How does banking without interest work?

In the Islamic model, savers are not creditors earning a fixed rate of interest but partners. They share profit and loss with the bank and have a say in how it is run, so that honesty and good judgement are rewarded.

Today’s banking rests on a silent assumption. Money is supposed to multiply by itself. Whoever puts money in a bank expects it to grow. But money can also shrink. Banks go bankrupt, and sometimes they are run by dishonest people, so that money that seemed to be growing suddenly vanishes without a trace.

Islam sees it differently. Money neither grows by itself nor shrinks by itself. It is the human qualities of those who work with the money that decide between profit and loss. That is why the verse above links gain to genuine trade and not to a fixed rate of interest.

This leads to a different model. Whoever deposits money becomes a partner. Depositors elect representatives who oversee the bank’s policy and make sure it is run honestly. Today, by contrast, small savers usually have no say at all. If the bank makes a profit, the depositors share in it. If it makes a loss, they bear it too.

Over time this lets what is good prevail. A bank that is run honestly and wisely shows better results than another under the same conditions. Money moves towards it. In this way honesty becomes the most valued asset.

History offers examples of this. It is reported of Imam Abu Hanifa, one of the great jurists of Islam, that he was a successful and very honest merchant. People entrusted their money to him in small labelled bags so that he could put it to good use, and he returned to them their share of the profit. Because he combined honesty with skill, he became very wealthy.