Funds Deposited in Interest-Based Banks

Dr. Muzammil Siddiqi, former president of the Islamic Society of North America, states the following: “Interest (Riba) is forbidden in Islam. Since non-Riba, or interest-free banks are not available in the West, we are allowed to use conventional banks. The Fatwa of many scholars is that the interest money paid by these banks should be taken out on a regular basis and be given for some charitable purpose. One should not use it for his or her own expenses and it cannot be considered in the payment of one’s Zakah. In sha’Allah, one will receive the reward from Allah for not using the interest money.”
Moreover, Dr. Monzer Kahf, a Scholar in Islamic Economics & Financial Expert, adds: “The rules of the Shari’ah regarding funds deposited in interest-based banks and generating interest are as follows:
1. There is no doubt that interest given by conventional banks is the same Riba prohibited in the Qur’an. This point has been confirmed over and over again by the Islamic Research Academy affiliated to Al-Azhar in 1965 and later by the Isalmic Fiqh Academy affiliated to the Organization of Islamic Conference (Decision No. 10 in its plenary Session of 1406 H = 1985 CE).
2. Muslims must be keen that all transactions they do with other people, Muslims or non Muslims, are either permitted in the Shari’ah or at least do not violate any of its rulings, regardless of the degree to which the other party abides by the rules of the Shari’ah. In other words, we can transact Muslims who abide by the Shari’ah, Muslims who do not abide by the Shari’ah, and non-Muslims as long as the transaction at hand is compatible with the Shari’ah.
Consequently it is permissible to make transactions with interest-based banks as long as such transactions do not violate the Shari’ah. To open a checking account that does not generate interest is hence permissible, making transfers of funds, currency change, etc.
3. On the other hand, any transaction in violation of the prohibition on interest is haram, whether with conventional banks in the Muslim countries or in the non-Muslim countries.
4. The circumstance of hardship removal affects such prohibitions, especially when there are no Islamic banks, or when they exist but they charge more than normal fees for their transactions or they are inefficient that they really waste the time of Muslims (as customer) or they have small capacity that doesn’t accommodate the activities of large transactions one want to make. Shari’ah rule is to remove hardships, especially when they affect a category of people, as in such a case they are upgraded to the level of necessities in regards to their effect on relaxing a prohibition.
5. Under circumstances mentioned in point # 4, hardships and necessities have to be dealt with only according to what warrants them. This requires that whenever one has to deal with interest at conventional banks one must keep it to the smallest possible amount. This implies that if one happens to have an interest generating account, keep it to minimum, if you cannot avoid it.
6. The case of interest accrued in circumstances mentioned in point # 4 and whenever a Muslim happens to have earned interest and now he is reckoning himself/herself or repenting, etc.: any such accrued interest does not become his/her property according to the Shari’ah, and you must get rid of it. The principle is to return it to the payer. But this principle does not apply with regards to conventional banks, whether in Muslim or non-Muslim countries (there is recommendation to this effect by the Second Fiqh Conference of Islamic Banks held in Kuwait in the early 1980s). The reason is that the banker will use it to strengthen the bank’s position and ability to generate more interest-based transactions and income for itself. Beside you as a Muslim would be making fool of yourself because according to prevailing laws, which are obviously incompatible with Shari’ah, the banker, who deals in haram, is giving you this interest lawfully and with consent. Therefore this earned interest must be treated like haram money whose owner is unknown. You still have to get rid of it but to general Muslim charities, areas like poor and needy to drought-stricken people or people fighting to defend themselves and their lands.
7. Notice that this use of accrued interest is only for the purpose of keeping one’s money clean from the dirt of interest and will, in sha’Allah be rewarded accordingly. This is not a Sadaqah nor Zakah and cannot be considered part of due Sadaqah or Zakah. It is also better not to use such dirt to buy copies of the Qur’an nor to build mosques, or at least expenditure on the prayer area in the mosque. Remember that even the people of the jahiliyyah did not put any money earned as interest in the reconstruction of the Ka`bah before the advent of Islam.
8. One last point that is consistent with the previous analysis. If a Muslim happens to need to keep large sums with conventional banks, for any reason, is it better to keep it in no interest generation account or in an interest generating account and give the interest away as mentioned in point # 6.
In my opinion, here comes again the point that a Muslim must not put himself/ herself in a position that he/ she is fooled. This implies that if the laws of the land permit, especially in non Muslim countries, it is better to put large sums, when you have to put them anyway, in interest-generating accounts and dispose of the interest the same way as in point # 6.”