A creditor benefiting from land put up as collateral
Is it permissible for a creditor to benefit from land put up as security until the debtor repays the loan? Is the debtor's refusal to pay the loan in time considered a justification for the creditor to profit from the land until repayment?
Collateral is sanctioned by both the Qur`an and sunnah. Allah the Almighty says,A pledge with possession (may serve the purpose). [Al-Baqarah, 283]
The Prophet passed away while his armor was still mortgaged to a Jew for 30 sa's of barley.
It is impermissible for the creditor to utilize the article put up as collateral except if he pays the equivalent of the usufruct. Otherwise it is considered wrongfully consuming another's property—a prohibited act attested to by the words of Allah the Almighty, O ye who believe! Eat not up your property among yourselves in vanities: But let there be amongst you traffic and trade by mutual good-will: Nor kill (or destroy) yourselves: for verily Allah hath been to you Most Merciful. If any do that in rancor and injustice, —soon shall We cast him into the Fire: and easy it is for Allah. [Al-Nisaa`, 29-30] Furthermore, this would be considered to be from the category of loans that incur interest which is considered usury.
Any default on the debtor's part does not justify the creditor utilizing the land until repayment.
Based on this, it is permissible to put up the land as collateral. If the creditor farms the land, he must either pay rent to its owner based on the current tenancy prices of neighboring lands or deduct the value of the rent from the debt. If the debtor delays repayment, the creditor may do no more than sell only a part of the land part that is equal to the loan's value. However, it would be even better if he grants the debtor additional time to repay the loan or if he remits the debt altogether since Allah the Almighty says,If the debtor is in a difficulty, grant him time till it is easy for him to repay. [Al-Baqarah, 280]
But if ye remit it by way of charity, that is best for you if ye only knew. [Al-Baqarah, 280]
Allah the Almighty knows best.
 Recorded by Bukhari, Muslim and Ahmed from a hadith narrated by 'A`isha, Bukhari, al-Tirmidhi, al-Nisa`I and Ahmed from a hadith narrated by Ibn 'Abbas and by Ibn Majah and Ahmed from a hadith narrated by Asma` Bint Yazid (may Allah be pleased with them all).