Is Indexation of Loans Permissible?

Answered by Shaykh Muhammad Carr

Question 

My friend asked for a loan to buy a house, but I’m concerned about inflation eroding the value of the money. Is it permissible to peg the loan to the value of gold? Alternatively, can I lend gold coins, and my friend repays with the same amount of gold?

ِAnswer

Thank you for your question.

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

Your concerns about inflation are valid. However, Muslim scholars are sharply divided on the validity and legitimacy of pegging loans (indexation). Scholars such as Rafiq al-Misri and Sultan Abu Ali M.A. Mannan permit it, while the vast majority do not [Mansuri, Islamic Law of Contracts and Business Transactions].

All scholars consider the alternative of lending your friend gold coins and having him repay the same amount valid and, therefore, the better option.

Please remember that gold is considered an usurious asset, which means that a stipulated positive return beyond the principal amount is strictly prohibited in a loan contract.

I pray this is of benefit and Allah guides us all.

[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Muhammad Abu Bakr Badhib

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 benefitted 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 for 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’ah Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.