What is the difference between inflation and interest?

Dear Brother / Sister,

In our religion, interest in all its forms is forbidden; both receiving and charging it are haram (al-Baqara, 2/275-279; Bukhari, Libas, 96; Muslim, Musaqat 105, 106).

Therefore, it is not permissible to deposit money in institutions that engage in interest-bearing transactions, regardless of their location, and to use the interest earned on such deposits for any purpose.

Regarding the difference between inflation and interest rates:

If a Muslim enters into a contract or agreement without stipulating or including interest in the income and expenses, and if the payment of the debt is delayed or not made on time, the inflation difference -arising during the period of delay- is included in the payment. Otherwise, the debtor will have paid less than the full amount. However, if the debt arises from lending money for the sake of Allah, the payment is made with the inflation difference, regardless of whether the payment time has passed or the due date has arrived or passed.

If the contract is made with a bank, that is, if a deposit is made with the bank or a loan is taken out, this is also a contract, but interest is included in the contract, stipulating that a certain amount of interest will be received or paid at the end of a specified period; this transaction is part of the contract’s legal validity. It is not permissible for a Muslim to enter into such a contract. Even if the interest received or given is below the inflation rate when the payment time arrives, this does not erase the sin of having entered into an interest-based contract in the first place.

Furthermore, since money deposited in the bank is lent out as loans to those who want it at high, real interest rates, even if the depositor is not paid the real interest on his money, real interest has accrued on that money, the bank has received this interest, and the depositor has consented to it. Such a depositor is more wretched and foolish than someone who receives real interest because the latter has at least saved his worldly life -by committing a haram deed- while the former committed a haram deed but failed to gain any worldly benefit.

Interest accrued on money deposited in a bank, in whatever form, should be given to the poor or charitable organizations without expecting any thawab in return, and one should repent for having engaged in this interest-bearing transaction.

The first condition of repentance is to resolve never to commit that sin again.

Using interest income for charitable purposes does not atone for the sin of usury.

We should believe that the relationship between the servant and the Creator is similar to the relationship between a patient and a doctor. Therefore, what is beneficial is not what the servant deems beneficial for himself, but what the Creator deems beneficial for the servant. It is not the medication the patient wants that is beneficial, but the medication the doctor deems appropriate for the patient.

O Allah! Enable us to see the truth as truth and follow it, and to see falsehood as falsehood and avoid it. Amin.

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