Egypt’s Dar Al-Ifta received a question about a company that provides employees with interest-free loans to purchase apartments but requires borrowers to obtain life insurance.
The purpose of the insurance is to ensure that the company receives the remaining amount owed if the employee dies before completing repayment.
Dar Al-Ifta stated that requiring life insurance in this situation is permissible, because its purpose is to secure the lender’s existing right rather than provide an additional benefit in exchange for the loan.
Why Is Security for a Loan Permitted?
Islamic law places significant importance on protecting financial rights and preventing debts from being lost or disputed.
For this reason, Islamic jurisprudence recognizes several mechanisms for securing debts, including guarantees and pledges.
A guarantee involves an undertaking to fulfill a debt or obligation if the debtor is unable or unwilling to do so, while a pledge involves holding a specified asset as security for the debt.
What Is the Basis for Guarantees and Pledges?
Dar Al-Ifta referred to Quranic evidence concerning guarantees and pledges.
Allah says:
“And whoever brings it shall have a camel-load, and I am responsible for it.”
The Quran also states:
“And if you are on a journey and cannot find a scribe, then security may be taken.”
The Prophetic tradition also includes an example of pledging an asset to secure a debt, as the Prophet ﷺ purchased food and pledged his armor as security.
These principles demonstrate the permissibility of using legitimate means to document and secure financial obligations.
Can Life Insurance Serve as Security for a Loan?
According to the ruling presented by Dar Al-Ifta, life insurance in the case described functions as a mechanism for securing the company’s outstanding debt.
If the borrower dies before completing repayment, the insurance is intended to cover the company’s remaining right.
The purpose, therefore, is not to generate an additional return for the lender but to protect the original debt.
Can an Interest-Free Loan Include a Security Requirement?
Yes. According to Dar Al-Ifta’s response, an interest-free loan may include a condition intended to secure repayment of the original debt.
A loan in Islamic law is fundamentally a form of assistance and cooperation. Therefore, a lender cannot make the loan conditional on receiving an additional financial benefit because of the loan.
A requirement that simply protects the lender’s existing right is treated differently from a condition that creates an additional benefit.
What Is the Difference Between a Lender’s Benefit and Debt Security?
The distinction is whether the condition creates an additional benefit for the lender or merely protects the amount already owed.
A prohibited benefit would involve an increase or advantage obtained by the lender because of the loan itself.
In the case described, the company does not receive an additional return for providing the loan. Instead, the insurance serves as a means of ensuring repayment of the outstanding principal if the borrower dies.
Is Requiring a Guarantee for a Loan Accepted in Islamic Jurisprudence?
Dar Al-Ifta stated that the four major Sunni schools of jurisprudence agree on the permissibility of requiring security for a loan to protect the lender’s right.
Such security is part of the broader Islamic framework for documenting and protecting debts, provided that it does not become a means of imposing an additional benefit on the lender because of the loan.
What Is the Ruling on Life Insurance in This Case?
Dar Al-Ifta concluded that requiring an employee who receives an interest-free loan to obtain life insurance for the purpose of securing the company’s outstanding right is permissible.
The condition is regarded as a form of debt security rather than an additional benefit for the lender.
Can an interest-free loan include a life insurance requirement?
According to Dar Al-Ifta’s ruling on the case described, it can, when the purpose is to secure repayment of the outstanding debt.
Is requiring security for a loan considered interest?
No. Securing the original debt is distinct from requiring an additional financial benefit because of the loan.
Why does the company require life insurance?
In the case described, the purpose is to ensure that the remaining debt can be recovered if the employee dies before completing repayment.
What is the difference between a guarantee and a pledge?
A guarantee involves an undertaking to fulfill a debt or obligation, while a pledge involves using a specified asset as security for the debt.
What was Dar Al-Ifta’s ruling?
Dar Al-Ifta ruled that requiring life insurance to secure the company’s right under an interest-free loan is permissible because it serves as debt security rather than an additional benefit for the lender.
