Adjusting Interest against Inflation

Dear Sir,

Your help is required in the following :

I invested 10 Lakh (PKR one million), in Govt. of Pakistan based Defense Certificates. The annualized return ((which was fixed) is 10.8 % (Hundred and eight thousand over my initial capital.) I checked some Official Govt, of Pakistani websites and found inflation rate for year 2011-2012 is around 12%.

Considering inflation rate more than the annual return, I got, am I allowed by Shariah to retain the return ? Will it be Halal?

What are directives of Isalam in this case ?


A Brother

Dubai, UAE

Mar 2012

Dear Brother

Assalam o alaikum wa Rahmatullah

How are you? How is the life going on? I am glad to see your question which indicates your concern for right and wrong.

There are two issues involved here which should be treated separately.

1. The first issue in investment in Defense Saving Certificates (DSCs) which itself is prohibited because the certificates are interest based. Even from pure worldly perspective, it is not a good investment as it is resulting a negative yield because the interest rate is always less than the inflation rate which results in overall loss. Therefore, I shall strongly advise you to sell the certificates and invest your money in any lawful business e.g. real estate, some business etc.

 2. The second issue is related to inflation. There are two viewpoints on this issue:

(a)  A group of scholars maintain that it is not allowed to offset interest against the inflation. The proponents of this view regard such investments as loan of consumable commodities. If one gave 1000kg of wheat to someone, he should not receive 1050kg in return on the grounds that the price of wheat decreased otherwise the additional 50kg will be considered interest.

(b) The second group of scholars allows adjusting interest against inflation because they do not treat such investments similar to consumable commodities. In their view, money is not like commodities but it is a medium of exchange which is a special case. Therefore, any changes in the price of money should be offset against the loan amount otherwise there will be an undue loss to one party.

You can compare the both positions and decide at your own. I agree with the second group as their viewpoint is more reasonable. However, in such cases, both parties should agree in advance on some standard e.g. gold prices. It should be a two-way agreement and in case of deflation, amount of loan should be reduced as well. This is not the case with DSCs, so you should avoid investment in them.



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Adjusting Interest against Inflation
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