Rafed English

Banking and Financial Service

(1) Loans and Deposit

Banks are of three kinds:

- National bank, whose capital is owned by one or more persons.
- State owned bank, whose capital is raised by government funds.
- Company bank, whose capital comprises government stake and public money in the form of share holdings.

(1) It is not permissible to take loan from a national bank on a condition of earning interest, because it is usury that is haraam. If one took loan as such, the loan is in order, but the condition is batil. Payment of interest [by the bank] and receipt [by the customer] thereof in fulfilment of the condition is haraam.

However, to avoid involvement in usury transactions, you may resort to one or more of the following ways:

a) Purchase something from the owner of the bank, or its agents, at the rate of, say 10% or 20% higher than the market value, so that the bank may give you some money by way of a loan for a specified period. It may, then, be said that this loan is permissible and is free from usury. However, it is not free from ishkal. Avoiding it is, therefore, recommended as a matter of ihtiyat luzumi. The same goes for the gift, hiring, and mutual agreement of loans concluded with strings attached. The same rule, of making the loan conditional on preferential treatment, applies to making delay in repayment conditional thereupon.

b) Exchange the loan for sale. Suppose the bank sold a sum of money, say a hundred Dinars for a hundred and twenty, that you must pay back in two months' time. However, though this is not a usury loan per se, yet its validity is a question of ishkal. Of course, there is no objection to the bank selling an amount of money, say a hundred Dinars, to be paid back in two months' time. The deferred sum would then be made into a different currency, the value of which is larger than the hundred Dinars according to the exchange rates in a measure commensurate with that portion constituting the difference between the hundred and the hundred and twenty Dinars. At the end of the stipulated period, the bank may take from the customer the specified currency or its equivalent in Dinars, so that the debt could be settled not in kind.

c) The bank may sell goods to the customer for a certain amount, say a hundred and twenty Dinars, to be paid back in two months' time. The bank will then buy it back from the customer for a cash price that is lower, say a hundred Dinars. This, too, is not in order if a provision is made in the first transaction of sale that the bank shall buy back the goods for a cash price that is lower than the credit price, even with the contract implicitly taking into consideration such an understanding. Yet, there is no harm in entering into such a transaction, if the contract does not contain such a provision. It is noteworthy that even though these ways are in order, they do not materialise for the bank its fundamental objective, i.e. having the right to demand from the debtor an increase over and above the original extra amount payable at the end of the specified period. Such an increase be spiral in proportion to the period of excess delay in repaying the original debt. Taking interest for the delay or repayment is usury and is, therefore, haraam, albeit in a form of making it a condition in the sale agreement, for example.

(2) It is not permissible to obtain loan from a state owned bank subject to a condition of payment of interest, irrespective of whether or not it is obtained by mortgaging some property. If such a loan was obtained, however, it is invalid and so is the condition, because the bank does not own the money under its disposal to give it to the debtor.

To avoid such a problem, it is permissible for the customer to receive the money on the basis of majhoulil malik, not with the intent of taking loan. As a matter of ihtiyat, obtaining such a loan must be with the permission of the Marji', who can authorise the recipient as how to go about spending it. However, the person obtaining the loan should not pay attention to the fact that, whether he likes it or not, the bank will charge some additional amount from him, and even though he will have to pay the additional amount when the bank demands it.

(3) It is permissible to deposit money with national banks, in other words loaning the banks.

This, however, must be done without making a provision for charging interest on the money deposited, meaning not stipulating that the banks should give an undertaking to pay the interest on the loan. The opposite of this is that the depositor reaches a conclusion that if the bank was not going to pay the interest, he would not demand it. The intent to demand the interest does not contradict the non-stipulation. Similarly, the intent not to demand the interest does not contradict stipulation. That is because each of which is alien to the other.

(4) It is not permissible to deposit money with national banks, that is to say lending it, with the condition of obtaining interest.

If the transaction has been concluded, depositing the money per se is in order, but not fulfilling the condition. If the bank paid the interest, the depositor should not assume ownership of the interest money. However, it is permissible for him to have the right of disposal over it, if he was sure of the acceptance of the owners [of the bank], even with the assumption that they know of the invalidity of the condition, and that he was not entitled to the interest from a shari'a viewpoint, as it happens.

(5) It is not permissible to deposit money with state owned banks, that is to say by way of loan, with the proviso of obtaining interest. It is usury that is haraam.

From an Islamic shari'a law standpoint, depositing the money in the bank, albeit without attaching conditions to receiving interest, amounts to wasting it. The justification for this ruling is that whatever money could be retrieved from the bank is not the bank's money per se. Rather it is from that which is majhoulil malik. Accordingly, profits and interest yielded by the depositor during his [religious] tax year, before setting aside the khums, is a matter of ishkal. This is because he has the right of disposal over it for his living expenditure, and is not permitted to waste it. If he caused it to be wasted, he should compensate its owners.

(6) The rulings contained in the preceding five paragraphs apply to both kinds of accounts.

These are deposit [or saving] accounts with a specified time lag, i.e. the bank is not bound to give the customer access to his money immediately [only when notice is given by the customer and after the stipulated duration has elapsed, otherwise penalty is due]. Current account is the second type of such accounts where the bank is bound to put the deposited money at the disposal of the customer whenever he requires it.

(7) National and state owned banks are also covered by the rulings outlined in the preceding paras (1-5).

This is because the money deposited with such banks should be treated as majhoulil malik. Thus, it is not permissible to have the right of disposal over it, except after consulting the Marji'.

(8) The rulings just discussed pertain to banks in Islamic countries. As for the banks that are financed by the unbelievers, whether national [private] or otherwise, it is permissible to deposit money with them with the condition of earning interest.

This is because, alal adhhar, obtaining usury from them is permissible.

As regards obtaining loan from these banks, subject to payment of interest, it is haraam. Avoiding such a usury transaction could be achieved by receiving the money not with intent of obtaining a loan, rather by way of istinqath. Only then, one should have the right of disposal over it without consulting the Marji'.

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