Short Answer

If it is almost certain that you will be able to meet all the requirements to have the loan forgiven, then it is permissible to take such a loan. If only part of the loan is guaranteed to be forgiven, then it is allowed as long as you consider the conditions of the loan upfront and are sure that you will not be charged more than the total amount you were loaned. If such a loan forgives the principal but requires you to pay the interest, it is still permissible, since it is not functionally equivalent to an interest-bearing loan.

Detailed Answer

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 monetary aid by the government is given in the form of “loans” which are forgiven if certain requirements are met. 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.”[1]

These loans were actually intended to 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.[2] For this reason, the interest may still be due on these “loans” even when the principal is forgiven.

An important principle in Islamic Law is captured by the legal maxim: “the consideration in contracts is the functional meaning, not the wording” [al-ʿibrah fī l-uqūd li l-maʿānī lā li l-alfāẓ]. For example, if someone says, “I will give you this gift if you give me that gift”, the contract is viewed as a type of sale transaction. Even though the word ‘gift’ is used, since two items are being exchanged, it is functionally a sale contract and not a gift at all. This same principle is applied to 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.

An example of such an exception is credit cards, which are permissible to use as long as certain conditions are met. The majority of contemporary Muslim scholars have allowed Muslims to sign up for and use credit cards if they can ensure they will pay off their balance before any interest accrues.[3]

As mentioned above, Islam considers how a contract functions practically, and not the words that are used in it. As Professor Mahmoud El-Gamal pointed out, “the term ‘interest’, as used in today’s economic and practical language, extends beyond fixed rates of return on loans in-kind”. Therefore, he drives home the point that “not all interest is the forbidden ribā”. An example of this is a modern car lease, a portion of which may be called “interest”, but it is functionally and practically considered a portion of the lease rental amount and is not a type of forbidden ribā. Another example would be selling an item [using a murābaḥah contract] with a higher deferred price than the immediate cash price and labeling the difference between the two profits “interest” — again, this is not considered forbidden ribā. The term interest is used in conventional finance to describe a portion of the profit in both of these examples. However this type of “interest” is Islamically permissible since it is not additional money on a monetary loan.[4]

A loan, with an almost guaranteed loan forgiveness stipulation, would fall in a similar category. Even if the loan required interest to be paid, but the principal would be forgiven, it would not truly function as an interest-bearing loan.

Therefore, since both the underlying intent and the functional reality of such a loan are not like an interest-bearing loan, it would be permissible to take as long as these conditions are almost certain to be met.

[Shaykh] Mustafa Umar and [Shaykh] Umer Khan

Anaheim, CA – April 2, 2020

[1] https://www.reedsmith.com/en/perspectives/2020/03/cares-act-overview

[2] According to Dr William Kindred Winecoff, Professor at Indiana University Bloomington

[3] http://www.daruliftaa.com/node/6139?txt_QuestionID

[4] Mahmoud El-Gamal, An Economic Explication of the Prohibition of Ribā in Classical Islamic Jurisprudence (Islamic Economic Studies, 2001, vol. 08-2, 29-58)