Resource & Deposit Mobilization.pdf

7/28/2019 Resource & Deposit Mobilization.pdf

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Muhammad Saarim GhaziAssociate Fellow IIBI - London

RESOURCE &

DEPOSITMOBILIZATIONBYISLAMIC BANKS

THE LIABILITYSIDE

Muhammad Saarim Ghazi


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AGENDA

Features of contracts used in deposit management

Shariah position of various deposits

Profit mechanics

Special considerations & recommendations for Islamic BankDetermining balances for profit entitlement

Summary: Profit/Loss Allocation mechanism


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Islamic banks may raise funds generally based on anyof the following five arrangements.

Amanah or Wadiah (Trust)

Qard-e-Hasan

Mudaraba (P/L Sharing)

Musharaka (P/L Sharing)

Wakalatul Istismar (Funds Mobilized on anInvestment Agency)


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AMANAHOR WADIAH (TRUST)

Amanah refers to deposit held in trust.

Amanah can not be used by the holder

If the bank have any explicit or implicit permission then these arecovered in Wadiah

Amanah entails absence of liability for loss except in breach ofduty

The depositors will not be entitled to any profits

The depositors can withdraw his deposits at any time withoutgiving notice

Characteristics


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QARD-E-HASAN

The relationship between depositor & the bank is thatof lender & borrower

Qard-e-Hasan can be used by the holder

Qard-e-Hasan does not entail absence of liability forloss; bank guarantees refund of entire amount even incase of loss(OIC Fiqh AcademyJeddah)

The depositors will not be entitled to any profit

The depositors can withdraw his deposits at any time

without giving notice

Characteristics


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It is a partnership agreement in which one partyinvests while the other manage the business

Depositors are Rabb-ul-Maal& the Bank is Mudarib

Profits are shared between depositors & bankaccording to a pre-agreed ratio

Losses are borne by Investors (Rabb-ul-Maal) on apro-rata basis while bank goes un-rewarded for all itsefforts

Mudaraba (P/L Sharing)


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It is a partnership agreement in which a joint pool of funds is formed,in which all partners contribute capital as well as efforts.

Bank & depositors are partners.

Profits are shared between partners on pre-agreed ratio.

Losses are shared according to ratio of investment

If bank invests its own money than bank will be investor just likeother depositors.

All participants in the investment pool will be partners amongthemselves & bank will also serve as the fund manager (Mudarib).

Relationship within the pool would be governed by the rules of

Musharaka & overall relationship between bank & the depositorsremain as Mudarib and Rabb-al-Maal.

Mudarabah + Musharaka (P/L Sharing)


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Depositors Investment $2000

Bank Investment $1000

Agreed Profit Ratio 50:50

Profit $300

Bank Share $200(1/3rd on its own +$100($200*50%))

Depositors Share $100

Example; Profit distribution in above case


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The model is used mostly for fund management by

investment banks or by commercial banks

Investors appoint bank as Wakeel (agent) to act on theirbehalf

The bank as a Wakeel would charge a fee from investorsfor providing service

Bank will get a certain commission, irrespective of theprofit or loss to the portfolio

So, all profits or losses, after deduction of fund-management commission, will be distributed among

investor(s)

Wakalatul Istismar(Funds Mobilized on an Investment Agency)


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Current Account Deposits

Amanah orWadiahMalaysian Practice Qard-e-Hasan Pakistani Practice

Saving (Deposit) Account

Mudarabah Musharakah

Investment (Deposit) Account

Musharakah Mudarabah

Investment deposit; Specific Purpose (Restricted Mudarabah)

Investment deposit; General Purpose (Unrestricted Mudarabah)

Deposit Mobilization


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Cash Management Account

Investment deposit; Specific Purpose (Restricted Mudarabah)

Investment deposit; General Purpose (Unrestricted Mudarabah)

Mudarabah Certificates

Mudarabah e.g. Meezan

Wakalatul Istismar

Wakalah

Deposit Mobilization Contd


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PROFIT MECHANICS


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The whole profit from the assets given in the pool isdistributed among the funds providers on the basis of

weighted funds

The profit sharing weightages are assigned based on theperiod & maturity of funds deposited with the bank

The basic rule is that the longer the period of maturity,the higher the weightages

The rationale behind this is that a longer-term depositoris adding greater value & taking a longer exposure


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Riba Free Certificates Weightages

RFCs 1.090

RFCs 1 year-Monthly 1.158

RFCs 1 year-Quarterly 1.168

RFCs 1 year-Six Monthly 1.178

RFCs 1 year-Maturity 1.192

RFCs 5 year-Monthly 1.910RFCs 5 year-Quarterly 1.920

RFCs 5 year-Yearly 1.940

RFCs 5 year-Maturities 1.984

Example: The Bank of Khyber - 2006


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The serious issue in this regard is assigning differentweightages, keeping in view the size of investmentaccount

The Bank of Khyber

Interest free PLS Saving Account

Less than 1 million 1.000

1 million upto 5 million 1.030

5 million upto 10 million 1.060

10 million &above 1.090


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Assigning different weightages to larger deposits as anormal practice should not be allowed keeping in viewthe principle of justice

Another aspect that Islamic banks have to bear in mindis that no deposit should be excluded from the profitentitlement

Example: A deposit with less than a 1 million averagemonthly balance will not be entitled to any profit

As a policy concept, above practice has to be avoided forthe dispensation of justice that is the reasondtre ofIslamic finance


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SPECIAL CONSIDERATIONS RECOMMENDEDFOR ISLAMIC BANK


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Banks should take into account the risk-exposurelimit of its clients. Widows & Retired Citizens, arenormally not in a position to bear the risk of loss.

Weightages given to various categories ofsavings/term deposits have to be indicated inadvance.

Banks should not be allowed to indicate ExpectedRates ofReturn as it opens a back-door to interest.


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DETERMININGBALANCESFOR PROFITENTITLEMENT


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The Islamic banks usually use daily credit balancesor daily product to calculate the profits.

This concept is applied to savings & term deposits.

More applicable for saving-type of accounts where

depositors are permitted to make withdrawals.

The calculation on daily product is just that thecalculation on the minimum balance or averagebalance


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Date Balance

June 1 $10,0002 $10,000

. .

. .

28

$10,00029 $1,000 (Withdrawal of $9,000)30 $1,000

Profit Calculation

28*$10,000 = $280,0002*$1,000 = $2,000

Total Use = $282,000

$282000/30= $9400

Example: Daily Product Basis


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SUMMARY: PROFIT/LOSS ALLOCATIONMECHANISM

Deposits in current accounts are usually not eligible for payment of any

profit.

All savings and term deposits, irrespective of size, should be eligible fora share in the profit of the investment pool, except where it may beuneconomic to do so.

The depositor, as sleeping partner, cannot receive a share of the profitthat is more than the proportional share of the term-deposit to the totaldeposits in investment pool.

Profit is calculated on the basis of daily credit balances rather thanbeing paid on the maximum or the minimum balance during the

agreed period, usually a month;

Weightages have to be assigned to deposits based on tenure forwhich deposits are kept;

Depositors wishing to withdraw their term-deposits in an

emergency without notice may be required to forfeit their profit.


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Thank You

Documents

Resource & Deposit Mobilization.pdf