Is a Loan That Charges Interest Permissible During COVID-19 Times?

28 August, 2020
Q According to the Shariah, is an Interest-Bearing Loan announced by US Government under the Coronavirus (COVID-19) Aid, Relief, and Economic Security Act (CARES Act) permissible?

Answer

In the Name of Allah, Most Gracious, Most Merciful. 

All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.


In this fatwa:

It is permissible for Muslim businesses to avail the loan given under the United States’ Coronavirus Aid, Relief, and Economic Security Act [CARES Act] if the they use loan for the purposes for which the government gives it and they follow all the terms of the loan.


In responding to your question, the Fiqh Council of North America, states:

CARES Act

The Unites States government passed the Coronavirus Aid, Relief, and Economic Security Act [CARES Act] on March 26, 2020 which allocated $2 trillion to help the country recover from the effects of the novel Coronavirus Disease 2019 [COVID-19].

This act includes loans for major industries and small businesses impacted by the Coronavirus. The government gives the monetary aid by the government in the form of “loans” which it will forgive if certain requirements are met.

CARES Act Loans will be forgiven

As an example, here is a summary of one clause which mentions the conditions of loan forgiveness:

“Any portion of the Section 7(a) loan used to maintain payroll, provided workers stay employed through to the end of June 2020, will be forgiven in an amount equal to the sum of the following costs incurred and payments made during the eight-week period beginning on the date of the origination of a covered loan; (i) payroll costs; (ii) interest payments on mortgages; (iii) covered rent obligations; and (iv) covered utility payments.”

These loans function like grants or gifts to eligible institutions. The reason they are structured as loans is so that they can be easily and quickly administered through existing financial institutions and already-established processes: FDIC banks, credit unions, etc.

For this reason, the interest may still be due on these “loans” even when the principal is forgiven.

Islamic Legal Maxim

An important principle in Islamic Law is the legal maxim that; “the consideration in contracts is the functional meaning, not the wording” [al-ʿibrah fi l-uqud li l-ma`ani la li l-alfazh].

For example, if someone says; “I will give you this gift if you give me that gift”, the contract is a type of sale transaction. Despite the use of the word ‘gift’, since two items are being exchanged, it is functionally a sale contract and not a gift at all.

This same principle holds true for a loan contract that has a guarantee of forgiveness. It is normally unlawful for a Muslim to enter into a contract that stipulates interest on a loan. However, exceptions to the rule can be made when there is an extremely high probability that this interest will not be incurred. The reason for the exception is that such a contract would in reality be functionally equivalent to an interest-free loan.

Ruling and Conditions

It is the opinion of the Fiqh Council of North America that it is permissible for Muslim businesses to avail this loan under the following conditions:

1- The Muslim businesses will use the loan amount strictly for the purposes for which the government gives it.

2- The Muslim businesses will follow all the terms of the loan, so that the loan amount is forgiven according to section 7 of CARES Act.

3- The Islamic organizations taking the loan must make every effort to ensure that they will not incur interest.

4- The Muslim businesses should consult a lawyer for submitting the application for this loan to protect the organization and its representatives from any future legal problems.

Almighty Allah knows best.

Source: https://isna.net/