The Objectives of the Prohibition of Riba By: Elhadi Habbani

Nominal Versus Real Rate of Interest:

Another debate between different views and theories on riba that the supporters of this theory argue that there is no hadith on Riba regarding the effects of inflation and deflation on the loan. Since, Inflation diminishes the purchasing power of currency, and deflation increases it, the giver of loan is subject to the inflation risk which therefore it is quite justifiable to compensate him by additional risk premium or interest rate in inflationary economies. The supporters of this theory claims that allowing interest on inflationary economics only there is no real pre-intention to support the benefit of the giver of loan rather than help him/her to preserve the real value of his/her benevolent loan at the occurred at first place because the declining of givers money due to inflation is not their fault since inflation is considered as a systematic risk which can't be avoided by anyone in the society.
The adversaries of this theory claiming that any increase on loans regardless of inflation or deflation would be a clear violation to Quranic and Sunnah in prohibiting Riba. It is argued, since Riba is considered in Islam as a one of the most bigger sins, it is not acceptable to legalize a bigger sin to fight another sin.
More over from the point of view of the author of this paper debt is an abstract and stagnant asset that doesn't make increment or value so inflation or deflation do not have any positive or negative impact on it, real asset only, whether it is products or services that subject to be impacted positively or negatively by inflation or deflation which is supporting the prohibition of Riba, and encouraging exchange of products and services which is, in turn, quite permissible in Islamic Shariah.
So, the argument of nominate and real rate of interest or inflation versus deflation is applicable here.

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