Section Nine
Banking Transactions
A’māl al-Masārif/al-Bonūk
Banks today play an important role in man’s economic activities: they are the money depots, the loan operations axis, the guarantors and places of transfer, big partners in investments and speculations and agents or middlemen in a lot of transactions and deals; therefore, explaining the rulings regarding the operations they carry out is essential for the individuals who cannot operate without dealing with banks, working in them or alongside them.
(A) On the Islamic lawfulness of the banking transactions and services
1200. It is allowed to earn income through working in banking services in their different fields that are common in our time, if they conform to the Islamic rulings, especially regarding the establishment of non-interest (ribā) based financial instruments, with no distinction regarding whether they are owned by individuals, organisations or states. That which does not conform to the Shari’ah, however, is either forbidden or invalid, which is the status of a lot of the transactions carried out by banks and financial establishments based on interest; so a person’s profit from interest (regardless of the sin that results from the transaction) is not allowed unless with the satisfaction of the parties it is taken from; if they allow it and give permission to take it – despite knowing that it is not due for the party taking it – it is allowed to own interest and dispose of it; otherwise it is not allowed.
1201. It is allowed and valid to deal with any financial establishment, owned by a Muslim or a non-Muslim, private or governmental, interest-based or not, if all the transactions that conform to the Shari’ah and the money taken from them is allowed, including their gifts and rewards, despite the knowledge that their money includes some forbidden money, unless if a person knows that particular money given to him forms part of forbidden money, in which case it is not allowed to take it.
1202. It is allowed to work in all interest-based financial establishments if the work itself is allowed; so it is allowed to work in positions like: personnel administration, public relations, promotion, money counting and receiving the responsibility and keys of safes and depots, in addition to all ordinary services such as security, cleaning, lighting, transport and maintenance. Also allowed is renting buildings, transport vehicles and the like which banks need.
What is forbidden is involvement their interest-based contracts where the employee – whether manager or his subordinates – is involved in the interest-based contract established with the client, or is the writer of the contract, a witness to it or an accountant dealing with the interest given or taken. That said, since banks give their clients interest with their satisfaction, even if the client refuses to take it, or did not request it, accountants are allowed to pay the interest given to clients, but are not allowed to receive the interest that clients give to the bank because they do not give it to them (the accountants) in any case.
It is also forbidden to work in banks in forbidden activities besides interest, such as investments in the manufacture and trade alcoholic beverage, financing forbidden singing and dancing activities, and so on when the worker/employee participates in them (these banking activities).
(B) Deposits
1203. The monies that their owners deposit in banks are subject to the loan rulings not rulings for deposit; this is because the depositor, here, puts his money in the bank to preserve it, to facilitate his use of it in his transactions, and to invest it on his behalf, so it can appreciate and he can profit from it. However, since this money asset itself does not stay (i.e. not the same money that he deposited) – as any deposit does –these deposits are termed ‘debts’. Loan rulings apply to this relationship even if the client says that that money is a deposit or a trust, and that he allows the bank to dispose of it as it likes so that it becomes secured/guaranteed through it.
On the basis of this, it is not allowed to make any dealings between them – explicit or implicit – on an interest basis, in the manner detailed in the loan and debt section, which in our time is called ‘fā’idah’ (benefit), since it is a forbidden ribā. So, if the depositing is not based – even on the client's side – on taking the interest, but rather his concern was to deposit the money not to profit from it, he is allowed to deposit it and allowed also to take the interest on it even though he knew that the bank would give it to him; he is allowed to spend it on his affairs provided that he has secured the satisfaction of the party paying it.
1204. No distinction is made in prohibiting the taking or giving of interest on deposits, be it by government, private or joint-venture banks, nor by banks that belong to Muslims – states or individuals – or by banks that belong to non-Muslims, since it is an obligatory precaution to abstain from interest-based dealings with non-Muslims as well. Moreover, there is no distinction between interest on fixed deposits where the bank is not committed to pay it until after the elapse of the agreed-on duration (known as a ‘savings account’), and the deposit that can be withdrawn immediately upon request (known as a ‘current account’).
(C) Lending
1205. It is not allowed for the bank to lend monies deposited with it, nor its own monies, to its clients at interest; individuals are not allowed to borrow from it – or from others – at interest, if the contract between them is based – explicitly or implicitly – on paying interest.
However, in allowing the borrowing it is sufficient if it is the intention of the borrower – when establishing the contract – not to pay the interest when due unless he is forced to do that; this is although the form of contract common in banks is based explicitly on paying interest and despite the fact that the two parties – when contracting – face this as an inescapable reality. However if the borrower is not committing himself – within himself – to the condition involving paying interest, he is allowed to borrow despite his knowledge that he will not be able to escape paying interest when due. In any case, it is better to limit interest-based borrowing (with the intention of not being committed to pay interest) to the situation where the borrower is compelled to do this to the extent that his living depends on it, or when not doing so would lead him into intense difficulty that he could not withstand.
And where interest-based borrowing is prohibited, no distinction in the prohibition is made between borrowing by someone who has money in the bank and needs to borrow an additional amount and someone who has no money. Also, there is no difference between someone who wants a loan for a business, such as a guarantee, opening an LC (letter of credit) or the like, and one who wants it for a personal matter, such as his son’s marriage, buying a house etc.
(D) Opening a letter of credit (LC)
1206. It is allowed for the bank to open credit for its clients to facilitate their business transactions with exporters, and it is allowed for the bank to charge money for carrying out all services related to the client’s business transactions. But the client is not allowed to borrow at interest from the bank an amount additional to his balance in order to fulfil payment for the merchandise, as it is not allowed for the bank to lend him this amount at interest, unless the contract between them is established on the basis of ‘debt security’, in which case the cover of the bank for what is left (needed addition) of the payment is a sort of security on the debt offered to the exporter, not a sort of borrowing, provided that the exporter returns to the bank what it paid to him, making it conditional on himself to pay a ‘reward’ (ja‘l) - equal to the amount of the interest - for paying off his debt and offering security on it. (See no. 1192.)
(E) Acting as middleman (wasātah) in business transactions
These are things that are dependent on the bank’s activities and wishes. We discuss here the types that are known and common:
1- Investment:
1207. It is allowed for the bank to invest the monies deposited with it and utilise them in all allowed trading fields, either on the basis of being an agent of the depositor so that all profits are for the depositor and likewise the losses, with the bank being paid a fee for its agency, or on the basis that it carries out the investment as a speculator on behalf of the depositor, in which case the speculation rulings apply. In both situations, the money which the bank takes in exchange for this is allowed.
2- Selling commodities and shares:
1208. It is allowed that the bank handles allowable goods and advertises them by all allowable means of presentation and advertising; it is also allowed that it carries out the sale, purchase, storage, packing and freight of these goods for its clients. It is also allowed for the bank to charge for this within a hiring (ijārah) contract, or to take a reward (ja‘l) for its work within a jo‘ālah.
1209. As it is allowed for the bank to act as a middleman in selling assets; it is also allowed for it to act as a middleman in selling the shares that stock companies announce for sale. Whenever it is allowed and valid to sell and buy such shares, the bank is allowed to act as a middleman in its transactions, as explained in the previous entry.
The bank is even allowed to act as a middleman in any transaction that meets all its conditions and in selling all what is valid to sell in terms of assets, benefits and rights, without any difference in this between it and other individuals or organisations.
3- Selling bonds (sanadāt):
1210. Bonds are: documents issued by legally authorised bodies/organisations at a certain nominal value postponed to a certain date, then they sell them at less than their cash-nominated value on the condition that they will retain their specified value after a period, with the aim of borrowing from people and increasing their funds to cover the expenditure due, then returning the monies to their owners gradually at interest, so that it may be regarded – in fact – as a loan at interest in the framework of a sale; this is known in Lebanon as ‘senedāt al-Khazīnah’ (interest-bearing bonds or government bonds). For example: the value of the bond is one hundred pounds, the state sells it for ninety pounds immediately on the condition (promise) that it will return it at the value of one hundred pounds after six months. Treasury bonds sold in this manner are based on forbidden interest, so it is forbidden to deal with them on the basis that they are loans; they are also forbidden, as an obligatory precaution, as a sale; therefore, it is not allowed for the bank to act as a middleman in selling or buying these bonds; also it is not allowed to charge commission on them.
4- Storage of goods:
1211. If the bank is acting as a middleman in some business transactions, it may be asked – or compelled – to store goods until they are handed over to the importer, with the charges met by the importer or the exporter according to a clear agreement between all parties. In this case, the bank is allowed to carry out such work and charge or take reward for carrying out the storage. But if this was not requested from the bank but it did it nonetheless, it has no right to charge money for doing so.
1212. If the goods' owner fails to receive the goods when due and fails also to pay the money due from him to the bank, it is allowed for the bank to sell the mentioned goods – as it is allowed for the others to buy them – if the bank has informed him of this act and warn him before carrying it out; this is because the bank – on the basis of the clear condition that is present in such situations – is acting as an agent for the goods' owners in selling them.
(F) Collecting IOU’s and paying off debts
1213. It is allowed for the bank to handle the debts of its clients, by paying them off or collecting for them, as follows:
1- The creditor must present to the bank the documents for the debt that confirms his right to it, which is called an ‘IOU’(literally 'I Owe You') (kompiyālah), and ask the bank to collect this debt from the debtor without the debt being transferred to it – i.e. the bank – for a certain commission. In this case, the bank is allowed to do this and make the charge or reward for mediating between the creditor and debtor to claim the former’s right over the latter. However, it is not allowed for the bank to collect any interest – if such exists – nor to charge it, unless the bank knows that the debtor accepts paying it in any case.
2- The IOU is transferred to the bank to present it to the debtor who signed it, without any money changing hands with it (the bank), which is a sort of transfer to the non-owing party; in this case the bank is allowed to charge a commission on accepting the transfer (hawālah) to it, and is also allowed to take a commission on paying it if using a currency other than the one used when the debt took place, as explained in the transfer ruling (entry no. 1199).
3- The IOU is transferred to the bank and its signatory has money in it, so it is like a transfer to the debtor (which is the bank); here as well, the bank is allowed to charge commission for this service as explained in the transfer rulings (entry no. 1199).
(G) Guarantee (kafālah)
1214. Banks usually guarantee contractors who commit themselves to carry out different projects at high costs, such as hospitals and bridges, laying electric and telephone lines, etc. The contract between the parties is based on the bank providing a guarantee for the contractor to pay a certain amount of money on its client's behalf to the project owner if the project is not completed in the specified time; it is like the financial guarantee explained before (entry no. 1181), so all its rulings apply to it, including allowing the guarantor, which is the bank here, to charge a commission for this guarantee, which is a type of reward (ja‘l).