Is my draft loan terms/agreement halal?

[shantaedavis]

Salam.

In the near future, it is likely that I may need to give a loan. For now we have agreed to prepare for any negotiation, should this loan ever be needed. Whilst I am drafting my terms, I started questioning if they were halal. If it's not halal, why, and how can it be changed? Here's what I currently have drafted:

1. The day I give the loan, that value is converted into gold.
2. Any amount paid back will be converted to the gold value at that time and the repayment is based off that gold value.
3. The person has 5 years to repay the loan. There are no other specific installments or schedules.
4. After 5 years, should there still be any outstanding repayments, an additional 5% of the outstanding payments is to be made to a charity - not me - for each complete year where the loan has not been repaid. This is to act as an incentive to continue the repayments. The person may propose the charity and I must not reject unreasonably.
5. There is an agreed witness to the loan agreement. The witness must be notified of any repayments made by the person.
6. In the event of my death, any outstanding repayments of the loan are directed to a charity of my choice. In case point 4 becomes effective, the heir of my possessions assumes my position for the choice of charity.
7. In the event of the person's death, the heir of their possessions assumes the person's position of this agreement and becomes responsible for ensuring the repayments are made.
8. The terms of the agreement can be amended only by agreement with both parties and the presence of the witness. All amendments are to be made by writing.
9. I may, at any point, cancel any debts owed to me or redirect them to charity instead. I must also notify the witness of the decision. This does not apply to amounts that are already to be paid to charity as per point 4.

If anything is unclear please let me know, I'll try explain/reword it.

Thanks in advance.

 

[cautiouslittlehope]

@shantaedavis Assalam aleikum! This looks very interesting. What's the local currency?

 

[shantaedavis]

@cautiouslittlehope Euro

 

[sbmor777]

@shantaedavis A couple of terms may be problematic.

1. The day I give the loan, that value is converted into gold.
2. Any amount paid back will be converted to the gold value at that time and the repayment is based off that gold value.

Are you lending money or are you lending physical gold? Because if you're lending money and then tagging the value to gold, that is haram. Money must be repaid in exactly the same amount and gold would have to be returned in exactly the same carat/weight. Having unequal amounts exchanged in a loan is what becomes riba and haram so it must be completely equal. You cannot tag the value of the loan to an asset and then say that repayment will be dependent on the value of the asset in the future. If you want to do that, then you need to lend the asset itself.

Loan repayments must be equal to what was borrowed regardless of the change in value of what was borrowed.

https://amanahadvisors.com/is-lending-and-pegging-repayment-to-the-rate-of-inflation-permitted/

https://islamqa.info/en/answers/955...the-difference-in-value-if-the-currency-drops

1. After 5 years, should there still be any outstanding repayments, an additional 5% of the outstanding payments is to be made to a charity - not me - for each complete year where the loan has not been repaid. This is to act as an incentive to continue the repayments. The person may propose the charity and I must not reject unreasonably.

This is the second part that might be problematic. Even though the payments aren't going to you, forcing a borrower to pay more could be considered riba. Even late fees on loans without interest are still considered riba. I would avoid what is essentially a late penalty even though the payments aren't going to you as the lender.

https://islamqa.org/hanafi/daruliftaa/8558/monetary-penalties-on-late-payment/