Question Summary:
Sources of funds/income for a bank

Question Detail:

I refer to your fatwa dated Mar 05, 2014 (answered date) with a fatwa number of28501 on Ask Imam, regarding major sources of funds/income for a bank. In your reply you had mentioned the following:
 
“The major source of income for a bank is from the depositors’ money, not from interest. Hence, it will be permissible to attain your salary from the bank on condition your profession involves no direct contact with interest”
 
I would like to bring to your notice that the major source of income for a bank is interest income and not depositor’s funds. The depositor funds are held by the bank for safekeeping and the depositor has the right to withdraw the funds subject to the terms and conditions of the account. Also deposit are considered as liability on a Bank’s Balance Sheet and not an asset.
 
Essentially a bank earns it’s income by lending the money it collects as deposits. The difference between the interest paid to the depositor and the interest rate charged on the loan is the essentially the income for a bank. Banks also have other income modes like fee income and service income but these incomes compared to interest income is relatively small.
 
For example, I have taken the income statement of three banks; DBS Bank, Standard Chartered Bank and Citi Bank (which I think is representative of international banks in general) to show you what is their major source of income is:
 
DBS Bank (FY2013) annual report (In S$millions) pg 110
Source:http://www.dbs.com/annualreports/2013/pdfs/reports/financial-statements.pdf

Net Interest Income

5,569

Net fee and commission income

1,885

Net trading income

1,095

Net income from investment securities

276

Other income

273

Total Income

9,098

Net Interest Income % of Total Income

61.5%

 
 
Standard Chartered Bank (FY2013) annual report (In $millions) pg 229
http://reports.standardchartered.com/annual-report-2013/pdf/2013-Annual-Report.pdf
 

Net Interest Income

11,156

Fees and commission income

4,581

Fees and commission expense

(480)

Net Trading Income

2,514

Other operating income

1,006

Total Operating Income

18,777

Net Interest Income % of Total Operating Income

59.4%

 
 
Citigroup (FY2013) annual report (In $millions) page 148
Source:http://www.citigroup.com/citi/investor/quarterly/2014/ar13c_en.pdf
 

Net Interest revenue

46,793

Total Non Interest revenues

29,573

Total Revenues

76,366

Net Interest revenue % of Total revenue

61.3%

 
 
As can be seen from the above all three bank’s, including the large global banks (like Standard Chartered and Citi), their major source of income is interest. Banks use their income to pay their staff salary and as highlighted earlier deposits have to be returned back to the depositor and cannot be used to pay for bank expenses.
 
Please do correct me if I am wrong.

Answer :

In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
When we refer to the income of the bank, we do not confine the term income to “profits” earned. Income refers to all funds collected by the bank which includes deposits which is obviously more than the interest amount.
Furthermore, deposit is conventionally regarded as a loan which is why interest is payable on the deposits. This may not necessarily be the position in Shariah.
While you state the deposits are held by the bank as safekeeping, you also state the bank lends deposits collected.
How would it be possible for a bank to lend deposits if it was in safekeeping?
Hence, the income statements of the three banks you provided refers to relative income and not absolute income.
If we were to scrutinize the issues further, it will lead to further complications and questions for example, if the deposits are regarded as a loan, then why should a depositor even pay bank charges? A depositor ought to be a creditor and now he is being charged for even depositing (loaning) his own money? This then leads to the question of deposits being regarded as Amanat (trust) in Shariah and the consent by the Ameen (owner) to the bank to use the money.
The simple solution is we will analyse the dealings of the bank according to our assessment and understanding in Shariah and not according to the practises and terminologies of the bank.
And Allah knows best,
Mufti Ebrahim Desai.