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Is Interest Paid By Banks In Saving Accounts & Fixed Deposits Riba Or Sood?
Banks offer fixed income on saving accounts, fixed deposit, fixed monthly income on deposits made by its account holders, as banks are not asking for LOAN so the income earned from these will be considered as “interest or Riba” –
giving money to bank is not same as giving a loan to an individual to fulfill his/her needs – as one of Ghamdi sahab lecture this is considered as as “financing”
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22 Replies
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Is Interest Paid By Banks In Saving Accounts & Fixed Deposits Riba Or Sood?
updated 3 years, 9 months ago
4 Members
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22
Replies
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Question Is it allowable to:
-keep money as a fix deposit for five years in the bank and received a specific percentage on that amount and
-keep the amount in Pakistan government policy Qawmy Bachat Scheme?
Answer By Dr. Khalid Zaheer
Interest offered by the conventional banks is prohibited and a Muslim should avoid taking it unless his circumstances are compelling.
Qaumi Bachat Scheme too comes under the same category. However, if the government offers a regular payment to the old people in the form of pension etc taking it would be permissible no matter how revenue is generated.
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Question
ینک میں جمع کرائی ہوئی رقم کی قیمت افراط زر کی وجہ سے وقت کے ساتھ کم ہوتی چلی جاتی ہے، لہٰذا کیا بینک سے حاصل ہونے والا سود اس صورت میں بھی حرام ہوتا ہے؟
Answered by Rafi Mufti
سود تو ہر صورت میں حرام ہے، لیکن اگر کوئی شخص بینک سے حاصل ہونے والے اضافی روپے میں سے
افراط زر کی شرح کے مطابق حساب لگا کر رقم رکھ لیتا اور باقی رقم کی ایک ایک پائی بینک کو واپس
کر دیتا یا بغیر ثواب کی نیت سے غربا میں تقسیم کر دیتا ہے تو اس کی نیت چونکہ سود لینے کی نہیں، بلکہ محض
کرنے کی ہے،لہٰذا ایسا شخص بالکل صحیح ہو گا اور اس پر کوئی اعتراض نہیں ہو سکتا۔ ‘inflation’کو ‘cover’
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How about if. Interest is less than the inflation rate, would it still be considered RIBA or Sood?
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In my understanding interest rate is set based on inflation rate and it is not less than inflation rate – Time value of money.
Pls. let me know if I didnt understand the question.
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Respectfully my understanding is different. Interest rate in my saving account is less than 1%. However, Cost of Living Adjustment (inflation) for this year was 3.1 %.
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Thanks, Cost of living adjusment is not same as inflation, it is dependent on inflation though. 3.1% mentioned in your comment is not inflation.
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Thank you for pointing out the difference. However, I was not talking about Cost of Living. I was talking about Cost of Living ADJUSTMENT (COLA) which is based on Consumer Price Index (CPI). Let me ask the question in a different way : If the interest earned in saving account is less than CPI or COLA, would it still be considered RIBA? And, I know for fact, many banks pay interest much less than CPI or COLA. I would appreciate your response.
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Thanks, let me try to simplify the problem a bit. I can understand looking at this thread where confusion began (inflation offset).
The idea is pretty straight forward – The money deposited in bank will lose its value over time if I withdraw exactly same amount 5 years from now. The right term for this as you would agree is TVM – Time value of money. TVM factors in the interest rate (r%) in the computation and it accounts for inflation in that interest rate, they go hand in hand.
Keeping aside all other terminologies (to simplify this), if bank’s return on your savings account (r1%) or CD (r2%) or money market account (r3%) is higher than the bank’s interest rate (r% – TVM is computed on this), then you are getting additional money from the bank (greater than TVM or r%) and that is not allowed.
If your savings account, CD or money market’s yield is less than bank’s interest rate (r% on which TVM is computed), that is not interest (you are actually losing money here).
Hope this helps.
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I agree with the concept of TVM. And , I understand the term “yield”, but I don’t understand, “bank’s interest rate (r% on which TVM is computed)”. Could you kindly elaborate on “bank’s interest rate”? What do you mean by bank’s interest rate?
Separate Issue: Also, could you please explain how do I ask a question in a forum? Because of my lack of knowledge in how to use a forum, I put my question in the the reply area. Thank you.
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@Fawwad TVM is computed based on r% (discount rate). This is generally Nominal interest rate (again to keep it simple – we can call it APR). APR or the discount point used in the computation of TVM is what I referred to as Bank rate (r%) in my previous comment (to keep it simple, so most people here understand the concept).
a) Real-risk free rate of interest (i*)
Nominal interest rate = i* + Inflation Premium + Default Risk Premium + Liquidity premium + Maturity Risk Premium
This nominal interest rate can also be referred to as the annual percentage rate (APR).
Bottomline (if I may): If your financial instrument’s yield is greater than the TVM computed on the discount point, that interest is not allowed. I hope you see the rational of this!
Thank you.
For your second point on how to start a new discussion, see my next comment.
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This post shows you how to start a new discussion. Thanks Discussion 1999
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Thank you. I appreciate your explanation.
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You are most welcome. Stay blessed.
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So, if the APR of a saving account is less than the CPI then the interest earned in the saving account is not RIBA. Correct?
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Salam, no CPI doesnt apply. Thank you.
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Walaikum Assalam,
I think CPI applies, CPI measures inflation. But, Let’s keep it simple and try to avoid all the technical jargon.
For a moment ASSUME, the scenario below is true:
A person has $100 in a savings account and earns $1 at the end of the year. Even after earning $1, due to inflation during that same year his purchasing power goes down to $98.
Under the above scenario, would that $1 earned in the savings account be considered RIBA?
Thank you.
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CPI applies to you 100% but it does not apply to TVM. TVM or the APR already factors in inflation, pls. see my previous comment where I explained APR and Nominal interest. Also, note CPI is not the only index out there that depends on inflation, if you look at my screenshot copied above you will notice other index also.
Why TVM matters? It is your “money” deposit we are discussing here and how “inflation” relates to it.
Thanks,
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Dear Sohail Sahib,
I do not have the capacity to understand all these technical terms. That is why, I requested to keep them out. Would you kindly answer the question the way I presented it. Again, JUST ASSUME, it is a true scenario. Thank you.
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Dear @Fawwad sb – You are overthinking a simple issue, please read on TVM, discount rate/APR and FV (future value). The discount rate/APR already factors in “inflation”. So your initial $100 based on current “inflation” already factored in (in the discount rate or APR) gets you $1 – so your $100 does not lose its worth over time.
Bank already took care of this for you with APR!
No CPI needed in this equation. CPI factors in a lot of other things and it is not related to “inflation” on your $100 deposit.
Thank you. Stay blessed!
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Sohail Baita,
It looks like you won’t answer my question directly/the way I presented it. I just don’t understand how APR may already factor in “inflation” when APR is less than the inflation for the same period? I know for fact many banks offer an APR that is several times less than the inflation rate. This is my final try to get a straight answer. I am giving up. May Allah (SWT) keep you and your family safe.
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Salam @Fawwad sb – I wasn’t trying to dodge your question. There are multiple ways inflation can be estimated, CPI is definitely one way to do it. For a more accurate and comprehensive measure of inflation rates in the U.S., the PPI and the GDP deflator can be assessed in tandem with the most recently reported CPI measurements.
When bank determines APR on your savings account, that APR factors in “inflation” based on the formula of Nominal interest I already provided above.
a) Real-risk free rate of interest (i*)
b) APR = Nominal interest rate = i* + Inflation Premium + Default Risk Premium + Liquidity premium + Maturity Risk Premium
The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.
The real risk-free rate can be calculated by subtracting the current inflation rate from the yield of the Treasury bond matching your investment duration.
If you believe “inflation” is not built into APR already, pls. go with what other CPI related computation makes sense to you.
I am simply providing my input based on what I know and what makes sense to me in regards to TVM and APR.
Thanks again and stay blessed.
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