Is Repaying a Loan at Rate of Inflation Halal or considered Interest (Riba)

I stay in a western country and soon I will get admitted to a university this year. The state government has stopped giving out grants for students but they do give loan, which is interest free but is has to be paid back at the rate of inflation. In real terms the repayment I make is not worth more than I borrowed as you can only buy the same amount of goods with it. Although in physical terms I would be paying back more. For example in 2010 I borrowed 100 pounds which could buy me say a week’s food. Rate of inflation is 2%. In 2011 although I repay 102 pounds (due to inflation) but I can still only buy the same amount of food with it. I would like to know if this is Halal for me or is it same as paying interest (Riba)?

Yes, it will be interest (Riba). Any loan that is borrowed before inflation must be repaid with the same amount, regardless of the effect of inflation upon it. In your case, since the repayment of your loan was index-linked, you, the borrower, will be harmed. Therefore, this transaction is tantamount to Riba. Any amount paid in excess of loan amount is Riba.


Layout type:

Layout color: