Islamic ruling on interest-based loans

Walekumussalam,

If a loan is given on the condition that the borrower must repay more than the principal amount, then this additional amount is riba (interest/usury), which is prohibited according to the Qur'an and Sunnah, regardless of whether the increase is small or large, and regardless of whether the repayment is made in monthly installments.

As for the devaluation of currency (inflation), the majority of Islamic jurists hold that it does not, by itself, make it permissible to demand more than the original loan amount. The basic principle is that a loan is repaid according to its nominal value (its equivalent amount), not according to its purchasing power.

However, if the transaction was not a loan but rather a deferred sale (Bay' Mu'ajjal) from the outset meaning the cash price and the deferred price were clearly determined in advance then it is permissible for the deferred price to be higher than the cash price. This is because it is a sale, not interest, provided that one final price is agreed upon at the time of the contract and no additional amount is charged later due to delay in payment.

Therefore, if the arrangement is a loan with a stipulated increase over the principal, it is prohibited (haram). But if it is a deferred sale in which the price was fixed at the time of the agreement, then it is permissible.