Sources of Funds - SavingsInvestments and the Underlying Shariah Concepts

7/27/2019 Sources of Funds - SavingsInvestments and the Underlying Shariah Concepts

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ISLAMICBANKING AND

FINANCE

Mahyuddin Khalidemkay@

salam.uitm.edu.my

SOURCE OF FUNDS

SAVING/INVESTMENTS AND THE UNDERLYING SHARIAHCONCEPTS


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MUAMALAH CONTRACT2


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CATEGORIES OF CONTRACT3


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CONTENT

SOURCES OF FUNDS SHAREHOLDER FUND

DEPOSITORS FUND

CURRENT ACCOUNTSAVING ACCOUNT

GENERAL INVESTMENT ACCOUNT

SPECIFIC INVESTMENTS ACCOUNT

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SOURCE OF FUNDS

Source of Funds in Islamic bank is formulatedbased on the Shariah concepts of:

Wadi'ah

Mudharabah

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AL-WADIAH

Definition of Wadi'ah: 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, andguarantees repayment of the deposits on demand.

Wadi'ah does not provide the depositors with the right to

receive a share of the profits. Pillars of Al Wadi'ah:

Al-Muwaddi (Depositor, Owner of the property)

Al-Wadi (Depositee, Custodian of the property)

Al-Wadiah (Property for safe keeping)

Sighah (Offer (Ijab) and Acceptance (Qabul))

Islamic banks mobilizes its customer deposits in currentaccounts on the contract of al-wadiah yad dhamanah(guaranteed custody)

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CONDITION OF AL-WADIAH

Essentials Conditions

Al-Muwaddi

(Depositor, Owner of the

property)

Capable

Sound mind

Intelligent

BUT not necessarily attained age of puberty

Individual or institution

Al-Wadi(Depositee, Custodian

of the property)

Same with above Custodian is not allowed to promise any rewards

or return

Al-Wadiah

(Property for safe

keeping)

Manageable by custodian

Storable

Sighah

(Offer (Ijab) and

Acceptance (Qabul))

In definite and decisive language

Acceptance must be consistent with offer

Offer and acceptance made at same time

Both parties have the right to terminate contract

at any time

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MUDHARABAH

Definition of Mudharabah:

A joint-venture profit sharing contract whereby one party is the providerof capital while the other is the entrepreneur.

Characteristics of Mudharabah:

The profit will be shared between parties whom involved in thecontract according to the terms of their agreement.

The losses will be borne by the capital provider who is the financier ofthe project.

The entrepreneur suffers of their fruitless effort.

Pillars of Mudharabah:

Sahibul Mal (Owner of capital, fund provider)

Mudharib (Entrepreneur)

Rasul Mal (Capital) Al-Amar or Mashruk (Business ventures or project)

Ribh (Predetermined share of profit)

Sighah (Offer and acceptance)

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CATEGORIES OF MUDHARABAH

Mudharabah al-Mutlaqah

Unrestricted mandate

Under unrestrictedinvestment fund,entrepreneur (bank) has gotthe authority by the capitalprovider (depositor) to investthe funds in any mannerwhich they think appropriate.

Entrepreneur (bank) is free

to invest on how, where andfor what purposes the fundsshould be invested. They(depositor) will be norestriction to entrepreneur.

Mudharabah al-Muqayyadah

Restricted mandate

The entrepreneur isrestricted in his activity incarrying out the mudharabahproject in term of business,method, time period orplace.

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SHAREHOLDERS FUND / EQUITY

Shareholder fund and equity in Islamic bankis formulated based on the Shariah concepts

of Musharakah (Profit and Loss Sharing

contract).

Through shares :

Ordinary Shares quoted or unquoted

Special share (Minister of Finance)

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DEPOSITOR FUND

DepositManagement in

Theory of IslamicBanking

Pure profit

Sharing Model

Profit Sharing

Model

Two Window

Model

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PURE PROFITSHARING MODEL

Pure Profitsharing Model was the firstdeposit model developed in Islamic banks.

This model enjoys much support amongstmost of Islamic economists.

It assigns a significance role to profit sharing(mudharabah) on the both side of balancesheet, the asset and liability side.

Also know as the Two-Tier MudharabahModel.

Concept based on two level of Mudharabah : The first tier

The second tier

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TWO WINDOW MODEL

The liability side of the banks activities is divided into2 window : The bank is required to pay the funds held in the current

account on demand, it is subjected to a 100% reserverequirement .

The Islamic precept that funds of demand deposits are

a trust (amanah) that is held by the bank on behalf of thedepositors.

The banks neither have a right to use these funds tomake profit nor it should be used for the purpose ofmoney creation through fractional reserve system.

Funds held in the investment accounts shall not besubjected to any reserve requirement.

It is argued by the economists who have advocatedthis model that investment accounts of Islamic banksare not similar to time deposits of conventionalbanks, which are used for credit creation.

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PROFIT SHARING COST PLUS


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PROFIT SHARING COST PLUS

MODEL

A profit sharing (mudharabah) on the liabilityside of the balance sheet and cost-plus

technique of financing (murabahah) on the

asset side.

Other Islamic/shariah permissible technique

of finance such as mudharabah, musharakah,

ijarah, etc. may also be used on the assets

side.

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CUSTOMERS DEPOSITS IN CURRENT

ACCOUNTS

Definition of Current Account:An account into which customer can deposit

money and effect payments by the drawing ofcheques.

The bank accepts its customers deposit andundertake to honor any demand (invariably inthe form of cheque) made by customer,provided there is available funds in the

account. The Current Account is formulated based on

the Shariah concepts of:

1. Al-Wadiah

2. Al-Mudharabah

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MODES OF OPERATION OF WADIAH CURRENT

ACCOUNT

The bank accepts deposits from its customerslooking for custody of their funds and absoluteconvenience in their use in the form of CA on theprinciple of al-wadiah yad dhamanah.

The bank requests permission from such customersto make use of their funds so long as these fundsremain with the bank.

The customers may withdraw a part or the whole oftheir balances at any time they so desire, and thebank guarantees the refund of such balances.

All the profits generated by the bank from the use ofsuch funds belong to the bank.

The bank provides its customers with cheque booksand other usual services connected with the CA.

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MODES OF OPERATION OF MUDHARABAH CURRENT

ACCOUNT

Contract made between Depositor (provider ofcapital) AND 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

ACCOUNTS

Mobilizes customers deposits under thecontract of al-wadiah yad dhamanah itsmodification on the payment of profit at theabsolute discretion of the bank.

This is a trust arrangement and involves thedepositing (movable) or monetary depositswith another person, for safe-keeping.

The depository acts as a trustee or guarantor,

and guarantees repayment of the deposits ondemand.

Wadi'ah does not provide the depositors withthe right to receive a share of the profit.

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DISCRETIONARY REWARDS OF WADIAH SAVING

ACCOUNT

Under the principle of al-Wadiah, the bank isnot 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

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Balance for the

monthNo. of days in the

month

x Rate x 1/12


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GENERAL INVESTMENT ACCOUNT BASED ON

MUDHARABAH

The bank acts as entrepreneur and thecustomers 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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MODES OF OPERATION OF

MUDHARABAH GENERAL INVESTMENT ACCOUNT

The bank accepts deposits from its customers for GIA on

the principle of Mudharabah. This investment is utilized as business capital by the bank.

Customer will have no authority to interfere with themanagement of investment.

Bank will has the right to manage the investments as it

deems fit by investing into businesses that are both Halal(permissible) and profitable.

The deposits will have to be for a specified period.

In basic Shariah relationship, the bank acts in this case asthe entrepreneur and the customers as the provider of

capital and both will agree among others on how todistribute the profits, if any, generated by the bank from theinvestment.

In the event of loss in the investment, the customer bears allthe loss.

Modes of investment of the funds and the ratios of profitdecided by the bank for all customers.

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PROFIT ON MUDHARABAH GENERAL INVESTMENT

ACCOUNT

Distribution of Profit:Bank in an agree predetermined ratio.

This agreed distribution ratio must be stated in

the contract.

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:

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Tenor Rate

12 100Capital x x


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PROFIT ON MUDHARABAH GENERAL INVESTMENT

ACCOUNT

= 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 2010

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SPECIAL INVESTMENT ACCOUNTS BASED ON

MUDHARABAH

Mobilizes customers deposits from governmentor corporate customers under the contract ofequity-financing.

The bank acts as the entrepreneur and thecustomers as the provider of capital.

Modes of investment of the funds and the ratiosof profit may usually be individually negotiated.

Mudharabah SIA operates under the same basic

principles as Mudharabah GIA. However, the Mudharabah SIA is more in tune

with the requirements of the client may negotiatethe tenure of the investment as well as the profit

sharing ratio.

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DIFFERENCES BETWEEN MUDHARABAH AND CONVENTIONAL FIXED

DEPOSIT

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END OF CHAPTER28

Documents

Sources of Funds - SavingsInvestments and the Underlying Shariah Concepts