[A Man Deposited His Money in the Bank, Then They Gave Him a Profit]

Answer—and by Allah’s enabling: What is well-known of bank dealings is that they give “interest” to the one who deposits money with them according to the length of time; the longer the term, the greater the interest, and the shorter the term, the smaller the interest. This is only because the bank benefits from the monies deposited with it: it extends loans with interest, and it trades with them by buying, selling, currency exchange, and transfers. There is no doubt that the depositor receives the interest whether the bank profits or loses, because the interest is tied to the length of time. On this basis, the “interest” the depositor takes is prohibited and must be given in charity.
If it is said: It is possible that the bank traded with the deposited money, profited in it, and gave the owner of the money his share of the profit—so that the “interest” would be a profit from muḍārabah (profit-sharing)?
It is said: What is well-known of bank dealings is that they pay “interest” according to time—whether or not they make profits, and whether or not they trade with the deposits.
— And even if we suppose the bank did trade with it and gave the depositor his share, most of the bank’s gains and profits come from loan interest. On that basis, the depositor’s “interest” is prohibited in every case.
If it is said: Banking transactions have become today nearly a necessity; what is the way out of ribā? And how should an Islamic state act if it wants to correct bank dealings?
It is said: The solution is that bank deposits be divided into two categories:
1. First: short-term deposits—returned to their owner without interest, as is the case today.
2. Second: long-term deposits—the solution is that the bank contract with the depositor on muḍārabah in what he deposited for a fixed term: a year, two years, or more.
If it is said: Depositors differ in the time of depositing—some at the beginning of the month, some at the end; others at the beginning of the second month, others at its end, and so on to year’s end. Deposits keep coming—so how can the bank conduct muḍārabah with these capitals?
It is said: The bank can hold in reserve what is deposited in the first and second months, combine all of that, and begin trading with it starting from the third month, without adding any later funds to it, and place it in a particular line of trade. Then the bank receives the deposits of the third and fourth months, combines them, and places them in another line of trade.
If what is deposited in two months is not enough for trading, the bank adds to it the deposits of a third and fourth month, and begins trading with the total funds from the four months starting from the fifth month. When the term agreed between the depositor and the bank ends, the owner of the deposited money is called: if he wishes, he takes his capital and profit; if he wishes to continue trading, the bank concludes a new contract with him and treats him with a new arrangement—combining his funds with those of new depositors and beginning to trade with them from a specified month.
On this basis, the bank can place announcements for those who wish to partner with the bank in trading real estate, [stating] the last date for receiving depositors will be such-and-such a day, etc.
— I hold that this arrangement will bring great benefits.
— As for the benefit from short-term deposits, the bank will profit from them without paying “interest”—by currency exchange, transferring currencies from country to country, and the like.
— As for alternatives that can replace an interest-bearing loan, they may take the following forms:
1. The bank sells the borrower a commercial commodity at the retail (broken-up) price; the bank benefits by the margin between wholesale and retail. Some jurists of the madhhab have permitted this form.
2. The bank sells the borrower a commodity at the highest price that exists for that commodity in the market; the bank benefits by the margin between the highest and lowest prices in the town or locality. This form has also been permitted by the jurists of the madhhab.
3. The bank sells the client paper currency in exchange for what it is worth in gold or silver, and the debt becomes in gold or silver.
4. The bank advances to the would-be borrower a specified sum of cash against a commodity the bank desires and hopes to profit from, on condition that the commodity be precisely described—by known measure or known weight, known kind, known grade, specified characteristics, and defined composition if it is a manufactured item—for a fixed term. This is called salām (forward sale).
Merchants can make use of this if they need funds from the bank, for the merchant can meet his obligation to the bank by having the required commodity produced to the specified standards.
Source: Min Thimār al-ʿIlm wa al-Ḥikmah vol.2