I am living in Istanbul, Turkey. We have few financial organizations here who claim to be performing Islamic interest-free banking, though they pay extra money for your deposit.
Now, I wanted to put some money in such an interest free financial organizations and so I went to one of them and discussed with the manager about their work system. He told me: 'We will pay you a certain percents for the money you deposit here and this is how it works: businessmen who want to buy a certain machinery or tool come to us and give us the supplier's name and address. We as the bank buy the item from the supplier and sell it to the buyer on installment plan but with a higher price. From this difference, we pay our depositors some certain monthly percentages depending on their deposit amount.' What I want to know is whether this is 'Ribaa' or not? Can I deposit my money this way and accept the profit? Please reply very soon to help my clear my doubts.

All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah, and that Muhammad is His slave and Messenger. We ask Allaah to exalt his mention as well as that of his family and all his companions.

The method of sale which the manager explained to you is called Al-Muraabahah (i.e. the bank purchases the item and then sells it to business man by instalments with profits after the bank actually possessing it), and this is a permissible transaction as long as it fulfilled the conditions and pillars of Al-Muraabahah. Among these conditions and pillars is that the sold item should be permissible and pure, and the bank should really buy, own and possess the goods and not only pay off the goods on behalf of the customer and then sells it to him by instalments with an increase, as this transaction is nothing but a loan with Ribaa (interest or usury). The transaction should also fulfil all other conditions and pillars. The fact that the bank pays a definite interest rate regardless of the amount of the capital money which is deposited, is Ribaa itself. The reality of the transaction is that the bank guarantees for the customer his capital money whether he gains or loses, and in addition to this it gives him a definite interest rate on his capital money regardless of the amount of profit. What is permissible is that the bank should not guarantee the capital money; this is like giving a certain amount to someone else to do business with, and then dividing the profit thereof according to a known rate [for example half-half, or one third, and if the bank loses, the customer will lose as well, and in case of profit, the customer will share a known rate of profit too].

Therefore, it is not permissible for you, dear brother, to deposit your money in the said bank if it guarantees your capital money and pays a definite monthly percentage that is not included in the final calculation of profit and loss, and you are obliged to look for another bank whose transactions coincide with Islamic legislation. However, if you do not find such a bank and you fear to lose your money or fear that it will be stolen from you, then it is permissible for you to save your money in a bank which deals with Ribaa provided it is a current account without any profit until Allaah makes it easy for you to save your money in an Islamic bank.

May Allaah enable you to seek permissible earnings and provision, and may Allaah save all of us from all sorts of Ribaa.

Allaah Knows best.