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. Content presentation. Sources of Funds Shareholder fund Depositors fund Current account Saving account
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Chapter 5 :
Source of funds – Saving/Investments and the Underlying Shariah Concepts
Prepared by :
Mohammad Salleh Bin AbdSaha
Razizi bin Tarmuji
Sources of Funds
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).
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.
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.
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.
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.
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.
Muamalat Contract : Al-WadiahYadDhamanah (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.
Islamic banks mobilises its customer’ deposits in current accounts on the contract of al-wadiahyaddhamanah (guaranteed custody)
Basic Features and the Nature of Agreement between Banks and their Customers that forms the basis of Current Account :
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.
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.
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.
Definiton of al – 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.
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.
The entrepreneur is restricted in his activity in carrying out the mudaharabah project in term of business, method, time period or place.
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
Owner of capital
Profit or loss
Contract (offer and acceptance)
Sighah (ijab and qabul)
The contract dissolved :
Muamalat contract : Al – WadiahYadDhamanah
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-WadiahYadDhamanah.
Al-WadiahYadDhamanah 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.
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.
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).
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-WadiahYadDhamanah.
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:
balance for the month x Rate x 1/12
No. of days in the month
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.
The banks accepts deposits from its customers looking for investment accounts on the principle of al-Mudharabah.
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.
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.
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.
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
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
MuamalatContract:Mobilizes customers deposits from government or corporate customers under the contract of equity-financing 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.
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.
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.