Question: Is it permissible to use banks, and is bank interest considered ribā and therefore ḥarām (impermissible)?
INTRODUCTION
This question, while simple and straightforward, requires a lengthier than normal answer since to make sense of the conclusion that dealing with banks is permissible and that bank interest is not equivalent to ribā and therefore also permissible, requires the discussion of some auxiliary matters along the way.
HOW ISLMAIC LAW SEES LEGAL PERSONS
The most important background discussion that is required in answering this question is to understand how Islamic law sees what is typically referred to in legal studies as “legal persons.” Of course, most of Islamic law acknowledges people as individual human beings with rights and responsibilities, what is called in the Sharī‘a al-mukallaf – a morally and legally responsible person. However, just like in modern legal systems, Islamic law also acknowledges non-human legal persons, or what modern Muslim jurists refer to as “a theoretical person.” Since these discussions are often found in the lengthier and more advanced books of Islamic jurisprudence, it is easy to miss them, but they are there and the Sharī‘a acknowledges them. So, while Islamic law has discussions, laws, and procedures for individuals (what we are more familiar with), it also has laws and procedures for institutions (theoretical people) that are slightly different. This is, perhaps, the most important point that one needs to understand first and foremost with regards to this topic, and a few examples will be instructive:
- A person who steals from the public treasury (bayt al-māl) does not receive the ḥadd punishment of stealing because this is public money and the thief is a member of the public. This is the opinion of Imam al-Shāfi‘ī, Imam Aḥmad, al-Nakha‘ī, al-Sha‘bī, as well as Imam Abu Ḥanīfa.[1] The point of this example is that the public treasury is an institution, not an actual person, and although it has the power to own and possess (al-milk) this is different than an individual’s ownership and possession.
- An extension of the previous example is that corporations, also theoretical or legal persons, while they own money and assets, do not pay zakat as zakat is an obligation on persons, not institutions.
- Another example from the laws of endowments is also instructive. Jurists argue that a mosque can become a partner in business and therefore possesses the right of preemption (al-shufu‘a). However, this right can only be granted to an entity that has a legal capacity and liability (dhimma), thus affording the mosque, which is a charitable endowment, the rights afforded to theoretical or legal persons.[2]
Therefore, we can see from these simple examples that we have a set of laws of actual people and a set of laws of legal persons (institutions). This will be critical to keep in mind since modern banks are institutions, not people, and while some of their functions mimic individual financial transactions, others are very different.
USING BANKS
Banks did not exist at the time of the Holy Prophet ﷺ and financial transactions were mainly between people or between the State and its subjects/citizens. As already mentioned briefly above, however, the concept of institutions (theoretical people) is not foreign to Islamic law and there is a large capacity to develop legal rules and principles around this concept. Therefore, when banks emerged throughout the Muslim world, it was easily recognized by Muslim jurists as an institution and instrument created for the benefit of people, organizations, and governments. When such institutions are created, they contain their own independent legal capacity and liability (dhimma) separate from the individuals who establish them. (Think of the examples previously mentioned.) To answer questions about Sharī‘a rulings of the transactions of banks, therefore, we need to look to them as theoretical people, not actual people and consistently apply the rulings of Islamic law accordingly.
What is the purpose of a bank?
Banks serve many functions and purposes in society by helping the flow of money and finance for individuals, businesses, and governments. People with savings can deposit their money in banks and those needing finance can use these deposits. The returns on these investments (small and large) generate profits that pour back into the bank. We will discuss these “interest” payments shortly. Banks also hold money in savings accounts, market accounts, and other instruments for their clients.
How do we understand the transactions of banks?
This is where the most legal discussion has occurred amongst Muslim jurists since the emergence of banks. And before we delve into this, which is perhaps what most people are looking for in this fatwa, let us say at the outset that we are only considering real jurist discussions on this matter, not preachers, activists, and the untrained.[3]
How do we conceptualize the banking transaction? If we say that the bank is a theoretical person, then we can also say people deposit their money as a form of loan (qard) to the bank: the person being the lender and the bank being the borrower. In the return of this money to people with interest, we find jurists can view this in two ways: one group argues that this is a loan of gold (leading to unequal amounts in the lending of gold being a textbook case of ribā al-qard and therefore impermissible), and another group argues this is a loan of a product, not money. The key in understanding the difference in these two opinions is how each understands money itself.
The first group sees money today as it is discussed in the classic books of Islamic law: gold and silver, or currency backed by gold and silver. The problem with this approach, and why we reject it, is that it is not a correct understanding of the current state of money. A Sharī‘a ruling must be a function of a correct understanding of the current moment (idrāk al-wāqi‘). Since 1973 when the United States severed the gold standard, currency has been fiat currency, unbacked by gold or silver. It is this reality that undergirds the second approach. Therefore, according to the correct understanding of money today being fiat currency and not gold/silver or currency backed by gold and silver, money today is seen by Islamic law as a product, not the money of the past.
The second opinion, the one we adopt, argues that since money today is not itself gold or silver, neither is it backed by gold and silver, it falls under the established legal maxim: there is no ribā in money that is not itself gold and silver or backed by gold and silver.[4] This is based on the legal reasoning of Imam al-Shāfi‘ī who argued that the ratio legis (‘illa) behind the prohibition of ribā in gold and silver is that they are used to establish the general prices of things and this ratio legis is therefore limited to gold/silver.[5] A limited ratio legis (‘illa qāṣira) means that when the price of things is set by other than gold and silver, ribā is not found, since the ratio legis will not move to the other currencies.[6] So if we look at the transaction above as the lending out of fiat money, we can comfortably conclude that this is not a ribā-based transaction.
However, there are other approaches to the conceptualization of these transactions leading to even further differences of opinions. Some jurists argue that transactions of the bank are a type of investment between the depositor and the bank, and the resulting excess money (interest) is a corrupt (fāsid) type of profit-sharing muḍāraba, which, while impermissible, the transaction becomes permissible out of necessity (ḍarūra).
And yet a further group argues that the transaction is an investment and a type of profit sharing (muḍāraba), but this is permissible because the bank is a theoretical person, not an actual person. In this case, a bank as an institution is allowed to engage in this type of transaction because it is set up by governments to do just that for the benefit of people. Interest in this case, therefore, is a return on the investment. We adopt this opinion as it is more in line with reality than the previous one.
Why is there a difference of opinion?
These various and differing opinions all stem, not from their understanding of Islamic law and the primary sources of Islam but rather from their different understanding of the here and now. The various opinions hold very different conceptualizations (taṣwīr) and designations (takyīf) of this issue, which is why you find differences of opinions of many trained muftis. (You can read more about this in our methodology on issuing fatwas).
CONCLUSION
Based on the above discussion and the Sharī‘a sources cited (mostly from the school of Imam al-Shāfi‘ī) we can conclude the following in our fatwa:
- Banks are legal institutions (theoretical people) that provide critical services for society and regulated by laws. This means they are necessary and permissible to use and interact with.
- As a theoretical person, banks are allowed to do things that normal persons are not allowed and therefore a different set of Sharī‘a standards are applied.
- When a person deposits money in the bank this is an investment-based relationship and the bank leverages its deposits to finance projects. Therefore, bank interest is a return on this investment, and not to be confused with ribā al-qard.
- Money today is fiat currency and therefore not subject to the rules of ribā.
And Allah Most High Knows Best.
Ibn Humām, Fatḥ al-Qādīr 8 vols., Cairo: Bulāq Press, 1316 AH): 4:235. ↑
Al-Kharshi, Sharḥ Mukhtaṣar Khalīl 8 vols., (Cairo: Bulāq Press, 1317 AH): 6:163; Zakariyya Anṣārī, Asnā al-Matālib 4 vols., (Cairo: Maymūnī Press, 1313 AH): 2:363. ↑
For a more detailed on “Islamology” or various versions of fake Islam, please see: Tarek Elgawhary, Gate to Madina (Potomac: Making Sense of Islam, 2025). ↑
Al-Shirbīnī, Mughnī al-Muḥtāj 4 vols., (Cairo: Dār al-M‘arifa, 1997), 2:34; al-Zarkashī, al-Manthūr 3 vols., (Kuwait: Ministry of Awqāf): 3:244; Zakariyya al-Anṣārī, Sharḥ al-Manhaj 4 vols., (Cairo: Dār al-Fikr, n.d.): 3:46 ↑
Imam al-Shāfi‘ī, al-Umm 8 vols., (Cairo: Dār al-Fikr): 3:15; al-Nawawī, al-Majmū‘ 9 vols., (Cairo: al-Munīriyya, 1347 AH): 9:490. ↑
Asnā al-Maṭālib: 2:22 ↑