IB1005
DEPOSITS AND FINANCING PRACTICES
OF ISLAMIC FINANCIAL INSTITUTIONS
CHAPTER 2 : DEPOSITS 1
COMPILED BY
HAMDAN HJ IDRIS, BSc Econs, MBA (Islamic Banking & Finance)
Certified Professional Trainer (MIM)
Industry Expert
INCEIF
PRESENTED BY
HJ MAHMUD HJ BUNTAT, MBA (AUOL, UK), DBM (Swansea Inst., UK), CIL (UIA)
Part-time Lecturer (INCEIF)
Former Head of Islamic Banking Division, OCBC Bank (Malaysia) Bhd
Chapter 2: Deposits 1
Rate of Return Framework
 In Malaysia, BNM introduced a framework for the
rate of return (ROR) to standardize the
methodology in the calculation of the various
rates of return to depositors, in order to generate
a mechanism for the distribution of profits
between the bank and its customers. Islamic
Financial System, 2003 (pp.191-2):
The objectives of the framework included;

Setting a minimum standard in calculating the
rates of the return.

Provide a standardized reference for IFI in
deriving RORs.

Provide BNM with ability
performance of the IFIs.
to
measure
the

The objectives aim to assess whether the RORs
accurately reflect the performance of the IFIs;
permit BNM regulation and supervision in
determining appropriate prudence and fairness in
the distribution of profits to depositors.
•
Standardizing a ROR mechanism provides
transparency in determining distributable funds,
including the disclosure of income and expense
items.

The introduction of the framework supports the
application of the mudharabah (profit-sharing)
contract in IFI deposit activities.

Conventional banking is based on the lenderborrower relationship, whereas the mudharabah
contract is based on the investor-entrepreneur
relationship whereby the depositor assumes the
role of capital provider and the IFI assumes the
role of entrepreneur.

Any profit generated from the invested capital is
shared, whereas any loss is borne by the
depositor.
Deposits
The public places their money in bank deposits
for two main purposes:
The transaction purpose and the investment.

To fulfill transactional purpose, Islamic banks
offer al-wadiah yad damanah deposit means
safe-keeping (wadiah) with guarantee (daman).

In return for the safe-keeping and deposit
protection services depositors allow the bank to
use their money in its financing operations.

But the bank has no legal obligation to pay
depositors a fixed monetary return but may do
so only on voluntary ground.

There is no mention of any form of return in the
contract.

Prerogative to do so in the form of gifts (hibah).

Providing hibah is necessary to motivate
depositors to place their savings in Islamic
banks. According to the Mejelle, hibah is giving
the ownership of property to another without an
equivalent counter value.

Otherwise they will lose deposits to banks that
pay interest.

The al-wadiah yad dhamanh contract says that
the bank will provide deposits protection and
honor all withdrawals on call provided that it is
allowed to use deposits to generate earnings.
•
Giving hibah on al-wadiah dhamanah deposits is
necessary because there is no free lunch in
business

an Islamic bank cannot promise to give
depositors a fixed contractual income as doing so
runs against the principle al-wadiah yad
dhamanah itself.
Workflow of
Wadiah Savings Account
Wadiah concept
(Guaranteed safe custody)
Customer
(Investor)
Guardian
(2)
Profits
(1) Invest
Profit at the sole
discretion of the Bank
Financing
Investments
Projects
•
If a bank wishes to give away hibahs, it must be
done voluntarily when it finds fitting to do so,
especially when business is bullish.
 Have
a good day 
 May God bless you
 Thank you and Wassalam