Khaled wants to earn a living being an Uber driver, but he doesnt have a car. Uber has high standards and requires a fairly new car but Khaled cant afford it so he asks his friend Abdullah if he can loan him 70,000 Riyals so he can buy a car and earn a living and that he should be able to pay him back in 3 years from the income he plans on generating.

Abdullah likes Khaled and has the money to spare but he studied the Fisher equation in his economics and finance classes that differentiates between inflation and real interest as follows:

Nominal Interest = Real Interest + Expected Inflation

So if the nominal interest rate is 5% and the real interest rate is 1% and expected inflation is 4%, Abdullah is wondering whether he should require Khaled to compensate him for the inflation rate of 4% so that his purchasing power remains the same when his loan is returned to him after 3 years. This way, in his mind, hes not charging interest; only inflation.

1. If Abdullah was to only charge Khaled for inflation
   1. Would he not be violating the Riba prohibition because hes not charging real interest, just inflation? Explain.
   2. Is there an economic explanation that would justify Muslim scholars for still advising Abdullah not to charge for inflation because that too is a violation in accordance to Islamic teachings? Explain (Hint: review the 3 functions of money).
2. Should Abdullah explore another mode of financing his friends car? Explain one option.
3. Should Abdullah give his friend the loan interest-free and accept the diminished purchasing power of his SAR70,000 after 3 years? Is this a fair and reasonable option? Explain (Hint: review the 3 functions of money).
4. What would you ultimately do (Group decision)? Explain.