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Is it similar to interest rate in conventional banking?

  • Which rate? What is the term for it? Conventional banking uses 'interest' which means a fixed return for loaning a certain amount of money. Islamic banking tends to work around the concept of fixed returns, so it tends to share profits at a similar rate to conventional banks, and implies that they will pay similar rates in the future but cannot promise a certain amount of money back. – Muz Mar 13 '13 at 8:15
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An Islamic savings account which works under the principles of mudarabah is a form of business relationship: You provide the money, and the bank does business with it. As part of this relationship, a profit sharing ratio (PSR) is stipulated (e.g. 95% of profits go to the bank, and 5% of the profits go to you).

The profit rate would be the actual increase on original capital you earned. Unlike interest, which is promised in advance by the bank regardless of how much profit the bank earns (or even loses), the profit rate in a mudarabah arrangement is calculated after the fact, and is merely informative: The profits you earned (according to the PSR) are divided by the original amount you invested, which shows the percentage of profit.

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It is how much profit you got with your money.You become business partner of that bank's invesments, and when the bank earns money you give you money.But if the bank lose money, your money will be lost.It is just like business partnership.There is no guarantee that you will earn money. But in interest, the bank promises to pay you the interest.

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