I have read your responses to question on Riba and note you make a point that a predetermined rate to account for inflationary adjustment would still not be allowed in Islam. My question is what if the rate on the loan is a variable rate – obviously this variable rate will change over the life of the loan based on national interest rate changes, and basic economics taught me that the interest rate related to a currency is dependent upon the inflation rate in that country. The last thing I want to do is try to pick holes in Islam or the koran, but I do want to explore the interpretation of the koran and hadith as I do not understand Arabic and cannot read the source documents, and human interpretation can always be prone to mistakes whilst the divine word cannot. So starting from the basis that Islam has to be a fair and just and logical religion in all cases and all times, and Islam allows commerce ( the aim of commerce is to make profit but Islamically it would also mean not to make extortionate profit as that would imply overcharging), then does it not follow that given a banks commercial activity is to lend money, they need to account for depreciation of the currency by charging a percentage to cover for this devaluation and then they will also have a profit margin (as all businesses do). So, as long as their margins are not excessive then why should an interest charging bank be treated any different to another commercial enterprise. I work in the finance industry in London, and there has recently been great interest by western banks in the Islamic / Halal banking sector. However, the cost of a halal mortgage works out more than that of a normal interest bearing mortgage – so in effect, this route is more expensive for Muslim consumers., and I would say more like USURY in the sense of extortionate amounts of interest. The whole halal mortgage to me looks like simply calling a mortgage payment a rental payment i.e. just a change in terminology. I hope you can clarify my understanding of this situation.
Your brother in Islam
First of all, as I have stated in one of my earlier responses, I do not only consider it permissible to make inflationary (or deflationary) adjustments in loans, but, in fact, I consider such adjustments necessary from the perspective of justice between the buyer and the lender. Furthermore, it is also clear that there is nothing in the directives of the Shari`ah, which hinders such an adjustment. However, it is one thing to make an adjustment in the loan in view of actual inflation, which is permissible in Islam, and quite another to ask for a predetermined increase in the loan, which is not permissible in Islam.
As for the aspect of the banking organizations involved in the business of money lending, it seems that by prohibiting predetermined increase in loaned amounts, banking in Muslim countries can only based on the principle of profit-sharing, rather than interest or predetermined increase.
Thus, in my opinion, under the provisions of the Islamic teachings, a bank may, firstly, make adjustments in the outstanding loaned amount concurrent with the rate of actual inflation, but only after such inflation has taken place and not on a predetermined bases; and, secondly, contingent upon the incidence of any profits arising from the use of the loaned amount, the bank may take an agreed upon share of such profits. None of these charges on the part of the bank can be considered as prohibited.
I hope this helps.
February 24, 2005