If a person takes out a loan from bank for an industrial project or a business, would he be committing something that Islam prohibits? May I point that in case the borrower fails in his business, and as a result, is unable to return the money, his loan is treated as a bad debt.
If a businessman takes an interest-bearing bank loan for an industrial or business project, then he is starting with a transaction of which Islam does not approve. You have cited the situation where the borrower's business fails and the whole debt is written off. That does not change the substance of the banking transaction. All loans, whether taken out from a bank or from an individual, bear an element of risk. When you lend someone a sum of money, there is always the risk of losing your money. If the borrower fails to repay you, you may have to come to the conclusion that you have made a bad decision and lent the money to a person that repays your kindness with stealing your money. You may have to simply consider your loan as a bad debt. If you have agreed with him to pay you interest, then you have done something forbidden in addition to losing your money. If you have given a loan that is in keeping with Islamic teachings, you earn a reward. The Prophet, peace be upon him, mentions that it is written on the door of heaven that "a charity, or a sadaqah, is given a reward ten times its value, and a loan is rewarded by eighteen times its value." So, the risk factor of the writing off a bad debt does not make the transaction permissible if it is essentially unlawful.• Loans: Devaluation and repayment with compensation
I borrowed some money from a friend of mine for a fixed period of time. However, after I had taken the money, our currency was devalued by 8.5 percent. I intend to pay him back the loan with a little extra to soften the effects of the devaluation, but I am afraid that this would be usurious. Please advise.
The devaluation that has been enforced by the government in your country practically reduces the real value of your currency. Hence, if you pay him the exact figure, which you have borrowed, then you are practically paying him less than what you have borrowed. Yet the effect of devaluation on the people of the country themselves is not felt immediately, but over a period of time which is influenced by various factors relevant to the political and economic situation of the country. Therefore, the timing of your repayment of the loan affects the value of the amount you are paying your friend. Hence, you should agree with him a reasonable amount to repay over the figure you have borrowed. In practical terms, this means that if you are repaying your loan after the devaluation, you should give him the full rate of devaluation over the figure borrowed. You may find out that he would not accept any increase over and above what he lent you. In this case, you may accept his decision without too much argument, or preferably pay the extra amount to the poor on his behalf. In this way, both of you can earn a reward from God: you for your good action of thinking about your friend’s interest and he for the charity given to the poor.
May I add that not every increase in the repayment of a loan is interest or usury. The Prophet, peace be upon him, borrowed money and returned it with an extra amount. That extra was a gesture of gratitude to the lender for having given him the money when he needed it. That is a freely given gift which is acceptable in Islam. What is important that there should be no prior agreement between the lender and the borrower that the latter would give a gift to the former. If there is an agreement, even a tacit one, then that becomes usury and it is forbidden. But if the increase is a free gift, which was not even hinted at between the two, there is nothing wrong with it.
• Loans: Inflation affecting the loan amount
I refer to what you have published in your column some time ago and I agree that an individual should not receive profit from lending money to a fellow human being. But I also believe that a lender should not come to any harm as a result of helping a person in need. However, in relation to the question of lending, may I ask what happens if I lend you an amount of money to buy a television set. Six months later, you pay me the exact amount of money that I advanced to you, but by that time, that amount can only buy a loaf of bread. I contend that it is not the amount of money, but its value that is of greater importance. I [a non-Muslim] have argued this point with Muslim friends, and their reaction is simply, "it is the lender's tough luck if he loses out on the transaction." I would be grateful for your comments.
I am glad that you are in agreement with me regarding personal loans between individuals. For a person to draw monetary benefit out of helping someone in need is rather immoral, although it is practiced in many societies. When a person gives another a loan, he is doing him a great favor, for which he stands to earn rich reward from God.
There is a Hadith which states: "It is written on the door to heaven: A sadaqah (or charitable donation) is rewarded by ten times its value, while a loan is rewarded eighteen times." The Prophet says that he asked Gabriel the Angel about this and Gabriel told him that it is because a loan answers a very pressing need on the part of the borrower.
Islam lays down a very strict condition on loans which requires the lender to ask for repayment of his principal only. No increase or profit should be asked by the lender. However, a borrower is recommended to follow the Prophet's practice and give the lender more than he received, if that is at all possible. The Prophet paid loans he had borrowed with an increased amount. That increase is a gift by the borrower to the lender to indicate his gratitude for the help he had received. It must be stated very clearly and without any equivocation, such an increase should be only at the initiative of the borrower. There should never be any discussion of that between the lender and borrower. Nor can there be any implicit or tacit agreement between the two, at the beginning of the transaction, that the lender should receive more than he has given.
We have to differentiate here between two situations. They are similar in practice because they involve an advance of money given by one person to another and an increased repayment by the other after some time. In the first situation, the increase is stipulated in advance, and the lender pays out the money knowing that he will receive more. In fact, he may take that as a business and get an income from lending money to people. This is totally forbidden, because it exploits people's needs.
The other situation is that the money is lent without any expectation on the part of the lender that he would receive anything over and above the amount he lent. However, the borrower repays it with an increase in order to express his gratitude. He is under no obligation to do so, but he puts it out of his own accord, without any pressure. That is perfectly permissible.
In our modern times, where inflation systematically erodes the value of money, borrowers should always try to compensate lenders for any loss of the value of money they had borrowed from them, by giving such an extra amount which at least offsets the drop that results from inflation. Suppose one borrows one thousand dollars from another for a period of one year. After a year, figures are published which show that inflation has eroded the dollar value by ten percent. If the borrower pays the lender back 1100 dollars, then he is actually paying him the value of his loan.
When inflation is very small and the value of a particular currency drops only marginally, it may not be a problem with either lender or borrower to repay only the same amount advanced. However, in cases where there is a severe drop of value in a particular currency, as happened, for example, in Lebanon during the civil war, when the Lebanese lira settled at about 1700 for one dollar, if you had borrowed, say, 10,000 liras for a period of 10 years and repaid it in the same currency, you would actually have borrowed the equivalent of $ 4,000, and repaid only six dollars. That is totally unfair. It is not right to say that this is only the lender's "tough luck". In the case of Lebanon, people with keen sense of religious duty were happy to discuss the situation with their lenders and compensate them for the value of the money they had borrowed from them. In many cases, a compromise was sorted out when both parties were happy. We should remember that in such a situation, both parties are in a different position. Therefore, a compromise that ensures for both a reasonable deal is perfectly acceptable. Fairness is the mark of Islamic transactions.
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