Question:
If a person borrows money in dollars and gives it back in sterling some months later, is he obligated to follow a particular exchange rate – at the time of borrowing or returning the money
Answer:
I don’t know the conditions that the loan was taken, nor the country that the loan was given, therefore I will try to include the various scenarios so it will include your specific case. The exchange rate that has to be paid back will depend on a few factors, but here are the rules. The first factor to consider is where the loan was given. If the loan was given in the United States, where the currency is dollars, then it is a dollar loan, and if the borrower wants to pay it back in a different currency, he still has to give the lender the value of dollars on the day that the money is being paid back. If the loan was given in a different country, where dollars is not the counties currency, it is important to know that we are not allowed to do that, because when the loan is given back that value of the dollar may go up and we will end up giving more value than what we took. Therefore chazal forbade taking such a loan, except in one of two ways. If the person borrowing the money had dollars in his possession at the time of the loan, then it is permitted, because then it is as if he can pay him back instantly, and not prohibited. The loan is considered to be a dollar loan, and now he owes him dollars, if he wants to pay him back in sterling he may, but at the exchange rate on the day the loan was paid back.
There is another way to take such a loan, and that is that the exchange is done at the time of the loan. For example if someone is borrowing dollars in order to pay back in sterling, then at the time of the loan, the two people agree that the money is then being exchanged for sterling, and then essentially the person took a loan in sterling, and therefore he has to pay back the amount of sterling that was the value of the dollars on the day that the loan was taken.
If none of these provisions were taken, and the person borrowed dollars with the understanding that he is to give back sterling, then the transaction was a forbidden transaction because it is going to cause the payment of ribbis. Therefore the loan should be paid back at whichever exchange rate is lower, so that he will not end up paying back ribbis.
Sources:
Y:D 162-1, 2, 161-1,2.
