Indexation of Loan in Conventional and Islamic Finance

Abstract

This study investigates the indexation as a tool to protect both lender and borrower in a contract of loan against the ebb and flow currency valuation due to inflation in an economy. Descriptive evidence is gathered to analyze the indexation and its use in an inflationary economy. We found that in both modern and classical Islamic Finance literature, we are did not find any principle evidence in linking any index with loan or debt to balance out the impact of inflation on acquiring power of money. Shari’ah do not prohibits in taking preventive measures to counter deteriorating value of money in any contract. But there is a need to explore other best possible alternatives to counter inflation that are Shari’ah compliant.