How do Islamic banks make money if interest is prohibited?
Islamic banks operate under principles that align with Islamic law (Sharia), which prohibits the payment and receipt of interest (riba). Instead of relying on interest, they utilize various profit-sharing and asset-based financing methods to generate revenue.
One common method is through profit-sharing agreements, such as Mudarabah, where one party provides capital while the other manages the investment. The profits are shared according to a pre-agreed ratio, and in the case of loss, the loss is borne by the provider of the capital. This arrangement is supported by the principle that Allah hath blighted usury and made almsgiving fruitful. Allah loveth not the impious and guilty.
2:276
Another method is Musharakah, which involves partnership where all parties contribute capital to a project and share profits and losses. This aligns with the understanding that trade is permissible while usury is forbidden, as noted in the Qur'an: Allah permitteth trading and forbiddeth usury.
2:275
Islamic banks also engage in leasing arrangements, known as Ijarah, where the bank buys an asset and leases it to the customer. The customer pays rent for using the asset, which provides income to the bank without the involvement of interest.
Moreover, Islamic finance promotes ethical investments. Banks avoid financing businesses involved in prohibited activities, ensuring that their investments are socially responsible. This is consistent with the guidance in the Qur'an to engage in mutual consent and lawful transactions, as stated: O ye who believe! Squander not your wealth among yourselves in vanity, except it be a trade by mutual consent...
4:29.
In summary, Islamic banks utilize profit-sharing, leasing, and ethical investment strategies to generate income, in compliance with the prohibition of interest in Islam.
Sources
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2:276 · Al-Baqara
2:276 · Muhammad Marmaduke Pickthall
يَمْحَقُ ٱللَّهُ ٱلرِّبَوٰا۟ وَيُرْبِى ٱلصَّدَقَٰتِ ۗ وَٱللَّهُ لَا يُحِبُّ كُلَّ كَفَّارٍ أَثِيمٍ
Allah hath blighted usury and made almsgiving fruitful. Allah loveth not the impious and guilty.
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2:275 · Al-Baqara
2:275 · Muhammad Marmaduke Pickthall
ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَٰٓئِكَ أَصْحَٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَٰلِدُونَ
Those who swallow usury cannot rise up save as he ariseth whom the devil hath prostrated by (his) touch. That is because they say: Trade is just like usury; whereas Allah permitteth trading and forbiddeth usury. He unto whom an admonition from his Lord cometh, and (he) refraineth (in obedience thereto), he shall keep (the profits of) that which is past, and his affair (henceforth) is with Allah. As for him who returneth (to usury) - Such are rightful owners of the Fire. They will abide therein.
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4:29 · An-Nisaa
4:29 · Muhammad Marmaduke Pickthall
يَٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ لَا تَأْكُلُوٓا۟ أَمْوَٰلَكُم بَيْنَكُم بِٱلْبَٰطِلِ إِلَّآ أَن تَكُونَ تِجَٰرَةً عَن تَرَاضٍۢ مِّنكُمْ ۚ وَلَا تَقْتُلُوٓا۟ أَنفُسَكُمْ ۚ إِنَّ ٱللَّهَ كَانَ بِكُمْ رَحِيمًۭا
O ye who believe! Squander not your wealth among yourselves in vanity, except it be a trade by mutual consent, and kill not one another. Lo! Allah is ever Merciful unto you.
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