Personal Finance Term
Profit Rate (Islamic Banking)
The return paid or charged on an Islamic banking product, used instead of interest because charging interest (riba) is not permitted under Shariah. It is the Islamic-finance equivalent of an interest rate, but built on a Shariah-compliant contract rather than a loan with interest.
In Malaysian Islamic banking, a profit rate arises from contracts where the bank and customer share in a real transaction, such as the bank buying an asset and selling it to you at a marked-up price, or a partnership where returns are shared. On a savings or investment account this shows up as a profit rate you earn; on Islamic financing it shows up as a profit rate you pay, which functions much like the interest on a conventional loan but is structured differently.
For consumers, the practical effect is that you can compare an Islamic product's profit rate against a conventional interest rate to see which is cheaper or pays more, while knowing the Islamic version is structured to be Shariah-compliant. Some Islamic financing also caps the maximum profit (a ceiling rate) and may behave differently from conventional loans when you settle early, so it is worth reading how profit is calculated and what happens on early settlement before signing.