Interest: Setting off interest against interest

Q291 :Sometimes an individual may find himself having some money which he can deposit in a bank, and he may have borrowed a loan to finance the purchase of his house. Is it permissible to use the interest paid to him on these deposits in order to pay off some of the interest charged on the house purchase loan?

A291 : There is no doubt that the argument for setting off interest earned against interest incurred appears to be strong and valid. However, the person who does this, gets involved in two interest-based operations. He is actually taking interest from the bank and paying it again to the bank. In other words, he deals with interest twice. That is a case of double prohibition. While there may be some compelling reasons for a person to get a loan to finance the purchase of a house, there is no compelling reason for him to earn interest by putting his money in a deposit account. If one has already bought a house on mortgage and he is paying interest to a bank, he should try to arrive at an arrangement whereby he can put money in the mortgage account above the regular instalments and draw it again at a subsequent date. I realize that banks do not like to do that because of the increased administrative costs to them, but if you have an understanding bank manager and you explain to him the situation from the Islamic point of view, he may allow you to do so. This will mean that the bank will charge you less interest when you have put some money in your mortgage account. The interest will increase when you draw some of what you have deposited. In this way, the bank is making the set off directly and you are not involved in taking interest; you are only paying it. [Added: Apparently, the bank manager may be forced by the prevailing practices to refuse such a facility. In such a case, one should indulge only in paying interest without resorting to collecting interest. That is the least he can do to avoid double prohibition.]

Our Dialogue ( Source : Arab News - Jeddah )