What can I do with interest from the bank?

Dear Hadi,

Dear Reader,

Thank you very much for your question.  We will bundle this question with another which we recently received, asking whether interest on bank deposits could be used to pay taxes.

The general presumption from your question, and other similar questions, is that the interest received on bank deposits is tantamount to riba, and thus haram.  This topic is important, not just for Muslims living in western societies, but has become a significant issue for Muslims worldwide.

Of course, all Muslims agree that riba is forbidden, based on clear versus of the Quran. The earliest of these in terms of revelation is found in Sura Al Rum, Quran 30:39, where riba was condemned, followed by clear prohibitions in Sura Al Imran, Quran 3:130, as well as reasserting the prohibition in very emphatic terms in Sura Al Baqara, Quran 2:275 - 280.  Also, there are numerous hadith of the Prophet (pbuh) concerning riba.

While Muslims agree that riba is forbidden, based on the above evidence, it may come as a surprise that Muslims actually do not agree on precisely what riba is.

The etymology of the word riba itself is that it means “increase”particularly when used in financial transactions.  The practical implementation of the meaning, however, has taken multiple forms among scholars:

1. The simplest, and probably most widespread definition, equates riba with interest of any kind, whether personal transaction between individuals or bank deposits or loans.
2. However, multiple other interpretations exist, including equating riba with increases only on specific commodities, such as gold, silver, and certain food stuffs.
3. Still other interpretations equate riba only to excessive interest tantamount to the English term “usury.”
4. Yet other interpretations do not focus on whether the interest is small or big, but on whether the economic situation represents an exploitation of a needy or poor person.

Given the different meanings and shades of meaning of the term, it becomes important to precisely define the issue and try to come to a conclusion on whether or not modern financial transactions such as interest-bearing bank accounts fall under the riba which the Quran and hadith forbid.

We always like to stress that we do not give fatwas was on this website, and consider that to be the purview of dedicated Islamic scholars with expertise both in Islamic jurisprudence, as well as the specific area in which the fatwa is given. In this particular case, it would require broad expertise in both Islamic jurisprudence, as well as in banking, financial transactions, and economics.

However, we do feel comfortable offering our opinions, usually based on fatwas by authorities whom we consider legitimate, and which are also grounded in reason and common sense.  We will explain in further detail below.  In this particular case, let us offer you our very clear (although controversial) opinion:

We do not believe that the interest you receive on savings accounts in the bank is haram. This applies both to fixed interest rate deposits, as well as to variable interest earnings on such things as commodities investment accounts.  Based on our opinion, and God knows best, you can do whatever you like with the interest you receive, since it is legitimate money. You can use it to help the poor, you can use it to buy things you want or need, or you can roll it over, and let your account grow with the bank.

We base our opinion on the thoroughly studied fatwas beginning in 2002 from the Institute of Islamic Jurisprudence of Al-Azhar University, as well as Grand Muftis of Al-Azhar, such as Mohammed Sayed Tantawai and Ali Gomaa.

It may come as a shock to you that this opinion exists, and we are providing you with the links so that you can check it out for yourself.  One of these is the text of the opinion itself as it was offered by the Al-Azhar Institute of Islamic Jurisprudence in 2002 (Al Azhar University fatwa allows for fixed returns on Bank deposits).  The second of these is an academic summary of this opinion versus opposing opinions (The recent Azhar fatwā: Its logic, and historical background).  The third source is a scholarly article providing an independent analysis of the issue based on principles of Islamic jurisprudence; this source does not specifically seek to address the fatwa of Al-Azhar University (The Difference Opinions Analysis on Conventional Bank Interest )

Very briefly, the opinion of Al-Azhar scholars is based on two foundational pillars:

1. The current banking industry, and the financial relationships between a bank and its customers, whether they are placing deposits or taking loans, is a very modern invention, not present at the time of the Prophet (pbuh) or the early generation of Muslims, and therefore requires a separate jurisprudential analysis, rather than trying to apply very specific rules meant to curb an exploitative practice in early Arabian society to current financial transactions.  The crux of the matter here is that when you deposit your money in a bank and the bank gives you interest on that money, this is an investment sort of relationship, where the bank takes your money, invests it in various areas in society, makes a profit, and gives you a part of that profit as interest. This is entirely different than a needy person requiring money to support himself or his family, and being exploited by a rich person who forces the one in need to pay an exorbitant interest rate on money he has borrowed.

2.  In financial transaction terms, the Al-Azhar scholars believe that the rules of riba apply to gold and silver, and not to any financial instrument, such as bank notes or paper money. That is because gold and silver have a fixed value, where things such as inflation change the worth of paper money, vis-à-vis gold and silver. With the abolition of the gold standard in the late 20^th century, the scholars felt that a reappraisal of banking financial transactions was necessary.

It is important to note that the viewpoint endorsed by Al-Azhar University has roots that stretch back over a century, to such scholars as Rashid Rida in his Tafseer Al-Manar which appeared in the early 20^th century. 

Also, the well-known scholar Fazlur Rahman provided a very comprehensive and most compelling argument in a long academic paper called “Riba and Interest” published in 1964 (Riba and Interest).  In that paper, he argues that the Quran discusses a practice already in existence in Arabia, without the need to specifically define it since it was known to all who heard the revelation.  That practice was the loaning of money at a certain interest rate, which was not itself considered exorbitant.  However, if the debtor was unable to pay the loan back at the end of the specified loan period, he would be given more time, but at an exorbitantly high interest rate so as to take advantage of the poor debtor who could not meet his initial obligations; this was defined as riba and was prohibited.  To quote directly from that paper, Professor Rahman states that “In short, the riba of the pre-Islamic days, which was categorically declared haram by the Quran, so that those who indulged in it were threatened with war from God and His prophet, was of an atrocious kind and went on multiplying in a manner that the poor debtor, in spite of his regular payments, could not pay off the usurious interest let alone the capital.”

It then becomes up to each Muslim to try their best to investigate the situation, and read the arguments for and against this point of view, and decide what they sincerely believe in their heart to be the truth.

It is on this basis that we agree with the opinion of Al-Azhar University, not because it is simply convenient, or makes our lives easier.  Although we do want to be clear that this opinion remains a minority opinion, it is not the opinion of just one scholar or a few separate scholars, but rather an opinion which represents the consensus of several different scholarly bodies, among them, the Islamic Research Council of Al-Azhar University.

Overall, we prefer this point of view to the point of view that interest of any kind is forbidden.  For example, if I borrow from you $100 today, and return it to you next year, if there is a 5% inflation rate, then the money which I return to you next year represents 5% less buying power. Some of the hadith of the Prophet (pbuh) discussed goods, and fixed buying power, so I should at least return to you the same buying power which you lent to me.  This does not account for the fact that the bank does not simply take your money and put it in the vault, but rather invests your money in various financial, industrial, and agricultural sectors in society, and returns to you a share of the profits which it has made on its global investments.

In fact, in his comprehensive analysis, Professor Fazlur Rahman finds that in the current economic climate, interest is actually not only allowed, but necessary, as a way to regulate capital resources between debtors and lenders. He believes that it may be possible to eventually establish an Islamic system where interest rates can be brought to zero, but until then, “it would be suicidal for the economic welfare of the society and the financial system of the country, and would also be contrary to the spirit and intentions of the Quran and the Sunna to abolish bank interest.”

The other point of view, of course, is that it is entirely haram, and if you are more convinced by that opinion, then we feel that you can either give the money in charity, or try to return it to the bank, although frankly, we are not sure exactly how that might work.

A last opinion, which you may notice in one of the articles we cited is that the issue falls under shubuhat (doubtful transactions), where we cannot say that they are strictly forbidden, but that they are questionable, and that it may be better to avoid questionable things.

We have done our best to give you our clear opinion with its justification, with the caveat as always that we may be wrong, and that God knows best.