In the name of God, the compassionate the merciful
The notion that Islamic banks strictly do not charge riba (interest/usury) in their dealings almost always mesmerizes the audience and triggers questions, especially from those who are hearing this for the first time. So, in Ghana, one of the most asked questions about Islamic banking and finance by traditional bank customers and others who want to know about the phenomenon is- “if Islamic banks don’t charge interest, how do they fund the operations of the bank and also make a profit to pay their employees?” Today’s write-up will insha Allah give us some insight into this particular often ask question. And Allah knows best.
Mobilization of funds from savings-surplus units in the economy is an important task of a financial intermediary. Islamic finance institutions aim at achieving this goal by using a number of financial instruments that match the needs of the savings-surplus units (tailor-made). Islamic finance institutions have a unique concern for mobilizing funds based on Shari’ah-compliant principles. In view of the above, Islamic fund mobilization instruments allow no trade-off in the matter of Shari’ah compliance.
Funds mobilized by banks can be categorized into deposits and other sources. The deposits are further divided into Mudarabah Deposits and non-mudarabah deposits. Generally, Islamic banks mobilize funds using the following contracts:
Qardul Hasan (Interest-fee Loan)
Wadiah yad amanah (Safe custody with guarantee)
Mudarabah (profit sharing)
Wakala (agency) and so on.
Deposits mobilized are similar in form to conventional bank deposits. They mobilize current account deposits, savings deposits, term deposits, and Investment deposits.
Current Account Deposits
All Islamic banks operate current accounts for the safe custody of deposits and for the convenience of customers. Under the current account, there are two dominant contracts based on which they are mobilized; Wadiah yad amanah (safe custody with a guarantee), Qardul Hasan (Interest-free loan)
Wadiah yad amanah (Safe custody with guaranty/trust). This is a cash deposit received by the bank on trust. The bank however guarantees the safety of the deposits. The bank in turn seeks permission of depositors to use the deposits at its own risk and responsibility with respect to profit or loss.
Qard Hasan (interest-free loan), in fact, is the easiest and free source of funding for the Islamic bank because money deposited into these accounts is considered an interest-free loan from the depositor to the bank. Besides, the bank is free to utilize these funds at its own risk without any return to the depositor and without needing any authorization because, in the case of qard hasan, the debtor does not need the specific permission of the creditor to use the borrowed funds. The debtor owes the creditor only the principal amount borrowed. This condition is fulfilled as the amount deposited in these accounts is fully underwritten by the bank.
Savings Account Deposits
Islamic banks operate savings deposit based on three contracts Wadiah yad amanah (safe custody with guaranty), Qardul Hasan (Interest-free loan), and Mudarabah (trustee partnership)
Our earlier discussion on the current account using safe custody with guaranty and Interest-free loans as underlying contracts is also applicable in the case of a savings account. Mudarabah (Trustee Partnership) is a form of investment account where the depositor who is the rabbul mal (wealth owner) deposits his money into the bank. The bank acts as the mudarib (fund manager) that will subsequently use the funds for investment purposes. The bank makes an offer to the customer on the ratio of profit sharing between the two parties which will be mutually agreed by them. In Mudarabah, the capital of the depositor can not be guaranteed since any financial loss will be borne entirely by the depositor unless there is proven negligence or breach of contract by the fund manager.
Wakala restricted investment deposit
Wakalah restricted investment deposit is an agency concept where the depositor (Muwakkil) will appoint the bank as his agent (Wakil) to invest his funds in a Shariah-compliant transaction. In Wakala restricted investment deposit, funds can only be invested within the limits of the restricted fund scheme. Normally, the investment parameter and type of investments to be made by the scheme are defined by the customers (holders of the account) to the bank.
Wakala unrestricted term deposit
This is another source of funding for Islamic banks. It is an unrestricted term deposit. It shares the same characteristics as wakala restricted investment deposit except that the bank will invest the funds in its general corporate purposes without any restrictions from the customers. The bank will notify the depositor of the profit expected to be generated upon the placement of the funds. However, any profit exceeding the quoted expected profit will be retained as an incentive to the wakil (The bank). This is based on the principle of tanazul where certain rights of claim are waived in favour of another party in a contract. The bank is entitled to draw a commission or agency fee from the incentive obtained. The muwakkil (depositor) shall bear all the risks associated with the transaction except where there is misconduct or negligence on the side of the wakil (bank).
Mudarabah General Investment Deposit
In addition, Mudarabah general deposit can also be mentioned as a very important source of funding for Islamic banks. It is a popular deposit product of almost all 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 indifferent and continuous financing operations of the bank. Profits are calculated and distributed at the end of the accounting period, which is either three months, six months, or one year.
These and other sources of funding for Islamic banks around the world, equip the banks to withstand liquidity troubles both short-term and long-term. It also enables them to weather other unexpected economic storms in the financial system. through these instruments of mobilizing funds, Islamic banks are enabled to stimulate economic activities and employment which in turn stabilizes economic growth with an excellent distribution to all participants in the financial system. and Allah knows best! May we all benefit from this piece, Ameen summa ameen.
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana.
Email: yahaya0246873726@gmail.com
Facebook account: facebook.om/Yahaya.iliasu.94
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