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How to Calculate the Banks Interests? at the basis of their establishment, represent an entity for saving money, individuals deposit funds to keep them from being stolen and lost, and noting that depositors did not withdraw their money, the banks started lending operations, and the banks function as intermediary institutions between surplus units (those who have money) and deficit units (who do not have money) in exchange for a Banks Interests, determined as a percentage of the capital.
The issue of bank interest is one of the fundamental points that the economic systems differed in their attitude towards it. Where we see the capitalist system treats the presence of bank interests as a cornerstone of the structure of the system and mobilizes justifications for dealing with it on the one hand, on the other hand, we will see the absence of bank interests as a cornerstone in the Islamic economic system, and it is called the term “usury” which the system fights, criminalizes and views it with a negative view.
The relationship of loans to banks interests
A loan is the giving of money from one party to another for use, provided that it is similar to the capitalist system. Loans are linked at their origin to fixed returns as a percentage of the capital. They see the return as the price of dispensing with liquidity. This is called interest. And it can be the process of lending these individuals among themselves and can be carried out by the banking system, and then these returns will be called bank interest.
While in the Islamic economic system, the loan in this form does not exist, and the loan is confined to what is called the interest-free loan, which is one of the donation contracts that is meant by charity and solidarity in society, and there is no return for it or a financial wage, so the loan in the Islamic economy is paying an amount of money to those who benefit from it, provided that he pays it in return without any interest.
This comes in harmony with the Islamic economic system, which links profit entitlement to risk tolerance. Therefore, Islamic banks grant funds through their participation in investment results in terms of origin in the event of providing investment funds.
Also read: 6 differences that must be known between Islamic and conventional banks
Calculate the Banks Interests
to Calculate the Banks Interest should know that it represents a percentage of the loan amount, paid by the borrower to the lender in exchange for the benefit of using the money. Usually, the amount is set as an annual rate, and interest can also be calculated for periods longer or shorter than one year.
Banks Interests
Who takes the banks interests?
In general, the one who provides money to the borrower is the one who deserves the interest. If the deal is between ordinary people, the lender will take the interest, and the borrower will pay it.
In the event of entering the bank as an intermediary, the transaction will be in the following manner: the one who owns the money will deposit it in the bank in a savings account in exchange for a specific interest rate – where we previously indicated that the banks treat all their accounts as loans except Islamic banks – the bank will lend money to one of the clients in exchange for an interest rate that the customer pays the bank. Of course.
the interest rate that the borrower pays will be greater than the interest rates the depositor takes, and the bank will benefit from the difference between the two interest rates.
Types of banks interests
Banks Interests
There are two main types of banks interest, which are simple interest and compound interest.
1- Simple banks interests
Simple interest is also called fixed-rate interest, which is the interest that is calculated as a percentage of the main amount of the loan, whether it is a deposit or a loan.
Regardless of the period spent by the borrower without paying the amount of the debt or the period that the account holder holds with the money in the bank, the interest account will remain on the original amount only.
Also read: The 3 Main Points of Capitalism
2- Compound banks interests
The interest is calculated by adding the amount of the interest due to the main amount, that is, it is interest on funds previously acquired as interest. As the interest becomes part of the main amount. Therefore, compound interest is called “interest on interest”.
How to calculate the banks interest
How to Calculate the Banks Interests?
How are simple Banks Interests calculated?
Simple interest is calculated according to the following law:
Simple interest rate = amount deposited * bank interest rate * loan term
Example:
If Ali borrowed from the bank the amount of 10 thousand dollars for a period of three years, and with an interest rate of 5%, the interest rate according to the previous law is equal to:
Interest rate = 10000 * 5% * 3
Interest rate = 1500
That is, the total amount = 11500
i.e., Ali will pay the bank 11,500 which is the loan amount plus the interest rate.
How are the compound Banks Interests calculated?
Compound interest is calculated on the main amount, in addition to the amounts accumulated on it each year or at the end of each specific time period
Below we explain how to calculate compound interest:
Based on the previous example that Ali borrowed from the bank an amount of 10 thousand dollars for a period of 3 years and an interest rate of 5%, we will first calculate the amount of interest for each year, according to the following law:
Interest amount = loan amount * interest rate
Interest amount for the first year = 10000 * 0.05 = 500
Interest amount for the second year = (10000+ 500) * 0.05 = 525
Interest amount for the third year = (10500 + 525) * 0.05 = 551.25
The total compound interest can be calculated according to the following law:
A = P x (1 + r / n) n*t
These codes indicate:
A: the future amount after adding the compound interest to the amount.
P: The principal amount of the loan
r: compound interest rate (as a decimal number).
n: The number of times multiplied during the year.
t: number of years.
If we go back to the previous example where Ali borrowed $ 10,000 with an annual compound interest of 5%, we get only once a year, the total amount of compound interest can be calculated based on the law
Total compound interest = 10000 * (1 + 0.05/ 1) 3 * 1
Total compound interest = $ 11,576.25
With a simple comparison between the final product of the amount, from its calculation once with simple interest and once with compound interest, dear reader, you will notice the difference.
The above is about calculating simple and compound interest, that the bank can charge as a lender, and the customer can get charged as a deposit.
Also read: 8 things to know about Islamic economics
In conclusion, dear reader, it must be pointed out and emphasized that banks interests are usurious interests prohibited from dealing in the Islamic economic system and have negative effects on the economy as a whole, as it is a guaranteed return on the capital that does not participate in the investment risks, which puts all the investments risks burden on the investor, and guarantees the lender a money asset, plus interest on money.
This applies to all bank’s interests, whether simple or compound, except that the negative effects are greater and more severe if they are compound interest.
read also: How do mortgage interest rates work?
