Principles of Islamic banking and finance/PIBF202/Islamic banking products/Deposit based products

Deposit is a common term known to banking and finance industry which is backed by the motive of safekeeping. The Shari`ah also deals with the perception of deposit under the amanah (or wadi`ah) framework. However, bank deposits cannot be put into this category, since banks invite and seek deposits to serve their own interests. The banks' intention while accepting money as deposits is not the safekeeping but to return it in full on demand after its utilization. The general consensus, therefore, is that where the deposit is a sum of money or something, which is consumable through use, shall be deemed to be a loan if the depository is permitted to utilize it. Conventional banks broadly invite: current account deposits, time deposits, and savings deposits. To the extent that these do not involve interest payments, such as the current account deposits, these may be Islamically acceptable. On the contrary, since the latter involve interest payments are not permissible in Shari`ah.

Unlike savings from a conventional banking perspective, savings from an Islamic banking point of view are in some ways different. While needs related to returns, liquidity, maturity, safety, stability and the like are equally important for a customer in terms of savings in Islamic banks the saver has a unique concern and that is Shariah compliance. And while there is possibility of a trade-off between the other concerns, Islamic deposit products allow no trade-off in the matter of Shari`ah-compliance. Islamic banks are engaged in mobilizing savings from this unique group of savers by offering Shari`ah compliant products that also vary with respect to other dimensions of return, risk, liquidity, maturity, safety, stability and the like.

Classification of Deposit Products in Islamic Banks

Generally the Islamic banks have three kinds of deposit products for account holders: current, savings and investment. Current or demand deposit is a deposit that can be withdrawn at any time using cheque, other payment instruction, or by overbooking. Current deposit products are in effect the same as in all conventional banks where the deposits are guaranteed.

Saving deposit is a deposit that can be withdrawn based on specified requirements agreed in advance, but cannot be withdrawn using cheque and or other similar instruments. It has different mechanisms. In some banks, the depositors allow the banks to use their money but they obtain a guarantee of getting the full amount back from the bank. Banks adopt several methods of suggesting their clients to deposit with them, but no profit is promised. In others, savings accounts are treated as investment accounts but with less stringent conditions as to withdrawals and minimum balance. Capital is not guaranteed but the banks take care to invest money from such accounts in relatively risk-free short-term projects. As such lower profit rates are expected and that too only on a portion of the average minimum balance on the ground that a high level of reserves needs to be kept at all times to meet withdrawal demands.

Investment or time deposit is a deposit of funds that may only be withdrawn after a specified term based on the agreement between the customer and the bank. Here deposits are accepted for a fixed or unlimited period of time and the investors agree in advance to share the profit (or loss) in a given proportion with the bank. In investment deposits capital is not guaranteed.

Following are the features of each deposit product mentioned above.

Feature of Current or Demand Deposit

Current or Demand deposit based on Wadiah contract

• Bank shall act as the party receiving the funds and customer shall acts as the party placing the funds;

• Bank may not make any promise of return or bonus to the customer;

• Bank may charge customer administration fee in the form of expenses directly related to the account management fee such as cheque book printing expenses, stamp duty, printing of transaction report and balance statement, opening and closing of account;

• Bank shall guarantee the return of funds to the customer; and

• The fund may be withdrawn by customer at any time.

Current or Demand deposit based on mudarabah contract

• Bank shall act as the fund manager (mudarib) and customer shall act as the fund owner (rabb-ul-mal);

• Profit sharing method shall be defined in accordance with the ratio agreed in advance;

• Bank may charge customer administration fee in the form of expenses directly related to the account management fee such as cheque book printing expenses, stamp duty, printing of transaction report and balance statement, opening and closing of account;

and

• Bank is not permitted to reduce the ratio of customer’s profit without any prior approval from the customer.

Feature of Saving Deposit

Saving deposit based on Wadiah contract

• Bank shall act as the party receiving the funds and customer shall acts as the party placing the funds;

• Bank may not make any promise of return or bonus to the customer;

• Bank may charge customer administration fee in the form of expenses directly related to the account management fee such as chequebook printing expenses, stamp duty, printing of transaction report and balance statement, opening and closing of account;

• Bank shall guarantee the return of funds to the customer; and

• The fund may be withdrawn by customer at any time.

Saving deposit based on mudarabah contract

• Bank shall act as the fund manager (mudarib) and customer shall act as the fund owner (shahibul maal);

• Profit sharing method shall be defined in accordance with the ratio agreed in advance;

• Fund withdrawal by customer may only be conducted based on the agreed term;

• Bank may charge customer administration fee in the form of expenses directly related to the account management fee such as cheque book printing expenses, stamp duty, printing of transaction report and balance statement, opening and closing of account; and

• Bank is not permitted to reduce the ratio of customer’s profit without any prior approval from the customer.

Feature of Investment or Time Deposit

• Bank shall act as the fund manager (mudarib) and customer shall act as the fund owner (rabb-ul-mal);

• Fund management by the Bank may be conducted with the restrictions defined by fund owner (mudharaba muqayyada) or conducted without any restriction from the fund owner (mudharaba mutlaqa);

• Restrictions defined by customer should be clearly specified in mudarabah Muqayyada agreement;

• Profit sharing method shall be defined in accordance with the ratio agreed in advance;

• Fund withdrawal by customer may only be conducted based on the agreed term;

• Bank may charge customer administration fee in the form of expenses directly related to the account management fee such as cheque book printing expenses, stamp duty, printing of transaction report and balance statement, opening and closing of account; and

• Bank is not permitted to reduce the ratio of customer’s profit without any prior approval from the customer.

Under the mechanism of current or demand deposit mention above these deposits, according to another view, is treated as qard or compassionate loan by the depositor. Accordingly, the bank operates "qard hasan current account". As in above, the bank is free to utilize these funds at its own risk. The depositor in its role as the lender is not entitled to any return as the latter would constitute riba. In fact, any kind of benefit passed on to the depositor that is a part of the agreement, is deemed to be riba. The qard hasan model is less popular than the wadiah model among bankers for the simple reason that marketing considerations demand providing additional benefits to the depositor. Under qard hasan framework, benefits to a lender (the depositor in this case) are rightly frowned upon as being against the spirit of this mechanism.

In addition, debit and charge card also fall within the category of current deposit products. Based on such current account deposits, which are essentially free of risk and returns for the depositors, the Islamic alternative to a credit card has been designed. While several attempts have been made to design an Islamic credit card, none of these is free from controversy. These cards make use of mechanisms, such as, bai-al-inah and tawarruq that do not appear to be fully Shari`ah compliant. According to one view, the only Islamic alternative to a credit card is a debit card or a charge card that is essentially a mechanism of withdrawal of one’s own funds deposited with an Islamic bank. These debit cards and charge cards cater to the fundamental need behind possession of a credit card, i.e. convenience by doing away with the need to carry cash to the point of purchase. Another reason behind possession of a credit card is simply the availability of credit that enables one to purchase beyond one’s means (buy now, pay later). While a debit or charge cards does not take care of this need, it perhaps serves as a tool of discipline in personal expenditure. Credit card, according to this view encourages wasteful consumption that does not fall within the ambit of desirable Islamic economic behavior.

Investment or time deposits can also be put under the following three categories.

General Investment Deposits

This is a popular deposit product of Islamic banks under which an investment pool is established. The pool includes investment deposits of different maturities. The funds are not tied to any specific investment project but are utilized in different and continuous financing operations of the bank. Profits are calculated and distributed at the end of the accounting period, which is three months, six months or one year.

Special Investment Deposit

This deposit account is similar in all respects to General Investment Deposit except that the depositor should meet the required minimum to invest in this product. For instance, the bank may selectively accept deposits from the government and / or the corporate customer. The modes of investment of the funds and the ratio of profit distribution may usually be individually negotiated. The product provides the bank with specific authorization to invest in a particular project or trade and the profits of this particular project only are distributed between the bank and its customers according to mutually agreed terms and conditions.

Limited and Unlimited Period Investment Deposits

As the name suggests, investment deposits under the former are accepted for a specified period, which is mutually determined by the depositor and the bank. The contract terminates at the end of the specified period but profits are calculated and distributed at the end of the accounting period. In case of the latter, the period is not specified. Deposits are automatically renewable unless a notice of three months is given to terminate the contract. No withdrawals or further deposits are permitted in this kind of contract, but customers are allowed to open more than one account. The profits are calculated and distributed at the end of the accounting period.