Tuesday, 13 March 2012

Paying off a loan in a different currency because the value of currency has dropped

I gave someone a loan of $2000. At that time $100 was worth 150,000 dinars. Now the rate has changed and today $100 is worth 127,000 dinars, i.e., there has been a loss of 23,000 for every $100. 
My question is: Is it permissible for me to take dinars instead of dollars, and count 150,000 dinars for every $100, or not?.

Praise be to Allaah.
The basic principle is that a loan should be paid off in the same currency as the borrower took it, unless both parties agree at the time of repayment to make the payment in another currency, so long as that done at the rate on the day of repayment, and not the rate that was in effect on the day when the loan was given. The same applies to each instalment. It is permissible for both sides to agree at the time of payment to pay it in another currency, at the rate that is in effect on the day it is paid. 
The fall in value of the currency does not matter in this case, so long as the currency is in circulation in the market place. 
It is not permissible, when making a loan, to stipulate that repayment must be made in another currency. The one who does that has engaged in riba, because in fact this transaction is selling currency now for another currency to be paid later on, and this is riba. 
The scholars of the Standing Committee were asked: what is the ruling if someone borrows a thousand dollars, then when the time comes, he pays back what he borrowed in a currency other than dollars; such as paying in riyals, so instead of paying a thousand dollars he pays four thousand riyals? Please note that a thousand dollars at the time the loan was given was equivalent to 3500 Saudi riyals. 
They replied: The borrower should pay back in the same kind of currency as he borrowed. If he wants to pay it back in another currency, then it should be at the rate which is in effect at the time of paying it back. But it is not permissible for a Muslim to stipulate that at the time the loan is given, because in that case it will be a currency exchange without an on-the-spot exchange, and that is not permissible because of the hadeeth of ‘Ubaadah. End quote. 
Fataawa al-Lajnah al-Daa’imah (14/166). 
That has been explained in detail in the answer to question no. 99642
To sum up: The lender may take back $2000, as he loaned or, on the day of repayment, he may agree with the borrower on another currency, at the going rate of exchange on the day of repayment, no matter how much it is. 
And Allaah knows best.

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