ISLAMIC BANKING
(ISB 300)
Chapter 5 :
Source of funds – Saving/Investments
and the Underlying Shariah Concepts
Prepared by :
Mohammad Salleh Bin Abd Saha
Razizi bin Tarmuji
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Content presentation
Sources of Funds
1. Shareholder fund
2. Depositors fund
a) Current account
b) Saving account
c) General investment account
d) Specific investments account
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Shareholders fund / equity
 Contract used : Musyarakah (joint – venture
profit sharing).
 Through shares :
 Ordinary Shares quoted @ unquoted
 Special share (Minister of Finance)
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Depositor fund
Pure profit –
Sharing Model
Two
Window
Model
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Deposit
Management in
Theory of
Islamic Banking
Profit
Sharing –
Model
Pure profit – Sharing Model :
 Model was the first to evolve
 This model enjoys much support amongst most of
islamic economists.
 It assigns a significance role to profit sharing
(mudarabah) on the both side of balance sheet, the
asset and liability side.
 Also know as the Two-Tier Mudarabah Model.
 Concept based on two level of Mudarabah :
 The first tier
 The second tier
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The first tier : Between bank and depositor
 Put their money in the bank’s investment
account and share profits with it.
 Depositors are considered to be provider of
the capital (rabb al mal).
 The bank functions as a working patner or
manager of funds (mudarib or amil).
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The second tier : Between the bank and the entrepreneurs.
 Seek finance from the bank on the condition
that profits accruing from their business shall
be shared between them and the bank in a
mutually agreed propotion.
 But, the loss shall be borne only by the
financier.
 Bank functions as the provider of capital.
 The entrepreneur is the manager of funds.
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Two-tier contract of Mudarabah
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Two Window Model
 The liability side of the bank’s activities is divided into 2
window :
 The bank is required to pay the funds held in the current
account on demand, it is subjected to a 100% reserve
requirement .
 The islamic precept – that funds of demand deposits are a
trust (amanah) that is held by the bank on behalf of the
depositors.
 The banks neither have a right to use these funds to make
profit nor it should be used for the purpose of money
creation through fractional reserve system.
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Cont TWM…
 Funds held in the investment accounts shall
not be subjected to any reserve requirement.
 It is argued by the economists who have
advocated this model that investment
accounts of islamic banks are not similar to
time deposits of conventional banks, which
are used for credit creation.
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Profit Sharing – Cost Plus Model
 A profit sharing (mudarabah) on the liability
side of the balance sheet and cost-plus
technique of financing (murabahah) on the
asset side.
 Other islamic ally permissible technique of
finance such as mudarabah, musyarakah,
ijarah, etc may also be used on the assets side.
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Customers Deposits in Current
Accounts
 Definition : An account into which customer
can deposit money and effect payments by
the drawing of cheques.
 The bank accepts its customer’s deposit and
undertake to honor any demand (invariably in
the form of cheque) made by customer,
provided there is available funds in the
account.
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Currents Accounts based on AlWadiah
 Muamalat Contract : Al-Wadiah Yad Dhamanah (a
combination of al-wadiah (custody) and al-dhamanah
(guarantee).
 A trust arrangement and involves the depositing
(movable) or monetary deposits with another person, for
safe-keeping.
 The depository acts as a trustee or guarantor, and
guarantees repayment of the deposits on demand.
 Wadiah does not provide the depositors with the right to
receive a share of the profits.
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The pillars of Al – Wadiah Contract
1. Al – Muwaddi’
 Depositor, Owner of the property
2. Al – Wadi’
 Depositee, Custodian of the property
3. Al-Wadi'ah
 Property for safe keeping
4. Sighah
 Offer (Ijab)
 Acceptance (Qabul)
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Condition of Al - Wadiah
Essentials
Conditions
Owner of good
•
•
•
•
Custodian of good
• Same with above
• Custodian is not allowed to promise
any rewards or return
Goods under custody
• Manageable by custodian
• Storable
Contract (offer and acceptance)
• In definite and decisive language
• Acceptance must be consistent with
offer
• Offer and acceptance made at same
time
• Both parties have the right to
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Capable
Sound mind
Intelligent
BUT not necessarily attained age of
puberty
• Individual or institution
Type of wadiah
 Wadi’ah Yadd al-Amanah
 Safe custody based on trust
 Wadi’ah Yadd al-Dhamanah
 Guaranteed safe custody
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Wadiah Yad Amanah
 Generally, wadi’ah is based on amanah (trust)
 It is charitable and divinely rewarded.
 Important features of wadi’ah yadd al-amanah:
 The custodian should keep the deposits as if he is keeping and taking
care of his own property.
 The custodian should not responsible for any damage of the property so
far it has not resulted from his negligence
 The custodian is not entitled to any profits gained from the contract. Any
benefits accrued from the deposit belong to the owner.
 The custodian should not utilize or take benefit of the deposit.
 The custodian should not transfer the deposit in the hands of others
without permission of the depositor.
 The custodian should not take the deposit in journey unless permission is
given.
 The custodian should return the deposit back to the owner upon
request.
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Wadiah Yadd Damanah
 This type of Wadi'ah is a combination of safekeeping (Wadi'ah) and
guarantee (dhaman).
 The Wadi'ah is based on guarantee whereby the custodian
guarantees the refund of the property kept with him and ensures to
refund the item upon request.
 This type of wadia’ah facilitates wider application in the Islamic
banking system.
 Important features of wadi’ah yadd al-dhamanah:
 The custodian is entitled to use the deposited property for trading or any
purposes.
 The custodian has a right to any income derived from the utilization of
the deposited item and liable for any damages or loss
 The custodian owns the profit and under his discretion to give some
portion of it as a gift (hibah) to the depositor. The gift cannot be in the
form of a pre-agreed agreement.
 The custodian must return the deposited property to the owner at any
time upon the request of the depositor.
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AL-WADI'AH: ACT OF TRUST BECOME
ACT OF GUARANTEE
 Besides the cases of ignorance, contract of Wadi'ah could be
transformed from trust (amanah) into guarantee (dhamanah) in
the following cases if the depositee:
1.
2.
3.
4.
5.
6.
7.
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Ignores the protection and safe keeping of the deposited
property
Deposits the property with somebody else, or not somebody
who normally takes care of the depositee’s property.
Benefits from the usage of the deposited property
Travels with the deposited property.
Refuses to return the deposited property to the depositor or
withholds it even though he/she is capable of returning it.
Mixes the deposited property with other properties, which
could not be recognized and distinguished from each other.
Commits certain conducts which are against the
predetermined condition of the depositor.
Customer’s deposits in Current
Accounts (al-wadiah yad dhamanah)
 Islamic banks mobilises its customer’ deposits
in current accounts on the contract of alwadiah yad dhamanah (guaranteed custody)
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Details or modes of operation
1
The bank accepts deposits from its customers looking for custody of
their funds and absolute convenience in their use in the form of CA on
the principle of al-wadiah yad dhamanah.
2
The bank requests permission from such customers to make use of
their funds so long as these funds remain with the bank.
3
The customers may withdraw a part or the whole of their balances at
any time they so desire, and the bank guarantees the refund of such
balances.
4 All the profits generated by the bank from the use of such funds
belong to the bank.
5
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The bank provides its customers with cheque books and other usual
services connected with the CA.
Cont…. Current Accounts
Basic Features and the Nature of Agreement between
Banks and their Customers that forms the basis of
Current Account :
 The banks accepts deposits from its customers looking
for safe custody of their funds and absolute
convenience in their use in the form of current accounts
on the principle of al-wadiah yad dhamanah.
 The banks requests permission from such customers to
make use their funds so long as these funds remain with
the bank.
 The customer may withdraw a part or the whole of their
balances at any time they so desire, and the bank
guarantee the refund of such balances.
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Cont…. Current Accounts
 All the profits generated by the bank from use of such
funds belongs to the bank.
 The bank may, at their absolute discretion give
reward to accounts maintained by Federal and State.
 Government and Statutory Authorities provided they
maintain a minimum daily balance of not less than RM
25,000.
 The bank provides its customers with cheque books
and other usual services connected with current
accounts.
 Any losses generated from the investment will be
borne by the bank.
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Characteristics and Salient Features
 Current accounts mostly govern what is commonly
known as call deposits or demand deposits.
 These accounts are opened by both individuals and
business companies.
 These accounts may be opened in local or foreign
currency if the bank is allowed to operate in the
foreign exchange market.
 The banks guarantees full return of these deposits on
demand and the depositors are not paid any share of
profit or a return in any form.
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Cont…. Characteristics and Salient
Features
 The depositors are not subjected to any
conditions regarding to deposits or
withdrawals.
 Any amount may be deposited into account
any time and may be withdrawn any time.
 Some banks may insist to maintain a minimum
balance in the account to keep it operational.
 The banks usually provide checks writing
facility to account holders.
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Dominant Expressions of the Idea of
Loans that Underline Current
Accounts in the Islamic Banks :
(i) To treat demand deposits as an Amanah (Trust) /
Wadiah :
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
Among islamic banks which apply the principle
of wadiah are banks in Bangladesh, jordan and
Malaysia.

In Malaysia, however instead of wadiah, the
principle is called wadiah yad dhamanah or
guarantees custody.
Cont…. Current Accounts
(i) To treat demand deposits as Qardh Hassan
(an interest free loan) :
 Among islamic banks which apply the
principle of qardh hassan are banks in
Iran, Dubai islamic bank of the United arab
Emirates and the Kuwait Finance House of
Kuwait.
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Differences between wadiah account
from conventional savings account
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Current Accounts Based on AlMudharabah
Definiton of al – Mudharabah :
 Literally : Profit or increase
 Technically : can be defining as a joint-venture
profit sharing contract whereby one party is the
provider of capital while the other is the
entrepreneur (Ahmad,2006)
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Characteristics of Mudharabah
 The profit will be shared between parties
whom involved in the contract according to
the terms of their agreement.
 The losses will be borne by the capital
provider who is the financier of the project.
 The entrepreneur suffers of their fruitless
effort.
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Categories of
Mudharabah
Categories of Mudharabah
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Al-Mudharabah alMutlaqah
(Unrestricted
mandate)
Al-Mudharabah alMuqayyadah(restrict
ed mandate)
Al-Mudharabah Al-Mutlaqah
(unrestricted mandate)
 Under unrestricted investment fund,
entrepreneur (bank) has got the authority by
the capital provider (depositor) to invest the
funds in any manner which they think
appropriate.
 Entrepreneur (bank) is free to invest on how,
where and for what purposes the funds
should be invested. They (depositor) will be
no restriction to entrepreneur.
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Al-Mudharabah Al-Muqayyadah
(restricted mandate)
 The entrepreneur is restricted in his activity in
carrying out the mudaharabah project in term
of business, method, time period or place.
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Pillars of Mudharabah






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Sahibul Mal : owner of capital, fund provider
Mudharib : entrepreneur
Ra’sul Mal : capital
Al-Amar or Mashru’ : business ventures or project
Ribh
: predetermined share of profit
Sighah
: offer and acceptance
Condition for pillars of mudharabah







Owner of capital
Entrepreneur
Capital
Project
Profit or loss
Contract (offer and acceptance)
Sighah (ijab and qabul)
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Termination of Mudharabah
The contract dissolved :




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With the completion of the venture
Or the expiry of the specific time period
Or the death of either rab-al-mal or the mudharib
Or the serving of notice by either of the two partners of
his intention to dissolve the mudharabah.
Al-mudharabah in Current Account
 Contract made between :
 Depositor (provider of capital) ---------- Bank
(entrepreneur)
The amount deposited for a stipulated period by the
depositor will be used by the bank for investment
purposes according to the al-mudharabah principle.
The bank becomes wholly responsible and liable in the
management and investment the deposits in halal
business ventures.
Profits gained will be divided and distributed
accordingly, based on margins agreed upon earlier.
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Customers deposits in Saving
Account
Muamalat contract : Al – Wadiah Yad Dhamanah
 Mobilizes customers’ deposits under the cintract of
al-wadiah yad dhamanah its modification on the
payment of profit at the absolute discretion of the
bank.
 This is a trust arrangement and involves the
depositing (movable) or monetary deposits with
another person, for safe-keeping.
 The depository acts as a trustee or guarantor, and
guarantees repayment of the deposits on demand.
 Wadiah does not provide the depositors with the
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right to receive a share of the profit.
Details or modes of operation
1
The bank accepts deposits from its customers looking for
safe custody of their funds and a degree of convenience in
their use together with the possibility of some profits in the
form SA on the principle of al-wadiah yad dhamanah.
2
The bank requests permission from such customers to make
use of their funds so long as these funds remain with the
bank .
3
The customers may withdraw a part of the whole of their
balances at any time they so desire, and the bank guarantees
the refund of such balances.
4
The bank provides its customers with saving passbook books
and other usual services connected with the SA.
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Basic Features And Nature Of
Agreement
 The bank accepts deposits from its customers looking for
save custody of their funds and a degree of convenience in
their use together with the posibility of some profits in the
form of savings accounts on the principle Al-Wadiah Yad
Dhamanah.
 Al-Wadiah Yad Dhamanah is a trust arrangement and
involves the depositings of goods (movable) or monetory
deposits with another person, for safe-keeping.
 As this is trust, the depositary acts as a trustee or
guarantor, and guarantees repayment or the deposits on
demand.
 Wadiah does not provide the depositor with the right to
receive a share of the profits.
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 The bank request permission from such customers to make
use of their funds so long as these funds remain with the
bank.
 The customers may withdraw a part or the whole of their
balances at any time they so desire, and the bank guarantees
the refund of such balances.
 All the profits generated by the bank from the use of such
funds belong the bank.
 However, in contrast with current accounts, the bank may at
its absolute discretion rewards the customers by returning a
portion of the profits generated from the use of their funds
from time to time.
 The bank provides its customers with savings passbook and
other usual services connected with savings accounts.
 The bank also provides the ATM services for these accounts.
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Salient Features/ Characteristics
 A savings account is a type of deposit account. It
characterized by a passbook.
 Savings account are primarily intended for small
savers.
 These savers formed a stable deposit base for the
bank.
 The 3 shariah principles used by islamic banks for
savings account are: Qard Hassan (used by banks in
Iran), Wadiah (used by bank in Malaysia, Kuwait
Finance House of Kuwait and Faisal Islamic Bank of
Bahrain) and Mudharabah (used by Dubai Islamic
Bank and Islami Bank Bangladesh).
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 The banks accepts deposits from its
customers looking for safe custody of their
funds and a degree of convenience in their
use together with the posibility of some
profits in the form of savings accounts on the
principle of al-Wadiah Yad Dhamanah.
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Discretionary Rewards of Saving
Account:
 Under the principle of al-Wadiah, the bank is
not obligated in any way to give returns on
depositors.
 However, the banks at its absolute discretion,
may reward its customer a certain amount of
return as deemed fit.
 Calculation of profit is a follows:
Cumulative daily
balance for the month
x Rate x 1/12
No. of days in the month
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Customers deposits in General
Investment Account
 Muamalat Contract: al-Mudharabah (trustee
profit- sharing). This account open to all its
customers.
 The bank acts as ‘entrepreneur’ and the
customers as the ‘ provider of capital’.
 Both agree on show to distribute profits (if
any) and in the event of loss, the customer
bears all the loss.
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Details or modes of operation
1
The bank accepts deposits from its customers looking for
investment opportunities for their funds in the form GIA on
the principle of al-Mudharabah.
This investment is utilized as business capital by the bank. In
this contract you will have no authority to interfere with the
management of your investment.
Conversely, the bank will has the right to manage the
investments as it deems fit by investing into businesses that
are both Halal (permissible) and profitable.
2
The deposits will have to be for a specified period. (Period of
investments may be between 1, 3, 6, 9, 12, 15, 24, 36, 48, or 60
months (varies from bank to bank).
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3
In basic Syariah relationship, the bank acts in this case as the
‘entrepreneur’ and the customers as the ‘provider of
capital’ and both will agree among others on how to
distribute the profits, if any, generated by the bank from the
investment of the funds. For e.g 70:30, 70% for for the
customer and 30% for the bank.
4
In the event of loss in the investment, the customer bears
all the loss.
5
The customer does not participate in the management of
the investment of the funds.
Modes of investment of the funds and the ratios of profit
decided by the bank for all customers.
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Characteristics of an Islamic General
Investment Accounts
 The banks accepts deposits from its customers
looking for investment accounts on the principle of alMudharabah.
 The deposit will have to be for a specified period.
 In basic Syariah relationship, the banks acts in the
case as the entrepreneur and the customers as the
will provider of capital and both will agree among
others on how to distribute the profits if any,
generated by the bank from the investments of the
funds.
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 At present, the bank could offer the
distribution in the ratio of 70 percent to the
customers and 30 percent to the bank. This
offer of the ratio may varied from time to
time.
 In even of a loss, the customer bears all the
loss.
 The customer does not participate in the
management of the investment of the funds.
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Profit on Investment Account
Distribution of Profit:
 Bank in an agree predetermined ratio say for
example 70:30 (customer:bank).
 This agreed distribution ratio must be stated
in the contract, i.e the investment certificate.
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 Calculation of Profit:
 When an investment certificate is presented
on or after the maturity date of the
investment deposit, profit due will be
calculated.
 The formula can be as follows:
 Profit Amount: Capital x Tenor x Rate
12
100
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Example:
Principal x Profit rate x (Days in Month divide by No. of Days
in Year
50,000 x 2.50% x 28/365 = RM95.89 for the month of March '10
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Customers Deposits in Special
Investment Accounts
 Muamalat Contract:Mobilizes customers
deposits from government or corporate
customers under the contract of equityfinancing i:e ai-mudhrabah (trustee profit
sharing).
 The bank acts as the ‘entrepreneur’ and
the customers as the ‘provider of capital’.
 Modes of investment of the funds and the
ratios of profit may usually be individually
negotiated.
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 An Al-Mudharabah SIA operates under the
same basic principles as an Al-Mudharabah
General Investment Account (GIA).
 However, the SIA is more in tune with the
requirements of the client may negotiate the
tenure of the investment as well as the the
profit sharing ratio.
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Bank Muamalat
 It is a short-term placement with the bank based
on the Syariah Principle of Al-Mudharabah, or
profit sharing.
 Suitable for investors who are seeking the and
opportunity and flexibility to invest their cash
surplus. The ratio of profit distribution and mode
of investment are negotiable.
 The tenors may vary from overnight to 1 year,
 Minimum deposit amount is RM 100 000.00.
 No penalty for early upliftment.
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Differences between Mudharabah and
conventional Fixed Deposit
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