Can I Take an Interest-Free Loan?

Answered by Ustadh Salman Younas

Question

I want to ask about the permissibly of a 40,000 interest-free loan called CEBA for companies; you might be aware of this already. Get a $40,000 loan, interest-free until Dec. 31, 2022. Up to $10,000 may be eligible for loan forgiveness.
Is your business impacted by COVID-19?

The question here is: if there is the intention 100% to pay fully before 31 Dec 2022 interest-free, is it permissible to benefit from it? Also, we get a discount up to 25% if paid before 31 Dec 2022.

Answer

This is permitted so long as you can pay back before the interest kicks in. It would be similar to a credit card, which scholars allow with the same condition.

COVID-19 and Loans

COVID presents an unprecedented situation where people are at severe risk of losing their livelihoods and businesses. In this context, it may be permitted under specific and dire circumstances to take out an interest-bearing loan to the extent of one’s need. Mufti Faraz Adam and Mufti Billal Omarjee detail the conditions for this in a recent fatwa they authored.

Defining a Dire Situation

• If the business does not take a loan, it will go bust – and, crucially, that going bust will have a severely negative impact on the individual employees and directors of the business (i.e., they will not be able to afford day-to-day necessities such as household bills).
• If the business cannot get any alternative halal funding.
• If the business cannot get its creditors to agree on lenient terms for the coronavirus period.

When a Business Should Not Resort to This Dispensation

The authors also list indicators of when a business should not resort to taking an interest-bearing loan:

• The business does not need money now but thinks it might need some in 6 months’ time. The business should wait and see.
• The business expects that it will be able to weather the storm by running some short-term losses but ultimately return to profitability after that.
• The business has other funding avenues, grants, or qard hasana options available to it.
• The collapse of the business will not have a material impact on the lives of its employees or directors (perhaps it is just a small business and the employees and directors have other sources of income).

Further Considerations and Conditions

The authors conclude by stating:

• If a business resorts to taking an interest-bearing loan, it must only do so to the amount it needs to survive. Once it has returned to an even keel, the prohibition will apply again.
• A Muslim-owned business should also not take out a loan to fund its haram activities (e.g., some restaurants sell alcohol) – it should only seek (like at any time) to do halal activities.
• You must have exhausted all other means available, such as raising equity financing, obtaining grants, and obtaining interest-free credit (and paying off the money within the interest-free period) before you decide to go for the loan option.
• If you are unsure if the fatwa applies to your business, please consult a scholar you trust.

Source: What the Chancellors 350bn Package Means for Muslim Businesses

[Ustadh] Salman Younas
Checked and Approved by Shaykh Faraz Rabbani

Born and raised in New York, Ustadh Salman Younas graduated from Stony Brook University with a degree in Political Science and Religious Studies. After studying the Islamic sciences online and with local scholars in New York, Ustadh Salman moved to Amman. There he studied Islamic law, legal methodology, belief, hadith methodology, logic, Arabic, and tafsir. He is now in his final year of his PhD at Oxford University, looking at the early evolution of the Hanafi madhab.
His teachers include: Shaykh Faraz Rabbani, Shaykh Salah Abu’l Hajj, Shaykh Ashraf Muneeb, Shaykh Ahmad Hasanat, Shaykh Hamza Karamali, Shaykh Ahmad Snobar, Shaykh Ali Hani, Shaykh Hamza Bakri, Ustadh Rajab Harun and others.
Ustadh Salman’s personal interests include research into the fields of law/legal methodology, hadith, theology, as well as political theory, government, media, and ethics. He is also an avid traveler and book collector. He currently resides in the UK with his wife.