Question:
If I give 2 Lakh rupees to a homeowner and stay in his house without paying rent, how can this be considered interest (Riba)? He is using my money, and I am using his house; there is no loss to anyone. Furthermore, since the value of money decreases over time, isn’t it fair for me to stay there to offset that loss?
Answer:
1. What is a Pledge (Rahn) in Islam?
In Islamic Law, a Pledge (الرهن – Al-Rahn) is a permitted action. Its sole purpose is to serve as Security (Collateral) for a debt. It is an item taken as a guarantee to ensure the creditor that the debtor will not default on the loan.
The Prophet (ﷺ) himself practiced this: أَنَّ النَّبِيَّ صلى الله عليه وسلم اشْتَرَى طَعَامًا مِنْ يَهُودِيٍّ إِلَى أَجَلٍ، وَرَهَنَهُ دِرْعًا مِنْ حَدِيدٍ
Meaning: “The Prophet (ﷺ) purchased food grains from a Jew on credit for a specific period and pledged his iron armor to him as security.” (Bukhari 2252)
In this instance, the Prophet (ﷺ) gave his armor only as security. The Jew did not use the armor for his own benefit; it remained with him as a trust (Amanah). This is the essence of a true Islamic pledge.
2. Why is the ‘Othi’ System Considered Interest?
A pledge is not meant for the creditor to derive profit from the asset. Consider the example of a modern bank: If you pledge your house to a bank to take a loan, the bank keeps the original documents (Deed) as security. The banker does not move into your house or set up an office there.
The reason why staying in a pledged house is considered interest is explained as follows:
- If a house is rented out, the owner would receive a specific income (e.g., 50,000 rupees a month).
- Because you gave him a loan, you are enjoying that rental value without paying him.
- Any benefit or advantage derived from a loan is classified as Interest (Riba).
- Therefore, a correct pledge would involve keeping the house keys or documents as security, but residing in the house for free is a form of interest.
3. The Exception for Livestock (Animals)
A specific exception was granted by the Prophet (ﷺ) only for pledged assets that require maintenance costs, such as horses, camels, or cows:
الرَّهْنُ يُرْكَبُ بِنَفَقَتِهِ إِذَا كَانَ مَرْهُونًا، وَلَبَنُ الدَّرِّ يُشْرَبُ بِنَفَقَتِهِ إِذَا كَانَ مَرْهُونًا Meaning: “A pledged animal can be used for riding if the creditor pays for its fodder, and the milk of a pledged milch animal can be drunk if the creditor pays for its fodder.” (Bukhari 2511)
Since an animal will die if it is not fed, the person providing the fodder is allowed to ride it or drink its milk to offset the cost of maintenance. However, since a house does not require “fodder” or daily feeding, this exception cannot be applied to real estate.
4. Depreciation of Money and Economic Explanation
Regarding the argument that money loses its value (inflation) over time and staying in the house offsets this loss, the following points are clarified:
- Government Management: The decrease in the value of money is due to government mismanagement. In countries like the USA, currency values do not fluctuate as drastically as in poorly managed economies.
- The “Iron Box” Example: If you kept those 2 Lakh rupees in an iron box instead of lending them, the value would still decrease after five years.
- Unfair Penalty: It is not fair to penalize the borrower for a loss (inflation) caused by the government’s policies.
- A Rational Solution: To avoid loss due to inflation, the loan can be structured based on Gold. One can agree: “Today, I am giving you an amount equivalent to X grams of gold; when you return it, you must pay the value of the same X grams of gold.” This ensures neither party suffers a loss.
5. Security Measures
Simply holding a document might be risky, as an owner could falsely report to the police that the document is “lost” to bypass the creditor. To prevent this, the creditor can legally register the document or obtain a “Power of Attorney” (Power) as security. This serves as a legal hold on the property without granting the right to inhabit it for free.
Conclusion: In the Islamic perspective, a pledge is strictly a security for a debt. Using a house rent-free in exchange for a loan is a form of indirect interest. A pledge should provide Security, not Usufruct (Usage).