Depositing Money In A Riba-Based Bank

Question; Is it allowed for me to keep the money in the Bank for transactions only. if i will not take any interest on the deposited money. But obviously the bank will use my funds and maybe this interest for themselves.


 Praise be to Allaah.

It is not permissible to put money in a bank that deals in riba (usury or interest), and the Muslim should not do that unless he is forced to, in which case the following three conditions apply:

 1 - He should have the need to do that, meaning that there is no safe place to keep his money except this bank. If he can find another place where he can keep his money apart from this riba-based bank, then it is not permissible for him to deposit his money in this bank which deals with riba.

 2 - The bank should not deal one hundred percent with riba; if the bank's dealings are' one hundred percent with riba then it is not permissible to deposit his money with them at all, if you deposit money in the bank then in this case you can be certain that you have helped the bank engage in riba, and it is not permissible to help anyone with riba.

 3 - The depositor should not take any profit, because if he takes any profit that will be riba, and riba is haraam according to the Qur'an and Sunnah and the consensus of the Muslims.

With regard to the questioner's saying that if he does not take the interest the bank will take it: This is not interest, rather it is riba which is haraam, and it belongs to the bank in the first place. The depositor does not have the right to take anything of it, because Allaah has commanded us to abstain from riba when He said:

"O you who believe! Be afraid of Allaah and give up what remains (due to you) from Ribaa (from now onward) if you are (really) believers" (Q2 al- Baqarah]:278)

And He warned against taking riba when He said:

"And if you do not do it, then take a notice of war from Allaah and His Messenger" (Q2[al- Baqarah]:278-279)

 It should also be noted that depositing this money in the banks is not regarded as depositing it in the Shar'i sense, because depositing something in Sharee'ah means leaving it with someone for safekeeping, which means that the owner cannot use it; but when money is deposited in the bank, the bank uses the money, so it is a form of lending, not depositing for safekeeping. The fuqaha’ have explained this point, that if the depositor gives the keeper permission to use his money, it is no longer a deposit for safekeeping, rather it is a loan. (Therefore anything added to the principal is riba).

And Allaah knows best. May Allaah send blessings and peace upon our Prophet Muhammad.

 [See Fataawa Manaar al-lslam, 2/433-440 by Shaykh Ibn 'Uthaymeen].

 (All the above questions were answered by Shaykh Muhammed Salih AI-Munajjid)

QUESTION; Why is interest banned in Islam?


The Noble Qur'an, (the book of Allaah) makes it expressly clear in many verses that interest in any form is forbidden by Islam. In one of the hadiths of the Prophet (sallalahu alayhi wa sallam) he holds any person who receives it, gives it, witnesses it and records it accountable. In fact the Qur'an gives a warning that those who refuse this divine decree will face a severe punishment on Judgement Day. Allaah says in Surah al- Baqarah (2), verse 275:

"Those who devour usury will not stand except as stands one whom the Evil one by his touch has driven to madness. That is because they say: 'Trade is like usury'. But Allah hath permitted trade and forbidden usury".

Also Surah al-Nisaa (4), verse 161: "That they took usury,  though they were forbidden and they devoured men's subsistence wrongfully; We have prepared for those among them who reject faith a grievous punishment."

With regard to loans for consumption purposes, in times of need, ethical considerations demand that people should help each other without charging interest, because to charge interest amounts to taking advantage of a person's weaker economic position, which is against the Islamic spirit of justice and equity. Today, credit is mostly given for production purposes rather than consumption.

There are at least five reasons why interest is undesirable:

 1) Transactions based on interest violate the equity of a business. In business the outcome of any enterprise is always uncertain. Yet the borrower is obliged to pay the agreed rate of interest, even if he makes a loss on his enterprise. Even if he makes a profit, the interest he has to pay may amount to more than the profit and this clearly militates against the Islamic norm of justice.

2) The inflexibility of an interest based system leads to a number of bankruptcies and these result in loss of productive potential for the whole society as well as unemployment for many people.

3) A bank’s commitment to keeping its depositors' money safe as well as paying them a fixed amount of interest makes banks anxious to recover their principal as well as the interest. Thus more loans are provided for those who are already successful, while potential entrepreneurs are prevented from starting up.

4) The interest-based system discourages innovation by small businesses. Big businesses can risk trying out new techniques and products because they have reserves of funds to fall back on if the new idea does not succeed. Small businesses cannot try new things because they would need to borrow money on interest from banks to do so and if their ideas failed, they would have no way of paying back the loan or the interest and would be bankrupt.

5) With the interest system, banks have no interest in a venture except in so far as there are possibilities of recovering their capital and earning interest. Any business plan put to them is judged only on this criterion.

Financing Portfolio In Islamic Banks

Question; Does the Islamic Development Bank offer any type of financing?


The Islamic Development Bank (lDB) does offer financing with a view to promoting intra trade among the Islamic countries. The lOB and some Islamic banks and financial institutions have established an "Islamic Banks' Portfolio to achieve these objectives, besides serving as the nucleus of an Islamic financial market. This Portfolio's main objective is to promote and co-finance intra-trade and instalment sale. It is also an invitation to participate in the promotion of trade links and exchange of benefits among Muslim countries.

 Portfolio Manager As Mudarib

The (lDB) manages the operations of the Portfolio as a "Mudarib" according to the Regulations of the Portfolio and decisions of the "Participants' Committee", by making use of its own facilities and human resources and the outside assistance of experts in Islamic Shariah, the Securities Market and other relevant technical fields, if necessary. The assets and liabilities of the Portfolio are completely separate from those of the lDB. Its accounts are independent from the Bank's ordinary accounts and are audited every quarter of the Hijra year by two external auditors. Net profits are distributed annually to participants. The resources of the Portfolio are mainly oriented to exporters and importers within the private sector, besides the possibility of financing operations of the public and government sectors.

The different types of financing the Portfolio are involved in are:

Direct Financing - This type of financing is provided only from the Portfolio's resources and within the beneficiary country's ceiling. There is a financing contract between lDB as Portfolio Manager and the beneficiary.

Joint/Parallel - Financing - The Financing takes place upon joint agreement among the donor institutions, but there are separate agreements between each party and the beneficiary due to differences in mark-ups, repayment periods or any other terms and conditions.

 Syndication - This takes place under the management of the Bank/Portfolio, which invites the co-financing banks and financial institutions.

There are two agreements: (a) a "Mudaraba agreement between the Bank/Portfolio and the Financiers; and (b) a financing agreement between the Bank/Portfolio, as Mudarib, and the beneficiary.

 Modes Of Financing

To finance operations submitted to it, the Portfolio adopts Shariah-compatible modes of financing like:

Murabaha: It is a sale contract at a price considered as the capital, i.e. cost price plus a specific profit based on the fact that the party making the purchase order is getting ready to purchase the item he ordered. The first contract which proves the ownership has to become effective before the second contract can enter into force and by virtue of which ownership of the sold item is transferred to the party making the purchase order. The maximum period for this mode of financing is 18 months according to the type of commodities, which are mostly intermediate and consumer goods.

 Salam: This represents a purchase or sale contract of goods or products to be delivered in the future with advance payment of the price according to Shariah Rules, which stipulate that the price and maturity period should be known, and the quantity as well as quality of the sold item should be defined. The maximum financing period here "is 18 months, according to the type of commodities which are mostly intermediate and consumer goods.

Ijarah (Leasing): Under this mode, any asset owned by the Portfolio is leased upon the order of the lessee who finally owns the item after he settles the final instalment of its price. The maximum period for this mode of financing is 7 years, according to the type of commodities which are mostly machinery, equipment and capital goods. Instalment Sale: This involves the purchase of a commodity upon the request of a beneficiary and resale of the item to him, with payment of the sale price in quarterly or half-yearly instalments. Ownership of the asset is transferred to the purchaser upon its arrival at the port of the beneficiary country. The maximum period of financing under this mode is two years and the commodities are mostly intermediate or capital goods.

Equity: The Portfolio may have equity participation in the capital of Islamic financial institutions as well as industrial, commercial and agricultural corporations.

Investing On The Stock Market

QUESTION; Is it ok to invest in the stock market (not options) by actually buying and selling stocks for companies that are NOT involved in haram (impermissible) deallings?And under what conditions?


Modern scholars of Islamic law have determined that, when certain conditions are met, it is lawful to invest in the stock market, and that the earnings which result, if any, will be halal. In fact, when you purchase shares in a company you actually acquire an equity interest, which means that you, as a shareholder, are actually a partner in the business. Then, as a partner, your equity is exposed to risk so that you actually share in either profits or losses. All of this equates to the Islamic concept of musharakah and is clearly halal (permissible).

 Halal Business

Even so, there are several conditions that must be satisfied before one may invest in stocks. To begin with, one must be sure that the business of the corporation offering the stock must be halal. This means that the corporation must not be involved in any of the "sin" industries like entertainment, alcohol, pork, conventional finance, and so on. Of course, this is a vast subject with many details. In general, however, the broad guidelines are self-evident.

Scholars have developed another set of criteria for stocks, and these have to do with the capital structure of the corporation. These criteria are three, and their purpose is to determine the extent to which a corporation is involved in riba. In other words, these criteria represent tolerance levels for eligibility; companies that stay within the prescribed criteria, or screens, may be invested in by Muslim investors. On the other hand, if a company's capital structure is such that it goes beyond the tolerance levels. or falls outside of them then it will not be lawful to invest in that company. Again, without going into details, the three financial screens are:

 I. total debt divided by total assets must be less than 33%

2. Accounts receivable divided by total assets is equal to or greater than 47% (where receivables = current + long term receivables)

 3. non-operating interest income must be less than 10%

Of course, these criteria are the results of modern fiqh scholarship and should be understood to represent the current state of thinking on the subject. As such then, they represent interim tolerance parameters and not the last word on the subject. In recognition of the sensitivity of the subject, it is recommended that Muslim investors place their money in Islamic mutual funds that are professionally managed and have the added guarantee of a qualified Shari'ah Supervisory Board.

Shari'ah Supervisory Board

 In fact, the importance of such a Board cannot be underestimated. Obviously, there is the matter of determining which stocks qualify on the basis of the criteria outlined above; and such decisions will best be made by a Shari' ah Board. Oftentimes, Shari' ah Supervisory Boards will work hand in hand with money managers on issues related to these criteria. But beyond that there are several other areas of importance for Muslim investors. Perhaps most importantly, there is the matter of purification. From the balance sheets of corporations, if it is determined that the company has non-operating interest income (though less than 10%), then this must purified. The Shari' ah Supervisory Board will ensure that this is being done; it will also advise management as to what should be done with the funds collected through the purification ·process. Likewise, the Shari'ah Supervisory Board will ensure that the management of the fund will manage cash reserves in a manner that complies with Shari'ah teachings, and that the strategies of the fund, and its policies as well, are Shari'ah compliant. For example, many funds have defensive strategies which require that when the stock market is underperforming, or volatile, holdings there will be liquidated in favor of more stable instruments like treasury bills, or commercial paper, or bonds, or the like. A Shari' ah Board will see to it that such steps are avoided, and that only halal alternatives are chosen.

Islaamic Mutual Fund

In short, if a Muslim investor is contemplating a substantial investment in the stock market, he must be careful to do so prudently; both in terms of profitability and in terms of Shari' ah compliance. To ensure profitability, particularly in the long run, prudence dictates that the investor seeks out a reliable and established Islamic mutual fund. And to ensure Shari' ah compliance, the investor should be sure that the fund is supervised by a reputable board of Islamic scholars, i.e., scholars who combine knowledge of the Shari' ah sciences with a practical understanding of modern finance. AI hamdu lillah, the number of such funds is on the increase; and with the tawfiq granted by Allah, it is hoped that a variety of Shari'ah-compliant alternatives will soon be available to Muslims in need of financial services, including banking, insurance, and investments.

These questions above were answered by Institute Of Islamic Banking


This article was culled from the publications of Deen Communication Limited

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