It is common to see that people place their money in banks in their savings accounts. After some specific time period, banks provide them a fixed amount of profit on that. As Islam has prohibited interest. So, is that bank profit that they have earned haram in Islam?

We will try to find answers by underscoring how the banking system actually works. Then we will be able to reach a conclusion about whether the bank profit is halal or haram.

So, let’s begin with how banks make a profit for themselves. There are a few different ways for a bank to make a profit. It is not possible to say that bank profit is haram; yet, there are a few circumstances in which bank profit is haram in Islam.

Let us go through what involves haram and why it is so. And what are the other halal methods for banks to profit?

What are the several ways that banks make a profit?

There are multiple ways through which banks earn money. For example;

  • By providing Loans with Interest

Banks lend loans to industries, enterprises, and even individuals, as you may know. They get paid interest on these loans, which is one of their main sources of profits. However, it is strictly forbidden in Islam. Thus, earning money through interest is haram and it should be avoided.

  • Through Investments with Interest

Banks put their money into a variety of government and private securities. They profit from them by earning interest, which is likewise ethically wrong.

In brief, any profit made by a bank through interest is haram in Islam. But instead, let’s look at the other halal options.

  • Earnings from Fees

Banks charge fees to their clients for services such as loan production, taking bills of exchange, and providing safety lockers, among other things. This allows them to generate simple and halal bank profits.

  • Foreign exchange transactions

Banks also trade in foreign currencies and serve as dealers. This allows them to earn profit in a halal manner.

  • Third-party product commissions

Banks make money from commissions by selling insurance services and mutual fund products to their customers.

Why is profiting from interest haram for banks in Islam?

Any deed that involves dishonesty or injustice is forbidden in Islam. Charging interest is also unethical because it benefits only the moneylender. It merely enriches the wealthy by doing nothing.

On the other hand, the individual who takes the loan loses. This is because they must pay the interest and money back to the lender; regardless of whether they are able to benefit from the money.

Making guaranteed money with your money is forbidden in Islam. Because it is unjust. Islam wants you to be a part of the profit and loss process. You may either invest your money or lend it to someone else. You make a profit if that person makes money. If there are losses, you share them as well.

This technique encourages both capitalists and workers to work together to maximize profits rather than relying just on money to win.

Is it still possible to get a loan in a Muslim Country? If so, do they charge interest?

It is certainly possible to obtain a loan in a Muslim country. Despite the fact that the country is established on Islamic culture, the system is based on the global market.

There are, however, a few banks that operate under Islamic banking principles. They do not charge interest. Apart from banks, no other financial entity offers zero-interest loans.

So, theoretically, borrowing money from banks that charge interest is not haram. However, it should be avoided based on logic.

O YOU who have attained faith! Do not gorge yourselves on usury, doubling and re-doubling it – but remain conscious of God, so that you might attain a happy state.

-Al-Imran 3:130.

If not from interest, what other halal method does an Islamic bank use to profit from loans?

Islamic banks have the same goal as traditional banks; which is to profit from loans. The main difference is that they do not charge interest and instead use a number of different approaches.

Whereas Allah has permitted trading and forbidden Riba (usury)

-Ayah al-Baqarah 2:275.

Instead of lending the customer money to buy the asset, an Islamic mortgage transaction allows the bank to buy the asset from the seller. It then resells it to the customer at a profit while enabling the customer to pay the bank in installments. The bank’s profit, however, cannot be disclosed. Therefore, there are no added penalties for delayed payment.

The bank requests restrictive security in order to protect itself against bankruptcy. From the beginning of the transaction, the assets or land are registered in the customer’s name.

What is Islamic Banking?

An Islamic bank is a financial entity whose status, regulations, and methods explicitly proclaim its respect to Islamic Shariah principles; including the prohibition of receiving and paying interest on any of its operations.

Islamic banking is a type of financial intermediation that avoids receiving and paying interest in its dealings. It conducts business in a way that supports the goals of an Islamic economy.

Furthermore, this is a financial system based on Islamic principles of transactions, with profit and loss sharing as a key aspect; providing economic justice and equality.

Rather than paying interest, Islamic banks provide profit to their savers. Profits created by the Bank on behalf of the client are distributed to the customer in a variety of ways; depending on the type of Islamic finance concept applied.

  • Profits can be split between the customer and the bank based on an agreed-upon profit sharing ratio.
  • Other times, after the Bank negates its profit margin, the consumer might be given their profit.

All deposits received from the public should be used to serve the public interest and to achieve the necessary socio-economic goals of Islam. Islamic banks should use a goal-oriented approach rather than a profit-maximizing one. They should adapt to the various demands of the Islamic economy.

These banks are envisioned as a combination of commercial and investment banks, investment trusts, and asset management firms. They would provide a wide range of services to their clients. A significant portion of their funding would be allotted to certain initiatives or enterprises. They wouldn’t be able to borrow short-term cash and lend to long-term investments because of their equity-oriented investments. This should make them less vulnerable to crises than their capitalist equivalents; because they’ll have to work harder to match the maturity of their liabilities to the maturity of their assets.

Conventional banks analyze applications, take into account collateral, and try to reduce risk as much as possible. Their primary concern is assuring the safety of their principal and interest payments. Because the Islamic bank has a risk-sharing mechanism built-in, it would have to be more cautious when evaluating funding requests. It provides a healthy aspect to the loan industry as a whole. Similarly, it removes a slew of unethical lending practices.

A notable feature of an Islamic bank is profit-loss sharing. It creates deeper relationships between banks and businesses. It assists non-financial enterprises in developing financial competence. Moreover, it allows the bank to serve as a technical consultant and financial adviser, acting as a catalyst in the industrialization and development process.

Why is it that earning interest is prohibited in Islamic banking, but the bank’s profits are shared with individuals who have accounts there?

Whether you make a profit or not, you must pay interest. Profit-sharing, on the other hand, can only take place if there are earnings to be shared.

Interest

Profit

The payment by the borrower to the lender together with the principal amount as a condition of the loan is known as interest.

Profit is defined as the difference between the production cost and the price of the product.
There is no doubt on the side of either the lenders or the receivers of loans because interest is fixed. Profit is decided after the action is completed. Hence, the amount is unknown until the activity is completed.
It is Haram according to Islamic Shariah. It is Halal according to Islamic Shariah.

 

If someone borrows money in the Western way to establish a business that fails, they will be accountable for interest; even if they don’t have any revenue to pay it back.

If they borrow in an Islamic manner; the loan will sink with the firm. As a result, interest is forbidden, but profit can be shared. The rationale explains why interest is unethical.

Is the profit earned in Banks’ Saving Accounts Halal in Islam?

Traditional bank savings accounts could be seen as haram since it is possible to expect a low-interest rate based on the amount deposited in the account. This is haram in Islam.

Islamic savings banks, on the other hand, can help in this case. Savings accounts at Islamic banks are halal since they are established according to Shariah law. Profit-sharing is how Islamic savings accounts work.

The standard bank can take your savings and lend them to others in the form of a private loan or a home loan. The bank can then pay you a tiny interest for using your available cash placed; using the interest gained on loans handed out by the bank.

An Islamic savings account, on the other hand, cannot work in this manner; since it is forbidden. Instead, an Islamic savings account operates by establishing a business relationship: i.e. you contribute the money, and the bank does business with it. A profit-sharing ratio is provided as part of this partnership.

However, investors share both profits and losses according to Sharia laws. If the bank’s investment fails and the bank incurs a loss, the depositor’s money should also bear the brunt of the loss. This implies that with an Islamic savings account, there is always some risk.

  • Fatwa by Sheikh Faraz Rabbani

When asked if it is permissible to open a savings account with a bank that pays interest; Sheikh Faraz Rabbani imposed a fatwa, stating,

“No, it would not be permitted to open a savings account which engages with interest (riba), as Mufti Taqi Usmani explains in his Fiqh al-Buyu` [2.1063], because interest is categorically unlawful by the text of the Qur’an itself.”

Many other scholars, including Sheikh Muhammad Salih al-Munajjid and the Fatwa team on Islamweb, have issued fatwas stating that saving accounts are haram, as is profiting from interest.

If a Muslim has already earned interest on his savings account and the bank insists on taking it; the Muslim should not profit from it and instead give it up to charity.

Objectives of Islamic Banking

The major goal of Islamic banks across the world is to promote, encourage, and improve the implementation of Islamic principles in the field of business.

  • To provide modern financial services in accordance with Islamic Shariah

Interest-based banking is widely considered to be anti-Islamic. That is to say, according to Islamic Shariah, all transactions conducted through traditional banking are illegal.

As a result, the rise of Islamic banking is explicitly meant to facilitate Shariah-compliant financial transactions.

  • Contribute to economic progress and prosperity while adhering to Islamic justice values

Islamic banking is said to be more development-focused than traditional banking. Profit-sharing is a built-in development promoter since it provides a clear link between the bank’s return on investment and the entrepreneurs’ performance in running their businesses.

  • Optimal use of limited financial resources

The Islamic banking system is built on the principle of encouraging financial resources to be invested in projects that are regarded to be the most profitable and useful to the economy.

  • To assist in the management of financial assets in a more equitable manner

The most important goal of Islamic banking is to guarantee that revenue and resources are distributed fairly among the participants: the bank, customers, and businesses.

Final thoughts

In Islam, profit made by banks is not haram until it is obtained in the proper manner. People should choose Islamic banking over traditional banking to avoid interest.

Traditional banks are not encouraged in Islam because you will not be able to tell if what you are earning is interest-based or not. So, it is preferable to stick to what is openly fair and equitable. An Islamic bank’s first distinguishing trait must be that it is interest-free.

 

Also Read: Is Forex Trading Legal in Islam

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The admin chose to be incognito. He is a curious mind and a passionate writer. Also, a bibliophile, a gamer, a teacher, and a learner. He tries to stay updated on everything happening around the world!

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