by 5%. So the value of the money has fallen by 5%. If I charge 105pounds from my sister would it be riba?

According to the hadeeth it is,

Sayyiduna Abu Sa’id al-Khudri and Abu Huraira (Allah be pleased with them) narrate that the Messenger of Allah (Allah bless him & give him peace) 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 (Allah be pleased with them) asked: “Are all the dates of Khaybar like this?” He replied: “By Allah, no, O Messenger of Allah! We barter one measures (sa`) of this type of dates for two measures (sa`) of our own (normal & inferior quality) dates, and two measures (sa`)’s 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)

Though the "quality" of the money has now fallen (we can say the quality has fallen as low quality is equal to low value), 100 pounds is still 100 pounds.

But stil... I wish there was a better explanation.

Aren't you confusing the defintion of real and nominal interest rates?

Real interest rate is the Nominal rate minus infaltion right? Its nominal that's haraam. Banks charge n not r.

I shall say it once more: Wage power also increases in order to counter the inflation.

In the event that it does not increase, you could have two options: increase the amount owning (to get back the exact money owed), this option is least ethical (morally correct).

Or you take no action, in which you would make a loss, due to the decrease in the value of that currency. This would be the honest approach.

keep in mind that currency value will fall in relation to others and will rise if more people are using said currency.

format_quote Originally Posted by manaal

Aren't you confusing the defintion of real and nominal interest rates?

Real interest rate is the Nominal rate minus infaltion right? Its nominal that's haraam. Banks charge n not r.

salams sis, not at all.. infact i'm applying the fisher equation, which is r = i + pi (i=nominal, r = real, pi = inflation) i just assigned different letters to teh same variables to make it easier for ppl to understand..

yes banks charge n, because they are charging the value of inflation, and ON TOP OF THAT, they charge the real interest so they make profit.. hence why its haram to borrow from banks...

oh and incase i confusing anyone.. BORROWING FROM BANKS IS HARAM DEFINATELY I AGEREEEEEEE because they're charging REAL INTERST to make profit..

i'm talkin about lending and borrowing between people....

salams

format_quote Originally Posted by aamirsaab

I shall say it once more: Wage power also increases in order to counter the inflation.

salams bro,
but what does wages have to do with lending and borrowing..

infact i disagree.. if wages go up that can make inflation worse, becaue it means people will keep teh same level of demand for goods/services, and then prices have to go up further... (this idea was a starting point for Milton Freeman's Philip curve btw, which shows that wage inflation is related to unemployment).

In the event that it does not increase, you could have two options: increase the amount owning (to get back the exact money owed), this option is least ethical (morally correct).

yeh my question is... what's the proof?

Or you take no action, in which you would make a loss, due to the decrease in the value of that currency. This would be the honest approach.

my point is, if u look at 'Case 3'... i showed that making a loss may also be a case of interest, because you're literally paying the borrower more than what he gave you... which defiantely is interest.

keep in mind that currency value will fall in relation to others and will rise if more people are using said currency.[

hehe i don't think ur getting the concepts right...

ill make ti clear.. this is teh situation

me and you, we're both unemployed, but you have 100 pounds, you lend that to me, but you know at the end of one year, inflation is 2% (i.e. the money will lose 2% of its value)....

the question is, in that situation, are you allowed to offset your loss by asking me to repay you 102 pounds.

i'm very sure and aware that if u make me pay 103 poudns thats haram, because it's "real interst" (you're making a profit, and (btw sis manal) that's what the banks do, they not onlyo ffset their loss, but they also charge more to make profit).

salams

format_quote Originally Posted by lolwatever

ill make ti clear.. this is teh situation

me and you, we're both unemployed, but you have 100 pounds, you lend that to me, but you know at the end of one year, inflation is 2% (i.e. the money will lose 2% of its value)....

the question is, in that situation, are you allowed to offset your loss but asking me to repay you 102 pounds.

Then this would depend on the actual agreement. e.g. if the money owed was implied that it had the same value (e.g. I am to give you back the value of £100) then yes, i'd be allowed to increase the amount owed to counter the inflation. If however the agreement stated specifically that the amount owed was £100 only, then i'd only be owed £100 (the interest wouldn't be taken into account).

In simple terms, it depends on the agreement. If it stated to the value of £100, then the amount would be inclusive of interest. If it stated £100 owed, then only £100 would be owed.

Sorry if anyone is confuzzled.

i'm very sure and aware that if u make me pay 103 poudns thats haram, because it's "real interst" (you're making a profit, and (btw sis manal) that's what the banks do, they not onlyo ffset their loss, but they also charge more to make profit).

salams

Yes, if I charged real interest, it'd be haraam because the value owed was 100 (103 would be more than the amount owed plus inflation, therefore, haram interest.)

format_quote Originally Posted by aamirsaab

Then this would depend on the actual agreement. e.g. if the money owed was implied that it had the same value (e.g. I am to give you back the value of £100) then yes, i'd be allowed to increase the amount owed to counter the inflation. If however the agreement stated specifically that the amount owed was £100 only, then i'd only be owed £100 (the interest wouldn't be taken into account).

In simple terms, it depends on the agreement. If it stated to the value of £100, then the amount would be inclusive of interest. If it stated £100 owed, then only £100 would be owed.

Sorry if anyone is confuzzled.


Yes, if I charged real interest, it'd be haraam because the value owed was 100 (103 would be more than the amount owed plus inflation, therefore, haram interest.)

salams bro, ok hehe now we understand wats going on..

is there any evidence for that?

How about i propose a solution and maybe the bros/sis's can tell me if this is halal....

Seeeing that if i tell someone that they ought to pay me back 102 instead of 100 at the end of the year... it's possible i may be overcharging or undercharging right? Because 'how do i really know that inflation is exactly 2%?'

so. what do we do? Is it ok if i do this?

I lend you 100 pounds, and in the contract we right...

---
"Today the 100 pounds is worth 5grams of gold, you ought to pay me back 5 grams of gold in 1 year in form of cash".
---

is that halal?

i.e. if the money devalues in one year time... that means you'll be paying me back more than 100 pounds of money at the end of the year, and if the value of the money decreases, you will pay me less than 100, but either way, we know for fact i'm not going to be making any profit ebcause we're pegging the value of the money to an exact good (gold)

what you guys think of that?

Personally i know the solution, it comes down to the way the way this currency system operates, perhaps that can be the topic of another therad or ill put forwadr my idea here.. after i hear from you guys
salams

format_quote Originally Posted by syilla

all this talking about riba...made me sad (remember the quran mentioned about riba in surah albaqarah)

*do LI accept gold? hehe just joking

salams sis, yeh riba makes me sad and annoyed too.. i'm definately not saying that borrowing banks is halal, its definately haram because they're making you pay back more than what you borrowed..

but i'm asking if ofsetting a profit/loss is halal or not, because if you don't, it means that you're getting paid a higher value than what you lent, or getting paid back less value than what you lent out..

i'll give my solution to this problem inshalah if it can't be solved using this currency system

take care salams