Answered by: Imam Abdul-Malik Sheikh
Assalamu Alaikum Wa Rahmatullah
Is Islamic Banking system really interest-free?
بسم الله الرحمن الرحيم
In the name of Allah, the Most Gracious, the Most Merciful.
Assalamualaikum Wa Rahmatullahi Wa Barakaatuh
Islamic banking has become a well-established reality. Islamic banks and financial institutions are spreading across the world. Even conventional banks are opening and offering Islamic financial services.
Many of the Islamic banking systems are supervised by Shariah boards comprising of Islamic scholars and specialist in Islamic finance whose role is to evaluate current practice and provide Shariah guidance.
The practice of interest in conventional banking systems favours the rich against the common people. It creates inequity and imbalance in the distribution of wealth. There is no disagreement that the practice of interest is clearly Haram in Islam. Allah says:
“Those who eat Riba (usury) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan (Satan) leading him to insanity. That is because they say: “Trading is only like Riba (usury),” whereas Allah has permitted trading and forbidden Riba (usury). So whosoever receives an admonition from his Lord and stops eating Riba (usury) shall not be punished for the past; his case is for Allah (to judge); but whoever returns [to Riba (usury)], such are the dwellers of the Fire – they will abide therein.” (1)
The ideal instrument in Islamic banking is Musharakah (know as a partnership) where profits and losses are both shared by both parties according to equitable proportions. This provides better opportunities for the depositor to share actual profits earned by the business which in normal cases may be much higher than the rate of interest.
Since the profits cannot be determined unless the relevant commodities are completely sold, the profits paid to the depositors cannot be added to the cost of production. Also unlike the interest-based systems, the amount paid to the depositors cannot be claimed back through the increase of the prices. (2)
To find out more about Islamic Finance and Banking system, I recommended you to read An Introduction to Islamic Finance by Mufti Taqi Usmani.
Only Allah knows best
Written by Imam Abdul-Malik Sheikh
Checked and approved by Mufti Mohammed Tosir Miah
Darul Ifta Birmingham
Al Quran; Surah al-Baqarah 275
An Introduction to Islamic Finance by Mufti Taqi Usmani, p 162
This answer was collected from DarulIftaBirmingham.co.uk, which is run under the supervision of Mufti Mohammed Tosir Miah from the United Kingdom.