• Interest: An acceptable arrangement for bank interest
There is no doubt about the fact that usury is forbidden. However, Qur'anic reference to usury speaks of doubling and multiplying the capital as a result of usurious transactions. The Hadith suggests that such transactions lead to feelings of greed, selfishness, laziness, etc. on the part of the lender and misery on the part of the borrower. Nowadays, banks lend at a fixed rate of, say, 10-12 percent and give a slightly lower rate to depositors. If it is ascertained that the bank does not use certain deposits for lending to others with interest, is it permissible to use such deposit accounts and receive the fixed interest given on such deposits.
It is true that the Qur'an refers to usury as doubling up the money lent to someone in need, or even multiplying it. However, this does not mean that usury must reach a rate of 100 percent or more before it is forbidden. If you refer to the verses dealing with usury in the second surah of the Qur'an, "The Cow", you will see that the injunction is very clear:"Believers, fear Allah and waive what remains outstanding of usury, if you are truly believers. If you do not, then take notice that you are at war with Allah and His messenger. If you repent, you may have only your principal loans, neither inflicting nor suffering injustice." (2:278,279)
The Qur'anic verse is clear in requiring a lender to get back only what he has advanced. [It takes into account all usury, regardless of the extent; whether nominal or exorbitant.] The Prophet has disapproved of selling two measures of low quality dates for one measure of high quality dates, because he considered that as usury. He told his companions to do each transaction separately for cash, so that there is no element of usury in the deal. In the light of the foregoing, all scholars agree that even the smallest amount of usury or increase on the principal amount advanced to anybody, is forbidden.
When you deposit money with a bank, you are certainly not in a position of a lender and the bank is not a borrower. You have defined the relationship in a way which means that any returns given to you by the bank are legitimate earnings. As you realize, banks use the money they receive from their clients to lend it to borrowers, charging them interest, which means that they actually receive more than they give, in return for the loans they advance. Such transactions are forbidden in Islam. However, if you arrange with the bank that it invests your money for you in some way which does not involve lending to others with interests, then the return from such an investment may be legitimate to take. Some banks invest in shares and unit trusts. If the share they invest in are those of companies which do not trade in something forbidden, then such an investment is lawful. Quite recently, the Mufti of Egypt published a ruling stating that such an investment is lawful, even if the rate of returns is fixed at the outset. He makes it clear, however, that straightforward bank transactions of borrowing and lending, which involve interest are unlawful.
If you wish to make use of the services provided by banks, you should bear in mind that any interest given on deposits used for lending is unlawful to have. If you give instructions in the bank to invest your money in a lawful way, as in a profit-loss sharing account, then the money you receive on your investments is perfectly legitimate.
In a bank statement, the customer who deposits his money in the bank is a creditor while the bank is a debtor. But, unlike the situation that had prevailed with moneylenders over many centuries, it is the debtor, which is in a strong position. It is the bank, which determines the rate of interest. The bank is even in a much stronger position with those of its clients who receive its loans. On the other hand, I am told of a Hadith: "Gain from every loan is riba, or usury." Please comment.
I am not sure whether we can say that the bank is a debtor when we deposit our money in either a current or deposit account. It is the client who goes to the bank seeking its services. The money, which we deposit, is always available to us, unless we choose a fund, which places restrictions on the notice of withdrawal. When we do that, we stand to get more than we get from an unconditional deposit account. Hence the choice is ours, made from the specific reason of getting extra benefit. While the bank may try to sell its image as a safe place where we put our money, and to sell its services, it does not come to a client and ask for a loan. Hence, the relationship between the bank and its clients need to be defined in Islamic terms. Such a definition may come about only when scholars discuss it thoroughly with the help of economists and experts.
Now if a client goes to a bank manager and says that he wishes to invest this amount of money and the banker is the one whom he trusts to look after the investment, we have a very interesting situation. It is totally unlike that between a debtor and a creditor. Let us assume that the bank manager takes this as giving him power over the choice of the form of investment. The money, which the client receives from the bank after a period of time, is apparently a return on investment. That is determined by the fact that the client has stated that when he is after is an investment and not interest. It is permissible to take, particularly when we know that most banks operate systems of investment other than a straightforward deposit account. Here the client is certainly not a creditor, and the bank is not a debtor or borrower.
The statement quoted by my read that "Gain from every loan is usury," is not a Hadith, although it is quoted as such very frequently. It is a rule determined by scholars. Hence it may be open to question, and its applicability to bank transactions is dependent on the nature of the transaction itself. Besides, it is certain that the Prophet, peace be upon him, paid back debit he had incurred, giving the lender more than the amount of the loan. There was no prior agreement between the Prophet, peace be upon him, and the person who lent him the money that there would be an extra payment. The Prophet, peace be upon him, did this as a gesture of gratitude for the help he received in the form of the loan. Any one could do as the Prophet, peace be upon him, did; provided there is no suggestion in advance [on either side] that this would be the case. It is certainly safer to place one’s investment in Islamic bank, or in a profit-and-loss sharing account. If neither is available, then one should look into the form of agreement with the bank, so that it gives profit, not interest.
• Interest: Bank deposits and the uses of interest
Is it permissible to use the interest I get on my bank account to repay the debts of my poor relatives and friends?
An increasing number of scholars are now in agreement that it is permissible to use the interest received from banks and other financial institutions for a good cause. I must state however, that this should not be treated as an encouragement to put one's money in interest-earning accounts.
Perhaps I should explain that many scholars still maintain that one should not even handle interest money. However, when we look at the situation where the interest is paid by the bank, we find that there are four options for a Muslim:
[The prime alternative remains that one should not put one's money in interest-earning accounts.]
If your relatives or friends are insolvent debtors, which qualifies them to be beneficiaries of zakah, it is appropriate to give them that interest money to settle or reduce their debts. You need not tell them that it is interest money because it may deter them from accepting it.
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