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.

Address the following questions:

1. Abdullah feels he is forgoing the opportunity cost of investing his money in stocks that pay dividends. Accordingly, he feels justified in charging some amount from an economic perspective.
   1. Is the opportunity cost argument valid for a Muslim who would not invest in a risk-free US government bond? Explain.
   2. Is a Saudi government bond risk-free? Explain.
2. Abdullah is wondering whether the Islamic prohibition of Riba (usury) is not a crystal-clear concept and that maybe its based on a weak Hadith or that the definition of what is Riba is not mentioned in the Quran. He also wonders if it is just a minor sin and not a big deal like stealing or drinking alcohol or eating pork.
   1. Does the Quran actually specify that any amount of interest is Haram? In other words: is usury and interest the same thing in Islam? Support your argument with (daleel) a Quranic verse and/or Prophetic hadith. (Any Hadiths must be from Sahih Al-Bukhari or Sahih Muslim)
   2. Is this a big deal (is it a major sin or a minor sin) in Islam? In other words, is dealing in Riba worse than or lesser than eating pork or drinking an alcoholic beverage? Or is it minor, like taking an extra 2 minutes to turn in your exam? Support your argument with (daleel) a Quranic verse and/or Prophetic hadith.(Any Hadiths must be from Sahih Al-Bukhari or Sahih Muslim)
3. 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).
4. Should Abdullah explore another mode of financing his friends car? Explain one option.
5. 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).
6. What would you ultimately do (Group decision)? Explain.