Is a savings account permissible in Islam?

I know that Islam prohibits interest on money. If I open a savings account that pays interest, will I be committing usury?

One fundamental point a lot of people are not aware of is that today’s currency is worthless paper. Since the world abandoned the gold standard in 1971, currency is no longer backed by gold reserves. What that means is that currency has become a commodity. It appreciates and depreciates and can be bought and sold. It’s no longer money. Economists call it fiat money. I call it phony money!

In his excellent booklet, “Contemporary Economical Issues – the opinion of a Moslem scholar”, Dr. Mahmoud Abu Soud (Published by the Islamic Center of Southern California) defines the two types of riba: Time Riba (Riba an-nasee’a) and Exchange Riba (Riba al-fadhl). Time riba is to get more later than what you paid today, such as what happens with interest bearing loans. Exchange riba happens when you sell one of six commodities the Prophet peace be upon him designated. These are gold, silver, wheat, barley, salt and dates. These were treated as money in the old days. The prophet (pbuh) forbade the exchange of these specific commodities except in equal amounts, hand-in-hand and in kind. That is, you couldn’t trade gold for silver. In modern Western economy, however, they are all commodities and therefore riba doesn’t quite fit them, but in order to be on the safe side (Wara`), I wouldn’t engage in those exchanges except as the prophet said: in kind, equal amounts and hand-in-hand. The only transaction that still fits the Islamic definition of riba is interest bearing loans.

The wisdom of forbidding riba so emphatically in Islam is to prevent the lucrative, but illicit business of the rich taking advantage of the dire need of the needy. If a financial transaction does not involve taking advantage of the other, then it’s not riba! The prophet peace be upon him was asked by a man if it was OK to trade his ripe dates (Rutab) for dry ones (Tamr). The prophet asked the man, “Do ripe dates decrease in value when they dry up?” The man answered, “Yes.” The prophet said, “That is riba for sure!” The man replied, “But, o Messenger of God, I need dry dates now and can’t wait for my ripe dates to dry up.” The prophet replied, “Then it’s all right!”

The reason your bank pays you, say, 5% interest on the money you keep in a savings account is that they take the money and lend it with a higher interest to people who buy real property such as houses or land. They then turn around and sell the deeds of these properties in a secondary market and get more profit than they have to pay you. This works as long as there is a secondary market for real estate, but as we’ve seen recently this doesn’t always happen and that business model can fail miserably! Yet, the banks don’t fail too. That’s because the government bails them out by printing currency. Currency is really worthless paper. Your money actually decreases in value every year because of inflation, among other factors. Just check the price of gold over the years! So if anybody is taken advantage of in a savings account, it’s the consumer and not the bank!

So, don’t agonize much over the meager interest banks pay consumers. When you trade worthless paper for more worthless paper, you’re not practicing riba. You’re not lending the bank money with interest. Your money is ventured out and you get a minuscule share of the profit! The case for riba is difficult to make in this situation. However, it’s a judgment call and perhaps erring on the side of caution is advisable.

All of the above arguments go out the window as soon as we go back to the gold standard, but I doubt very much that would happen anytime soon.

2 Responses to “Is a savings account permissible in Islam?”

  1. 220002314scc@gmail.com says:

    Interest is always Haram Haram Haram

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