May I express my objection to your ruling that interest received from banks may be given to the poor. I base my objection on the Verse 267 of Surah 2 which states that charity should be made of our best earnings. Please comment.
You are right about the instruction included in the verse to which you have referred. Whatever we give in charity, whether it is zakah or voluntary charity should come from our good prosperity. We are commanded not to deliberately choose fouled things for our charity in order not to hurt those whose circumstances are more difficult than ours.
When a poor person receives something that is truly useful, or he is given cash to buy things with, then he realizes that he is receiving genuine help. But when he gets things that we would have thrown away, he may feel hurt. Hence the Qur'anic instruction.
That interest given by banks is not good earnings cannot be denied. But I have not said that it may be given in charity. I only said that it may be given to the poor, particularly those in famine-stricken areas or in places hit by natural or man-made disasters. There is a difference between the two situations.
Interest is money given by banks and other financial institutions on deposits. There is enough similarity between interest and usury to make the scholars return a verdict of prohibition on taking bank interest for one's personal use. Therefore, Muslims should find a different sort of investment for their money to make their returns lawful to take. The question then remains in need of an answer: What to do with interest a Muslim may happen to receive?
There are four possibilities. The first is that one may leave it to the bank to be used by the bank and may be put to uses harmful to Islam. The second is to destroy which is not permissible in Islam as it is deliberately destroying a useful commodity. The third is to take for one's use — which is unacceptable. Thus it may be given in aid of the Muslim community, like giving to an orphanage, a school in a poor Muslim area, or for provision of services in such an area, or to poor people. This is a ruling that an increasing number of scholars are now supporting.
• Interest: Varying rates of interest on bank accounts
You have mentioned that fixed interest is one of the two reasons which make using a bank deposit account forbidden from the Islamic point of view. However, some banks give a varying rate of interest. My bank is offering a facility by which one's account gains interest from the date the bank receives funds to the date of withdrawal at a rate which is set each Tuesday morning. The interest accrues daily and is credited monthly, provided the average balance of the account is above a certain limit. If it falls below that, the bank does not credit any interest for that period, i.e. one month. Is it permissible to use such an account for one's deposits?
Allah states in the Qur'an that He has "permitted trade and forbidden usury." There is a fundamental difference between the two, although the polytheists in Makkah used to claim that they were the same. In trade, a person invests capital and puts in an effort. Both are essential to make profit. Moreover, a trader always faces the possibility of incurring a loss. The investment of time, effort and money and the expectation of profit and the risk of loss are all part and parcel of doing a business and making a livelihood. In usury, the situation is totally different. Describing it in its ugly form of the old "moneylender" days, we say that in usury a person lends another some money for a specific period of time after the lapse of which the borrower returns the money with an extra sum which he pays to the lender for no reason other than having received from him the loan. The lender does not concern himself with what the borrower does with the money. He is only concerned with whether he would be able to repay it together with the additional sum. If the borrower starts a business with it and his business suffers a loss, the lender still expects to get his full principal and the additional sum. That sum is specified in advance and is included in the contract, whether it is a written or a verbal one.
The interest system is not much different, although it has acquired more respectability. Moreover, banks have added the apparently advantageous system which allows people to deposit money and earn interest. But still, even in the Western capitalist countries, where the banking system is so deeply entrenched in the overall social structure, the old moneylender still exists and exploits people's needs.
It is true that the banking system has developed over the years and the capitalist system has adopted a number of reforms which gives it a more pleasant image of care for the underprivileged. It remains, however, a system which is geared to serve those who are better off. If you start with an initial outlay, you are likely to improve your situation. But if you start with nothing, then the chances are that you will continue to have nothing.
The Islamic system has different aims. It does not respond to social pressures in order to care for the weak and underprivileged. It tries to remove the causes of such social pressures before they enlarge. It cares for the under privileged and similar groups without any need for them to either "lobby" politicians, or be organized in voting blocks which have to be pacified, or even seek the more violent way of demonstration and upheaval. In order to achieve this, Islam removes the causes which create social divisions. One of its remedies is the total prohibition of usury in all its forms.
What is wrong with the interest-based banking system, from the Islamic point of view, is that it is nearer to usury than straightforward trade. I have mentioned in the past that when a person puts his money in a deposit account which gives him some interest, this transaction differs with the Islamic system in two aspects: there is no risk element in the process which means that the depositor does not have any risk of his money diminishing as a result of losses incurred by the bank, and he makes no effort to generate an income. It is true that the bank is the party which makes the effort and conducts the investment of its assets. But the clients of the bank are not partners as such. Otherwise, they would have been given a percentage of the profits made by the bank, rather than a pre-arranged rate of interest. Their profits would have carried from one year to another according to the performance of the Bank, not according to changes in interest rates. If you look at the banks in the Western world you will find that they make huge profits, but what they give to depositors is peanuts in comparison.
When we mention this, some people are a little confused on their bank deposits. They say that since the rate of interest is variable over any length of time, then that is sufficient to make the transaction permissible from the Islamic point of view. This is a misconception. Islam is not concerned here with whether a bank pays its depositors a rate of interest of 5 or 15 percent, or whether it makes it 8 percent one week and 10 percent the next week. It is concerned with the fact that some interest is earned without any risk of loss. By the removal of that risk altogether, the transaction is no longer one of business and trade, but one of usury. This is the reason for its prohibition.
I realize that by saying what I have said, I have not helped people who have some savings which they would invest. In purely monetary terms, the safest way of investment which guarantees some returns without giving the investor any worries is, in our modern world, to open a deposit account in a bank. But this is not the fault of Islam. It is rather the fault of Muslims. For many years, Muslim societies have not matched the development of the more advanced societies. Therefore, they continue to borrow systems which are alien to Islamic outlook and philosophy. These borrowings increase the problem rather than contribute to its solution. As we see, in many Muslim countries, the Western banking system is imported, with little alternative available to people. But if we yield to the temptation offered by this system, we are less likely to develop an Islamic alternative. In the last 15 or 20 years, new attempts at establishing Islamic banks have been made, some of which have been successful while others have not enjoyed a great degree of success. Nevertheless, these attempts must be encouraged by governments and individuals so that truly Islamic alternative to the banking system becomes a reality.
Our government has started what it calls ‘small investment scheme’ under which people buy ‘Special Investment Certificates’ which mature after three years, earning them 6 percent every 6 months and a final profit of 7.5 percent. The government may alter these rates at any time, and does not give the investors any other privileges. It uses the money for the defense of the country and to help reduce the budget deficit. The scheme provides jobs for several thousand people. Could you tell me whether this scheme falls under the category of interest?
The government in this case has been honest in saying that the money raised through this scheme is going to be used for the army and to reduce the budget deficit. It does not say that it will be used in investment schemes that bring profit and whatever returns it pays to the holders of these certificates comes from such profit. It could have said, for example, that it needs the money for a housing project which will bring the government so much profit and the investors will have a share of that. But it has made its purpose clear. If you consider this purpose carefully, you will find that the government is in the same position as any individual whose income is not sufficient to meet his commitments. He goes to a bank to borrow some money and the bank charges him interest on that loan. We say without hesitation that the money the bank charges is not lawful because it is interest.
The government in this case needs large sums of money to meet its commitments, honorable as these commitments may be. By issuing these certificates, it is actually borrowing from the people small sums, hoping that the aggregate will give it what it needs. As an incentive to the people it offers them generous rates of return. But where will this return come from when the money will be spent on arms and salaries for armed forces, or to pay back some of its earlier loans?
Some people argue that there can be no exploitation in the relationship between the government and its people, because the government is actually taking care of its people and providing for them the services they need. Therefore it is only fair that the people should help the government when they can. When the government offers them return on the help they provide, it is making a generous gesture and adding to the well-being of the nation.
This may be so, and indeed there is nothing wrong in a government seeking help from the people, but if we want our actions to be appropriate, we have to make sure that what the governments ask or offers is acceptable from the Islamic point of view. This applies to governments and people alike. The government must refer to the Islamic principles which govern financial dealings and bring its offer in line with these principles.
It is to be noted that the government has fixed the rate of returns on this type of saving, just like banks do. The fact that it has stipulated that it may change these rates at any time does not make the situation any different, because banks make the same condition and they actually change the rate of interest they give or charge according to the fluctuations in that rate in the financial markets.
If the government wishes to use people's savings in meeting its commitments, it can certainly devise a scheme of partnership which allows people to save and have some returns without giving a loan to the government in the way described by the reader. When it does, it would get the benefit of using people's money in meeting its obligations and providing good service to the people. It will also help those who participate in such a scheme to make use of their money in a permissible manner which improves their position. This adds to the general welfare of the people and the country as a whole.
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