Question:

Is Fractional Reserve Banking halal? is it halal to have your money in a checking account where the bank takes most of that money and uses it to make loans to other people?  It is well known that banks lend out more than cash they have on hand.

Answer:

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

 

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We have reproduced the original answer below:

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

 

Fractional-reserve banking is the practice whereby a bank holds reserves (to satisfy demands for withdrawals) that are less than the amount of its customers' deposits. Reserves are held at the bank as currency, or as deposits in the bank's accounts at the central bank. Because bank deposits are usually considered money in their own right, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money originally created by the central bank.

Although the funds are used to give interest bearing loans to others, it is the current form of banking practised in all countries worldwide. Therefore, if there is no adequate alternative to fulfil one’s financial needs, it is permissible to utilize the fractional-reserve banking system.[1][2][3]

 

And Allah Ta’āla Knows Best

Saleem Khan

Student Darul Iftaa
Bradford, UK

Checked and Approved by,
Mufti Ebrahim Desai.

 

And Allah Ta’āla Knows Best

Bilal Mohammad

Student Darul Iftaa
New Jersey, USA

Checked and Approved by,
Mufti Ebrahim Desai.

www.daruliftaa.net



[1] To mitigate the risks of bank runs (when a large proportion of depositors seek withdrawal of their deposits at the same time) or, when problems are extreme and widespread, systemic crises, the governments of most countries regulate and oversee commercial banks, provide deposit insurance and act as lender of last resort to commercial banks. In most countries, the central bank (or other monetary authority) regulates bank credit creation, imposing reserve requirements and capital adequacy ratios. This can limit the amount of money creation that occurs in the commercial banking system, and helps to ensure that banks are solvent and have enough funds to meet demand for withdrawals. Rather than directly limiting the money supply, central banks may pursue an interest rate target to control bank issuance of credit.

Fractional-reserve banking is the current form of banking practised in all countries worldwide

 

http://en.wikipedia.org/wiki/Fractional_reserve_banking

 

 

 

[2] Checking Account

A transactional deposit account held at a financial institution that allows for withdrawals and deposits. Money held in a checking account is very liquid, and can be withdrawn using checks, automated cash machines and electronic debits, among other methods.

 

A checking account differs from other bank accounts in that it often allows for numerous withdrawals and unlimited deposits, whereas savings accounts sometimes limit both. Checking accounts can include business accounts, student accounts and joint accounts along with many other types of accounts which offer similar features.

 

In exchange for the liquidity, checking accounts typically do not offer a high interest rate, but if held at a chartered banking institution will be FDIC guaranteed up to $100,000 per individual depositor.

 

A checking account may also be called a "demand account" or "transactional account"

 

 

 

 

 

[3]  [فتاوي محموديه ج ١٦ ص ٣١٢ فاروقيه]

 

[كفاية المفتي ج ٧ ص ١٠٢ دار الاشاعة]

KHARWASTAN

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