Can I Convert a Cash Loan to a Gold Loan?

Answered by Shaykh Muhammad Carr

Question 

I lent a sum (let’s call it Y dollars) to a friend in need, with an agreed repayment period and a monthly payment plan to return the same amount. If the repayment plan is not proceeding as expected, or for any other reason, can I—with his consent—convert the loan from cash to gold in the following manner:

I would purchase X grams of gold, approximately equal to or slightly exceeding the value of the original loan (Y dollars), and provide it to him as a second loan. The understanding would be that he sells the gold for cash to repay the original loan of Y dollars. The new loan would then require him to repay the same X grams of gold under revised terms. This refinancing intends to prevent the erosion of value associated with cash.

ِAnswer

Thank you for your question.

May Allah reward you for ensuring that your transactions are Shari‘a-compliant.

Your concerns about inflation are valid. Allah says, “You may keep your original wealth neither wrongdoing nor being wronged.” [Quran, 2:279]

Restructuring the loan in the manner described above is permissible and, in fact, encouraged. There is nothing in the proposed structure that violates the Shari‘a. It is free from both contractual risk (gharar) and riba.

This approach ensures that you recover the principal loan amount while protecting yourself from the effects of erosive inflation. Adding inflation to the opportunity cost discourages individuals from lending their surplus capital, ultimately resulting in a loss for everyone involved.

Virtue of Lending

A hadith states, “On the night I was taken in journey [to Jerusalem], I saw inscribed on the door of Paradise, ‘Charity is multiplied ten-fold while giving a loan eighteen-fold.’ I said, ‘O Jibril, how come a loan is more meritorious than charity?’ He replied, ‘Because the beggar asks [for charity] despite having wealth, while the one seeking a loan does not do so unless out of real need.’” [Ibn Maja; Bayhaqi, Shu‘ab al-Iman; Tabarani, al-Mu‘jam al-Awsat]

Lenders are only entitled to the principal amount; Allah (Most High) says, “And you may keep your original wealth” [Quran, 2:279]. It is understood that when a person apportions—qard (loan) literally means “to cut”—a portion of their wealth for lending purposes, they forgo potential investment opportunities. This loss is referred to as “opportunity cost.” The lender will be rewarded for this sacrifice in the Hereafter. Charging for this loss, however, constitutes an unjust benefit (riba).

Loans must be repaid at their nominal value, regardless of inflation. Scholars have permitted deviation from nominal value to intrinsic value only in cases of hyperinflation. Inflation is a negative phenomenon—we pray that Allah (Most High) reduces the prices of goods and the cost of living.

That said, nothing prevents a philanthropist (lender) from taking measures to protect themselves against inflation, provided such measures comply with the rules of the Sacred Law.

Refinancing

The second loan fulfills all the necessary criteria for a valid loan. The loaned item is gold, which is fungible, and the borrower will return an equivalent amount in gold. The “understanding” mentioned above constitutes a separate pre-loan agreement, which amounts to a non-binding, unilateral promise.

Alternate Solution

Barring goods, it is permissible to substitute a liability for something else. Dimyati states: “The borrower must return the equivalent if no substitution occurs. Suppose the borrower substitutes a liability of wheat for clothing or dirhams. In that case, it is not considered impermissible, as it is permissible to substitute anything except the specific item or commodity being sold (muthamman).” [I‘anat al-Talibin] [1]

Since substitution is permissible, one may exchange a dollar amount for gold at maturity, provided that the relevant conditions for the dollar-to-gold exchange are fulfilled. The Prophet (Allah bless him and give him peace) said, “If the types differ, then sell as you wish, provided it is hand to hand.” [Muslim]

Therefore, rather than refinancing, you may enter into a post-loan agreement wherein the borrower consents to substitute the loan amount with gold at maturity. This is a unilateral, non-binding agreement that the borrower is encouraged to and has every reason to fulfill but is not legally obligated to uphold.

I pray this is of benefit and Allah guides us all.

[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Muhammad Abu Bakr Badhib

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefitted from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door for students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari’ah Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.