From: mmokhtar@attmail.com (Mazen Mokhtar)
Subject: Re: Interest/financing Cars and homes
Originator: mmdh@cbnewsf.cb.att.com
Organization: AT&T
Date: Thu, 13 Aug 1992 14:15:38 GMT


  Dave Bakken asked a question regarding interest in sci, I responded
to the question there, but since the turnaround time on sci is long, and
since this topic is also discussed here, I am reposting my answer.

In article <713648833@bronto.cs.duke.edu> bakken@cs.arizona.edu (Dave Bakken) writes:

>Is there any opinion of the ulema regarding the long-term impact of
>inflation with regards to what constituted Riba?  I believe that at
>the time of Muhammad, long-term inflation was not a concern.  During
>this century however, in just five or ten years time the value of
>money paid back could be half or less in real terms (and basically
>zero in a few periods of hyperinflation, e.g. Weimar Germany and
>Argentina in the 1980s).  Would a loan clause that required the
>loan to be paid back in the money after accounting for inflation,
>say the number of dollars it takes to buy a predefined basket of
>goods, be acceptable or would it be considered haram Riba?

  It would be perfectly acceptable. Inflation is a sad fact of the
twentieth century. It is a form of taxation indirectly caused by
unaccounted government spending and free printing of paper money. The
solution is quite simple. It is not necessary to fix a loan amount to
the value of a currency, it is possible to fix it to anything. For
example, I can borrow $1000, or I can borrow gold worth $1000 in the
form of $1000. In the first case, I have to return $1000, in the second,
I have to return the same amount of gold I borrowed, or its price, which
could now be $1020. Since gold usually doesn't tend to gain or lose
value on the long term, this method would protect you against inflation.

The way to apply this is for the two parties to agree what is being
borrowed. It could be gold, silver, inflation adjusted dollar, even
potatoes or stock shares. The borrower agrees to take the dollar value
of what he is borrowing and agrees to return the same some time in
the future.

  Using a basket of goods (inflation index) is more practical
and fairer than using potatoes [but either is acceptable, since you can
borrow whatever you want.] I can agree to borrow $1000 or I can agree
to borrow 1000 1990 dollars. In the fist case I have to return $1000 in
1994, in the second, I have to return 1000 1990 dollars, which could be
equal to 1115 1994 dollars.

  In order to see how this method works, we define for the sake of
calculation an inflation adjusted currency (call it a US dinar) as, for
example, $1.00 on January 1, 1990. Defining currencies for the sake
of accounting is not unusual, the European ECU is still such an example. The
value if the US Dinar is defined as the purchasing power of $1.00 on
Jan 1, 1990; so, if after fifteen years inflation halved the value of the
dollar, the value of one US dinar will be about $2.00. If I borrow from
you 1000 US dinars on January 1, 1990, I have to return 1000 US dinars fifteen
years later. If the Banks cannot deal in US dinars, I can return to you
the equivalent in US dollars, which is roughly $2000.

  Islamic economics is misundertood partly because there are two aspects of
it which are aften forgotten or ignored, even by Muslims:

  - There is nothing forbidden for no reason

  - If something is forbidden, a better alternative is always available



Regards,

Mazen Mokhtar


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