Interest: Varying rates of interest on bank accounts

Q293 :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?

A293 : 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 Dialogue ( Source : Arab News - Jeddah )