Is it permissible to stipulate that the borrower must pay the difference in value if the currency drops?

Question

Praise be to Allah.

It is not permissible for
the one who borrows money from anyone to commit himself to repaying the loan
based on the value of the currency at the time when the loan is repaid,
rather he must repay the loan with the same value as it had at the time he
took it. This is the view of the majority of scholars both classical and
modern, and it is what is stated in fatwas issued by contemporary fiqh
councils. This applies if the currency remains in circulation, even if the
exchange rate changes.

But if the currency is
abolished altogether and the people no longer use it, in this case there are
different scholarly opinions.

Some scholars say that the
borrower must pay back the value at the time of the loan.

Some say that what counts
is its value at the time the currency is abolished.

Others say that what
matters is its value at the time of paying it off.

Shaykh Muhammad ibn Saalih
al-‘Uthaymeen (may Allaah have mercy on him) said:

The view that is most
likely to be correct is the view that what counts is the value at the time
the currency is abolished, because he was responsible to pay ten fuloos [a
kind of currency] until it was abolished, i.e., if he had asked him for ten
fuloos one minute before it was abolished, he would have given him ten
fuloos, and it would have been binding on the lender to accept it. So if
that is the case, we should estimate the value to be paid at the time when
it is abolished. End quote.

Al-Sharh al-Mumti’
(9/104).

This is the ruling in the
case of the currency being abolished and another being used instead. But if
the currency is still valid and people are still using it, then it must be
repaid as it is, even if the rate of exchange is different and even if the
purchasing power has changed, and even if there is inflation. This is stated
in a report by the International Islamic Fiqh Council which belongs to the
Organization of the Islamic Conference, which is sufficient and good.

Statement no. 115 (9/12)

Re:

Inflation and change in
currency values

The Journal of the
International Islamic Fiqh Council which belongs to the Organization of the
Islamic Conference in its eighteenth session held in Riyadh, in the Kingdom
of Saudi Arabia, 25 Jumaada al-Aakhirah – 1 Rajab 1421 AH (23-28 September
2000 CE).

After studying the closing
statement of the Economic Fiqh Council for the Study of Inflation (in its
three sessions in Jeddah, Kuala Lumpur and al-Manaamah) and its
recommendations and suggestions, and after listening to the discussions on
this topic with the members and experts of the Council and a number of
fuqaha’, the following has been determined:

1 – Affirmation of the
previous decision, no. 42 (4/5) which reads as follows:

“What matters with regard
to repayment of undisputed debts in a certain currency is that they should
be paid in the same currency, not the equivalent value, because debts are to
be paid off in the same form as the loan was given. It is not permissible to
connect debts owed, regardless of the nature of the debt, to changes in the
level of prices.”

2 – In the event that
inflation is expected at the time of signing the contract, the contract may
be drawn up based on a currency or form of wealth other than that which is
expected to fall, such as basing the contract on the following:

(a)Gold or silver

(b)A similar product

(c)A basket (group) of similar
products

(d)Another, more stable currency

(e)A basket (group) of currencies

Payment of the debt in the
examples given above must be in the same form as that on which the loan was
given, because the borrower is not obliged to pay back anything more than
what he actually received.

These cases are different
from the case which is forbidden, whereby the two parties involved in the
transaction do the deal on the basis of giving in one currency on condition
that the debt is paid back in another currency or a basket (group) of
currencies. The prohibition on this type of loan was issued in the Council’s
statement no. 75 (6/8).

3 – It is not permissible
in sharee’ah to agree when drawing up the contract to connect payment of the
debt to any of the following:

(a)a mathematical formula

(b)the index of living expenses or
any other index

(c)gold or silver

(d)the price of a specific item

(e)the average gross domestic
product

(f)another currency

(g)the rate of interest

(h)the average price of a basket
(group) or products

That is because this kind
of connection may lead to many types of risk and unknown factors, to such an
extent that neither party knows what is owed or expected to be paid, so the
condition of clarity which is required for contracts to be sound will not be
met.

If these things to which
the debt is connected increase in value, that will result in differences
between what is owed and what is expected to be paid, and if the contract is
based on that, it is riba.

This statement by the Fiqh
Council is in accordance with that which was stated in fatwas by the
Standing Committee, Shaykh ‘Abd al-‘Azeez ibn Baaz, and Shaykh Muhammad ibn
Saalih al-‘Uthaymeen (may Allaah have mercy on them).

The Standing Committee for
Issuing Fatwas said:

The borrower must pay the
pounds that he borrowed at the time when the lender asks for them, and the
difference in purchasing power does not affect anything, whether it has
increased or decreased.

Fataawa al-Lajnah
al-Daa’imah (14/146).

See also the answer to
question no. 23388, as it
deals with a similar question. The two answers complement one another.

And Allaah knows best.