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Bank interest (Arabic: الفائدة البنكية) is the profit generated from customers' deposits in a bank or the return a bank collects from its clients in exchange for granting financial facilities, such as loans. Shi'a jurists generally classify the payment or receipt of bank interest under a conventional loan contract ('Aqd al-Qard) as loan riba, rendering it haram (impermissible). In their view, profit-generating operations are only permissible if they are structured under specific Shari'a contracts (distinct from a standard loan contract).

Conversely, another group of Shi'a jurists and legal scholars, such as Sayyid Muhammad Musawi Bujnurdi, Nasir Katuzian, and Musa Ghani-Nzhad, along with certain Sunni jurists, argue for the permissibility of bank interest, even within the framework of a loan contract. These individuals contend that bank profits fall outside the scope of Shari'a-prohibited Riba and are conceptually distinct. Among their justifications are the "difference between consumption and production loans" and the "restriction of Riba to the extension of deadlines, allowing for interest in monetary activities." In contrast, Islamic economists such as Sayyid 'Abbas Musawiyan—a jurist and member of the Fiqh Council of the Central Bank of Iran until 2020–21—have rejected these justifications and systematically critiqued such views in their academic writings.

The jurisprudential debate surrounding bank interest is classified among the newly emerged fiqhi issues, and with the advent of the modern global banking system, it has become a central challenge for Islamic and interest-free banking. Economically, interest serves as the primary mechanism for attracting an optimal level of deposits to mobilize resources, as well as the key benchmark for selecting investment projects for resource allocation and financial facilities.

Definition and Importance

Bank interest is defined as the income paid by the owner of capital to the counterparty in banking contracts (by the bank when borrowing from depositors, or by customers when borrowing from the bank) in exchange for the use of capital.[1] Researchers note that since the early 19th century, the tension between leveraging modern banking benefits and adhering to the Shari'a prohibition of Riba has prompted Islamic nations to seek a theoretical distinction between conventional bank interest and Riba.[2]

Consequently, a major challenge for Muslim jurists and economists is establishing a jurisprudential justification that the interest exchanged between banks and clients for financial facilities does not constitute Riba.[3] Interest remains the primary economic driver for optimizing deposit levels to mobilize resources, and it functions as the critical criterion for evaluating and funding investment projects.[4]

The jurisprudential status of bank interest is a prominent topic among newly emerged fiqhi issues. With the global expansion of modern banking, it poses a fundamental hurdle in the development of Islamic and interest-free banking.[5]

Shari'a Ruling of Bank Interest

A prominent group of Shi'a jurists maintains that exchanging interest on conventional bank loans constitutes loan riba and is categorically haram.[6] However, certain jurists have deemed such interest permissible under specific conditional frameworks:

  • Difference between state and private banks: According to the fatwa of Ayatollah Ali Sistani, individuals acquiring loans from state-owned banks may, with his authorization, receive the funds under the classification of property of unknown owner (Majhul al-Malik) and subsequently return the funds to the bank fulfilling the stipulated loan conditions.[7]
  • Taking loans and bank interests in the form of Shari'a contracts (other than a loan contract): Nasir Makarem Shirazi, another prominent Shi'a Marja', posits that interest derived from a non-Qard al-Hasan loan is permissible if structured under specific Shari'a contracts. However, if the transaction is a Qard al-Hasan (charitable) loan, interest is only permitted up to a 4 percent threshold to cover administrative service charges (wages); any amount exceeding this is classified as Riba and is forbidden.[8] Additionally, Ayatollah Sistani considers borrowing from private banks permissible only if the transaction is framed within Shari'a-compliant contracts such as Mudaraba or installment sales.[9]

Profit from Deposits

From a jurisprudential standpoint, bank deposits can be structured either as a loan contract or as a deposit (Wadi'a).[10] Shi'a jurists generally view the interest paid by banks on conventional customer deposits as Riba and thus forbidden,[11] unless the transaction is executed through contracts other than a standard loan.[12] Acceptable alternatives include the Mudaraba contract and installment sales.[13] However, jurists stipulate that if these contracts are merely formal (Suri) and lack genuine economic substance, the resulting profit remains classified as Riba and is therefore prohibited.[14]

On-account Profit

According to Ghulam Rida Misbahi Muqaddam, head of the Fiqh Council of the Central Bank of the Islamic Republic of Iran, a strategy was adopted to facilitate Islamic and interest-free banking wherein deposit profits are distributed to customers on an on-account ('Ali al-hisab) basis. This means customers receive a fixed, provisional profit every month. Following the annual audit and the deduction of the bank's agency fee (Wakala), the actual remaining profit is deposited into the customer's account, proportional to their deposit amount and duration. In a public interview, he noted that because banks often fail to execute this final reconciliation at the annual maturity, the on-account profit system has practically devolved into a loophole to circumvent the new interest-free banking regulations.[15]

Certain researchers, upon reviewing the edicts of Shi'a Maraji', have concluded that guaranteeing on-account profits without the depositor assuming any transactional risk constitutes Riba and is illicit. To legitimize such deposits, alternative structures like Wakala and the sale of participation papers have been proposed and analyzed.[16]

Theories that Interest is Not Riba

A contingent of jurists and legal scholars argues that bank interest is fundamentally distinct from Riba, supporting their claims with historical context and epistemological reasoning. Conversely, Sayyid 'Abbas Musawiyan, a jurist and former member of the Fiqh Council of the Central Bank of the Islamic Republic of Iran, has published critiques challenging these justifications and arguing that attempts to separate interest from Riba are jurisprudentially flawed.[17] The primary theories advanced to distinguish bank interest from Riba, along with their respective critiques, include:

  1. Restriction of Riba to the extension of the deadline and permissibility of interest in monetary activities: This view was articulated by Rashid Rida in Tafsir al-Manar regarding Qur'an 3:130. He argued that the Riba practiced during the Age of Ignorance (Jahiliyya) exclusively pertained to penalty charges for extending a repayment deadline, rather than an initial premium on the principal loan. Therefore, he concluded that a loan contract involving a predetermined excess in standard financial activities is unproblematic.[18] Musawiyan rejected this argument on four grounds, pointing to contradictory evidence in Shi'a narrations and highlighting gaps in Rashid Rida's historical analysis. According to Musawiyan, historical records clearly demonstrate the existence of loan Riba (excess stipulated at the inception of a loan, not just for extending time) during the Age of Ignorance.[19]
  2. Riba relates to consumption loans, not production ones: Scholars such as Katuzian, Bujnurdi, and Rashid Rida are recognized proponents of this distinction.[20] Critics counter this view by arguing that: 1. The underlying philosophy of the prohibition of Riba does not support such a dichotomy. 2. Numerous Shi'a narrations explicitly forbid merchants from engaging in usurious loans. 3. From Qur'an 2:275, which contrasts Riba with legitimate trade (Bay'), it is understood that Riba is not limited to consumption loans, and its prohibition is arguably even more relevant in production and commercial contexts.[21]
  3. Riba is in fixed income and interest is specific to variable and unpredictable income: This economic perspective is championed by Musa Ghani-Nzhad.[22] In his critique, Musawiyan argues that Qur'anic verses and Islamic narrations do not stipulate "fixity" as a defining condition for Riba.[23]
  4. Comparison of interest with rent (Ujrat) in lease: Some theorists draw a parallel between bank deposit interest and property rent, arguing that depositing money and accruing interest is analogous to leasing an asset and collecting rent. Thinkers such as Murtada Mutahhari and Yusuf al-Qaradawi reject this analogy as a fallacy. They argue that physical assets like land or housing possess an intrinsic, consumable usufruct (benefit) that justifies rent, whereas fiat money merely functions as a medium of exchange and lacks inherent usable value in the same manner.[24]

Notes

  1. ↑ Mūsawiyān, "Naẓarīyhā-yi ribā wa bahra", p. 70; Ḥā'irī, "Barrasī-yi fiqhī-yi aḥkām-i bānk, part 1", p. 137.
  2. ↑ Mūsawiyān, Maythamī, "Naqd wa barrasī-yi dīdgāhhā-yi jadīd pīrāmūn-i ribā wa bahra-yi bānkī", p. 7.
  3. ↑ Mūsawiyān, Maythamī, "Naqd wa barrasī-yi dīdgāhhā-yi jadīd pīrāmūn-i ribā wa bahra-yi bānkī", p. 7.
  4. ↑ Shaʿbānī, Bānkdārī-yi Islāmī rūykardī iqtiṣādī wa fiqhī, 1392 Sh, pp. 146-149.
  5. ↑ Rafīʿī, Mustathnīyāt-i ḥurmat-i ribā az dīdgāh-i farīqayn bā taʾkīd bar masāʾil-i mustaḥdatha, 1396 Sh, Abstract.
  6. ↑ Turābī, Māhīyyat-i ḥuqūqī-yi sūd-i sipurdahā-yi bānkī dar fiqh wa ḥuqūq-i Islāmī, 1396 Sh, pp. 48-49.
  7. ↑ Sīstānī, "Wām", Official website of the office of Ayatollah Sistani.
  8. ↑ Makārim Shīrāzī, "Wām giriftan", Comprehensive information portal of the office of Ayatollah Makarem Shirazi.
  9. ↑ Sīstānī, "Wām", Official website of the office of Ayatollah Sistani.
  10. ↑ Ḥā'irī-Nasab, Suhaylī, "Barrasī-yi fiqhī wa aḥkām-i sūd-i ḥāṣil az sipurdehā-yi bānkī".
  11. ↑ Ḥillī, Buḥūth fiqhiyya, Dār al-Zahrāʾ, p. 106.
  12. ↑ Ḥillī, Buḥūth fiqhiyya, Dār al-Zahrāʾ, p. 106; Ḥā'irī-Nasab, Suhaylī, "Barrasī-yi fiqhī wa aḥkām-i sūd-i ḥāṣil az sipurdehā-yi bānkī".
  13. ↑ Ḥillī, Buḥūth fiqhiyya, Dār al-Zahrāʾ, p. 106; Ḥā'irī, "Barrasī-yi fiqhī-yi aḥkām-i bānk, part 2", p. 195.
  14. ↑ Sīstānī, "Sūd-i bānkī", Official website of the office of Ayatollah Sistani; Khāminiʾī, "Sūd-i bānkī", Information portal of the office of the Supreme Leader.
  15. ↑ Miṣbāḥī Muqaddam, "Narkh-i bahra; kilīdītarīn mushkil dar niẓām-i bānkī ast", Website of Radio Goft-o-Goo.
  16. ↑ Darwīshī, Ṭabāṭabāʾī, Shafīʿī, Barrasī-yi fiqhī-yi sūd-i ʿalā l-ḥisāb-i taḍmīnī dar sipurdehā-yi bānkī, pp. 51-53.
  17. ↑ Mūsawiyān, Maythamī, "Naqd wa barrasī-yi dīdgāhhā-yi jadīd pīrāmūn-i ribā wa bahra-yi bānkī", p. 7.
  18. ↑ Rashīd Riḍā, Tafsīr al-manār, 1414 AH, vol. 4, pp. 123-124.
  19. ↑ Mūsawiyān, "Naẓarīyhā-yi ribā wa bahra", pp. 78-79.
  20. ↑ Aḥmadī, "Ribā wa bahra-yi bānkī", pp. 10-11.
  21. ↑ Aḥmadī, "Ribā wa bahra-yi bānkī", pp. 10-11.
  22. ↑ Ghanī-Nzhād, "Tafāwut-i ribā wa bahra-yi bānkī", pp. 314-326.
  23. ↑ Mūsawiyān, "Naẓarīyhā-yi ribā wa bahra", p. 84.
  24. ↑ Khalīlī Tīrtāshī, "Bahra-yi bānkī hamān ribāst; tarjuma-yi maqāla-ī az Yūsuf Qarḍāwī", p. 127; Muṭahharī, Masʾala-yi ribā wa bānk, 1381 Sh, pp. 70-72.

References

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