Islamic Bank Accounts: How Profit Is Earned on Current, Savings and Term Deposits


Everyone who opens an account at an Islamic bank has a few questions: “Why is my savings profit about the same as a conventional bank’s?” “If it is mudarabah, can I lose my money?” “Why does the profit change every month?” “Why do I get nothing on my current account?”

The answer is not simply “it is halal”. You need to understand what your money is in Islamic law when it sits in an Islamic bank, and how its profit is earned and shared. This guide explains the whole system step by step.


Three Ways Your Money Is Held in an Islamic Bank

Money in an Islamic bank is held under one of two basic Shariah contracts:



Some banks also offer investment accounts based on wakalah, where the bank charges a fixed fee to invest your money and the profit belongs to you.


1. Current Account: Based on a Loan


Money deposited in an Islamic bank’s current account is, in Islamic law, a loan (qard) to the bank. This has three consequences:




  • The bank guarantees your principal: A borrower must repay a loan, so your money is secure as the bank’s liability.
  • No profit: Any stipulated increase on a loan is interest, so no profit is paid on a current account.
  • The bank may use it: Loaned money becomes the borrower’s property, so the bank may invest it in halal financing; but the profit is the bank’s, because the risk of loss is also the bank’s.


A common question: “Aren’t Islamic and conventional current accounts the same?” Both are loans in Islamic law, but the Islamic bank uses this money only in halal sectors, while the conventional bank lends it out on interest. So keeping money in an Islamic bank’s current account does not strengthen an interest based system.


2. Savings Account: Based on Mudarabah


An Islamic bank’s savings account is based on mudarabah, in which:




  • You are the rabb al mal: the provider of capital.
  • The bank is the mudarib: the one who manages the business with effort and expertise.
  • Profit is shared in an agreed ratio.
  • Financial loss falls on the capital providers, unless the bank’s negligence or misconduct is proven.

The State Bank of Pakistan made this principle part of its formal rules in 2012. According to the announcement of those instructions, any loss will be borne by the depositors in proportion to their investments, unless caused by the negligence and misconduct of the Islamic bank in managing the depositors’ funds. sbp


How Is Profit Earned? Five Steps


Step 1: Creating pools:

The bank combines depositors’ money into one or more shared funds called pools. Under State Bank instructions, every Islamic bank must have a well defined profit and loss distribution and pool management framework for creating one or more pools of assets financed by different types of mudarabah based deposits. sbp


Step 2: Investing the pool:

Pool funds are invested in halal financing, such as murabaha, ijarah, diminishing musharakah and sukuk, which generates income.


Step 3: Deducting direct expenses:

Direct expenses of the pool, such as write offs of losses, losses on sale of investments, and provisions set aside for possible losses, are deducted from its gross income. What remains is the net distributable profit.


Step 4: Sharing between bank and depositors (PSR):

Net profit is shared between the bank (mudarib) and depositors (rabb al mal) according to a pre-agreed Profit Sharing Ratio (PSR), for example 50:50.


Step 5: Sharing among depositors (weightages):

The depositors’ share is distributed according to each depositor’s average balance and weightage. State Bank instructions require that profit and loss on mudarabah based deposits be computed and distributed on the basis of the average balance in the depositor’s account during the profit computation period. sbp


A weightage is the weight given to each account based on its amount, term and type. For example, if a regular savings account has a weightage of 1.0, a one year term deposit might have 1.3, and a five year deposit even more, because long term money allows the bank to make more stable investments.


A Worked Example


Suppose a pool’s position in a given month is as follows (figures are for illustration only):



These 450 million are then distributed among depositors according to their average balance and weightage: accounts with higher weightage receive a larger share in proportion to their money. That is why term deposits earn more than savings accounts, and why rates change slightly every month: the pool’s income is different each month.


3. Term Deposits: Higher Weightage for Longer Terms


A term deposit is also mudarabah, but you keep your money for a fixed term, such as three months, one year or five years. In return, you receive a higher weightage.


Early withdrawal:

If you withdraw before the term ends, your weightage is recalculated according to the period your money actually stayed in the pool. This is not a penalty, but a fair calculation: money that worked for a shorter period receives a shorter period’s weightage.


Hiba and Reserves


Hiba (gift):

The bank may give part of its own share of profit to depositors as a gift. The Shariah condition is that hiba must not be stipulated or mandatory in advance; otherwise it is no longer a gift, but a fixed increase.


Profit Equalisation Reserve (PER):

Setting aside part of the profit in good times, so that depositors’ profit does not fall too sharply in bad times.


Investment Risk Reserve (IRR):

An amount set aside from the depositors’ share of profit to protect against possible losses.

These reserves are valid in Shariah only if depositors know about them and agree to them when opening the account.


The State Bank’s 2024 Rule: At Least 75 Percent


In November 2024, the State Bank made an important change for Islamic savings accounts. It decided that Islamic banks shall pay profit on their PKR saving deposits, excluding deposits of financial institutions, public sector enterprises and public limited companies, equivalent to at least 75 percent of the weighted average gross yield of their investment pools. Under this rule, Islamic banks may, if needed, give hiba to savings depositors to meet the minimum profit rate requirement, and the instructions took effect from 1 January 2025. According to the State Bank’s FAQs, Islamic banks can also offer hiba to savings depositors over and above 75 percent of the weighted average gross yield.

(Circular: https://www.sbp.org.pk/circulars/ifpd-circular-no-09-of-2024) Circulars/Notifications - Islamic Finance Policy Department +3


What does this mean?




  • Protection for depositors: The bank cannot keep most of the pool’s income; at least three quarters must reach depositors.
  • Fairness: Before this, there was a common complaint that banks kept too much of the profit; this rule addresses that.
  • A juristic question: Some scholars ask whether allowing hiba to meet a minimum profit level, if it becomes a permanent mechanism, brings profit close to a fixed return. The response is that this requirement is not part of the contract between depositor and bank, but a regulatory obligation placed on the bank by the supervisor; the depositor has no Shariah right to any fixed amount. Still, it is a serious scholarly discussion worth watching.


Islamic vs Conventional Savings Account



Common Objections and Answers


Objection 1: “Why is Islamic bank profit about the same as conventional interest?”


Answer: There are two reasons. First, Islamic and conventional banks work in the same economy and market; if Islamic profit were much lower, depositors would leave, and if much higher, the bank could not price its financing above the market. Second, a similar price does not make two transactions the same: halal and haram meat may cost the same in the market, but the ruling differs. The real difference is that Islamic bank profit comes from the pool’s actual income, while interest is a pre-fixed rate.


Objection 2: “If it is mudarabah, why are there never any losses?”


Answer: A pool consists of thousands of different financings, so a loss in one business does not push the whole pool into loss; this is the natural result of diversification. Reserves also soften the impact of losses. But in Shariah and law, the principle of loss remains, as State Bank instructions clearly state that losses will be borne by depositors in proportion to their investments.


Objection 3: “The weightage and hiba system is not transparent; the bank shares profit as it likes.”


Answer: This is a serious objection, and researchers themselves have highlighted it. A study published in 2026 critically evaluated the profit distribution practices of Islamic banks in Pakistan for 2015 to 2024, including issues related to hiba distribution and assigning weightages. This is why the State Bank issued detailed instructions in 2012 and set a minimum profit requirement in 2024. As a customer, you have the right to ask your bank for its pool management policy and weightage table; this information should be published monthly on banks’ websites.

(Study: https://journals.riphah.edu.pk/index.php/jibm/article/view/3019) riphah


Mufti Taqi Usmani’s View


In Mufti Muhammad Taqi Usmani’s view, an Islamic bank’s deposit system should rest on the principles of mudarabah and partnership, where a depositor receives a share of profit only because he also shares the risk of loss. He considers the weightage system permissible, provided weightages are disclosed in advance and every depositor agrees to them when opening the account. In his view, this approach fits the spirit of mudarabah, because money held for different periods contributes differently to the business.


Zakat




  • The principal and the halal profit in your current, savings and term deposit accounts are all zakatable.
  • In Pakistan, zakat is officially deducted from some savings accounts on the 1st of Ramadan; this amount can be counted towards your zakat. See our article “Can Tax Be Counted as Zakat?” for details.


Customer Checklist


Before opening a savings or term deposit at an Islamic bank, ask:




  1. Is my account based on mudarabah or wakalah?
  2. What is the bank’s Profit Sharing Ratio (PSR)?
  3. What is my account’s weightage, and where is the table published?
  4. Does the bank keep reserves (PER / IRR), and on what terms?
  5. How will profit be calculated if I withdraw early?
  6. Which scholars sit on the bank’s Shariah board?


Authentic Sources





A Final Word


The real difference in an Islamic bank account is not the rate, but the relationship between you and the bank: in a current account, you are a lender; in a savings account, you are a partner in the bank’s business. This system is still evolving and needs more transparency; but an informed depositor who knows his rights and asks questions can play the most effective role in bringing it closer to its true spirit.