Are Islamic banks really riba-free?

Published on
March 28, 2024

In this day and age when almost everyone we know has a bank account, we sometimes take it for granted to understand the nature of this institution that safeguards our wealth and money. Have we ever stopped to ask, is my savings in the bank account really riba-free?

وَمَآ ءَاتَيْتُم مِّن رِّبًۭا لِّيَرْبُوَا۟ فِىٓ أَمْوَٰلِ ٱلنَّاسِ فَلَا يَرْبُوا۟ عِندَ ٱللَّهِ ۖ وَمَآ ءَاتَيْتُم مِّن زَكَوٰةٍۢ تُرِيدُونَ وَجْهَ ٱللَّهِ فَأُو۟لَـٰٓئِكَ هُمُ ٱلْمُضْعِفُونَ
📖 Riba in the Quran
“That which you lay out for increase through the property of (other) people, will have no increase with Allah; but that which you lay out for charity seeking the countenance of Allah (will increase); it is those who will get a recompense multiplied”.

Sura Ar-Rum, ayah 39

The word riba means excess that originates for the thing itself. When applied to such a thing as money, it means that one shall not exchange RM 1 for RM 2. Which makes sense right?

More than 92% of Malaysians save their money at the bank, and those who are Muslims would usually be offered an Islamic Account, often by a bank which also has a conventional window. Although these Islamic Accounts proclaimed to be interest-free, with contracts that have been vetted by Sharia scholars, in fact an Islamic bank is just a bank at the end of the day.1

Debt is the lifeline of all banks, including Islamic ones

All registered commercial banks in Malaysia are regulated under the Bank Negara, which includes Islamic banks. Bank Negara, like any central bank in the world, sets up the ‘rule of the game’ on how all banks in the country should operate. 

In summary, the rule allows banks to operate based on these basic principles: 

  • Accept deposits (cash that is saved with the banks by depositors like you and me)
  • Maintain some of the deposit as a ‘reserve’ - so that cash can be returned to the depositor whenever it is requested
  • Provide loans in value that is more than the reserve.

Although the first 2 points make so much sense and in fact shapes our thoughts and perceptions on how banks should be, the 3rd principle may seem a little odd. 

In other words, for every Ringgit you deposit in a bank account, the bank is allowed to lend multiple times more, thus creating new money from nothing. This system is called the fractional reserve system, which allows for the creation of money backed by debt - amount owed by individuals and businesses (and therefore the economy) to the bank.

How do Banks make money?

So we now understand how banks function. But how do they make money? In a very simplified way - Banks derive income from the 2 parties that transact with it, the depositor and the borrower.

  • To the Depositor, the bank is keeping their money safe. Rather than stashing the cash under one’s pillow, the banks issue a shiny plastic card that one can use in replace of cash, and all other convenient stuff like viewing the balance on your phone. All for a fee.
  • To the Borrower, the bank will charge fees (in form of interest) based on the amount borrowed. And if the borrower can’t pay in time, there’s probably a penalty fee. If the borrower can’t pay at all? Well there could be something that the bank can seize, maybe a car or house.

When we understand how banks function and how it makes money, it is clear that it engages with the practice of riba when it creates money from nothing (the fractional reserve as mentioned above) and charges the borrower a fee on the loan. Unfortunately, all banks in Malaysia (including Islamic ones) practise this directly or indirectly and call it in another name such as profit. Others would obscure it with Islamic terms and tie multiple contracts into one. But that would be a discussion for another day.

A journey to a riba-free way to safeguard your money and wealth

عَنْ أَبِي هُرَيْرَةَ أَنَّ رَسُولَ اللَّهِ صَلَّى اللهُ عَلَيْهِ وَسَلَّمَ قَالَ لَيَأْتِيَنَّ عَلَى النَّاسِ زَمَانٌ لَا يَبْقَى أَحَدٌ إِلَّا أَكَلَ الرِّبَا فَإِنْ لَمْ يَأْكُلْهُ أَصَابَهُ مِنْ بُخَارِهِ
📖 Abu Huraira reported: The Messenger of Allah, peace and blessings be upon him, said,

A time will surely come upon people in which none will remain but that he consumes usury. If he does not consume it, he will be afflicted by its dust.

Source : Sunan Abī Dāwūd 3331

There’s no doubt that we would continue to need the services offered by the bank, both as a means to safeguard our wealth and the convenience of a reliable payment system that we use in our daily lives. However, since there are truly no banks that are free from the practice of riba, we must make a conscious decision to consider placing our wealth in an institution whose business model is based on equity (”musyarakah”) rather than debt. 

Here are some tips you can adopt to make sure your hard-earned income and wealth is preserved without participating in riba:

  1. Minimise balance saved at the bank
    Banks would pay interest or ‘profit rate’ to you based on the savings you have with them (called fixed deposit) which is anywhere between the range of 2.65% to 3.45% in Malaysia. This is what you’d want to stay away from as you’ll earn it based on riba. You will receive this if you maintain a minimum balance for a period of time (usually 6 -12 months).To avoid it,  leave a balance below the minimum within the given period so it won’t accrue any interest. You can check this with your bank.
  2. Decide how much you plan to spend and save.
    Getting to know how much you’d spend and set aside as savings is not only a good financial discipline, but this way you’d know where would be the best place for you to park your money.
  3. Use e-wallets or digital banking products for spending
    To make sure you can spend freely and conveniently, most e-wallets or digital bank products would have the DuitNow feature which allows for payments to be made via QR. These services won’t usually pay out any interest, and if they do you can always opt out.
  4. Save through syariah-compliant investing
    To those who’ve never invested - this would be a giant leap and may sound daunting. But thankfully in this day and age, investing can be easy (in fact easier) than opening a bank account. Through investing, you’re making your money ‘work’ by placing them in the real economy - be it in helping a business grow (venture investing) or buying a property or gold in the hope that the price increases over time. The aspect of compounded returns in investing is very important when you plan to build your wealth through the act of saving over time. Also saving the money and not investing it, you would risk losing the value of the money to inflation.

As consumers, it is imperative to look beyond the surface and understand the mechanisms at play. Only then can we truly discern whether Islamic banks hold true to their promise of being interest-free. Just like how you’d look for a quality halal (Tayyib) restaurant to enjoy a meal, the same applies when you’d want to manage your wealth. You wouldn’t want to compromise on quality and standards so you can be assured that you’re practicing Islam in the best possible manner. That’s called Ehsan.

Click here to get started on your journey to investing the syariah-compliant way free from riba.

Sources :


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