Do Islamic Banks Deal in Riba?

Islamic banks do not give interest on the deposited money like non-Islamic banks but give some revenues to the depositors in return for using their money in investment. And what banks sometimes declare about giving a return on the money is probably the accumulative return on previous years. Islamic banks are closely watched by their own Shari`ah bodies to make sure that the banks never get involved in any transaction that contradicts the teachings of Islam.

The prominent Muslim scholar Dr. Hussein Shihata, professor of Islamic economics at Al-Azhar University, states the following: Islamic banks do not set a fixed return and do not fix the return in advance. What was written on the sign board may be that the percentage given in the previous years was around nine percent. This return is sometimes given periodically when the bank profit is known and, accordingly, the depositor’s return will also be set. For example, in one of the Islamic banks in Egypt, a percentage of the return is distributed every three months on account of the real profit, and in the last quarter of the year the bank declares its annual profit and the return is adjusted according to the profit.

If some Islamic banks—which I doubt—pre-set the return on the depositors’ money, this will contradict the principle of investment that binds the investor and the bank. In other words, the bank and depositor should be partners in gain as well as in loss.

If some Islamic banks use the wrong expression to describe their operations, this should not be taken against all Islamic banks. Field studies have proven that the system of partnership in gain and in loss is much better than the one lending with a fix interest. Actually, many non-Islamic banks, such as Citibank, saw the advantages of the system and were encouraged to establish their own Islamic branches.

The majority of foreign banks working in association with Saudi banks use the system of partnership in gain and in loss. Many banks in England, the United States, and Europe have changed to the partnership system, especially after the interest rate has plummeted to around 1.5 percent.

What we have to emphasize is that Islamic banks do not give a fixed rate of interest, or fix a rate of interest in advance, and what they announce is usually the return (profit) on the account. We implore the Islamic banks to be precise in their expression so that the sign boards will mirror the nature of their operations.