How to Repay a Foreign Loan After Local Currency Devaluation and Inflation?

Answered by Shaykh Muhammad Carr

Question

I borrowed 93,000 KES (local currency) from a friend, but she provided it in USD, which was equivalent to 600 USD at the time. Although I initially requested the loan in KES, it was given in USD. A year later, due to currency fluctuations, 600 USD now converts to 77,000 KES. My friend (a non-Muslim) feels it would be unfair for me to repay in USD since the exchange rate has dropped. Should I repay in USD or KES, and how much?

Answer

In the Name of Allah, the Most Merciful and Compassionate.

May Allah reward you for ensuring that your transactions are shari‘a-compliant.

Allah (Most High) says,

“You may keep your original wealth, neither wrongdoing nor being wronged.” [Quran, 2:279]

Loans should be repaid in the currency borrowed at its original nominal value, except in cases of hyperinflation. Therefore, you are morally responsible for repaying 600 USD. However, it is permissible to exchange 600 USD for 93,000 KES upon repayment, which I encourage, given that you are dealing with a non-Muslim. You may explain the Islamic ruling to her, which only obligates you to repay 600 USD, but you can choose to go beyond this by paying her 93,000 KES.

Adding inflation to the opportunity cost discourages people from lending their surplus capital, ultimately leading to losses for all parties involved.

Inflation

A hadith states,

“On the night I was taken on a journey (to Jerusalem), I saw inscribed on the door of Paradise, ‘Charity is multiplied ten-fold, while giving a loan eighteen-fold.’ I said, ‘O Jibril, how come a loan is more meritorious than charity?’ He replied, ‘Because the beggar asks (for charity) despite having wealth, while the one seeking a loan does not do so unless out of real need.’” [Ibn Maja; Bayhaqi, Shu‘ab al-Iman; Tabarani, al-Mu‘jam al-Awsat]

Lenders are only entitled to the principal amount; Allah (Most High) says,

“And you may keep your original wealth.” [Quran, 2:279]

It is understood that when a person apportions—qard (loan) literally means “to cut”—a portion of their wealth for lending purposes, they forgo potential investment opportunities. This loss is referred to as “opportunity cost.” The lender will be rewarded for this sacrifice in the Hereafter. Charging for this loss, however, constitutes an unjust benefit (riba).

Loans must be repaid at their nominal value, regardless of inflation. Scholars have permitted deviation from nominal value to intrinsic value only in cases of hyperinflation. Inflation is a negative phenomenon—we pray that Allah (Most High) reduces the prices of goods and the cost of living.

That said, nothing prevents philanthropists (lenders) from taking measures to protect themselves against inflation, provided such measures comply with the rules of the sacred law.

Solution

Barring goods, it is permissible to substitute a liability for something else. Dimyati states:

“The borrower must return the equivalent if no substitution occurs. Suppose the borrower substitutes a liability of wheat for clothing or dirhams. In that case, it is not considered impermissible, as it is permissible to substitute anything except the specific item or commodity being sold (muthamman).” [Dimyati, I‘anat al-Talibin]

Since substitution is permissible, one may exchange a dollar amount for KES at maturity, provided the relevant conditions for the dollar-to-shilling exchange are fulfilled. The Prophet (Allah bless him and give him peace) said,

“If the types differ, then sell as you wish, provided it is hand to hand.” [Muslim]

I pray this is of benefit, and Allah guides us all.
[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Faraz Rabbani

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefited from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door to students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari‘a Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.