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Liability Management in
Islamic Banksby
Atiquzzafar Khan
Presented at
Training Workshop
National Bank of Pakistan
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Presentation Outline
Nature of Deposits in Conventional Banks
Basic Concepts of Mudarabah & Musharakah
Types of Deposits in Islamic Banks
Deposit Management in Islamic Banks
A Case study Bank of Khyber
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Nature of Deposits in Conventional BanksDeposits made in Conventional Banks are Qard
according to Shariah and not Amanah (trust)
as generally belived since according toShariah
Amanah can not be used by the holder
Ameen can not be held responsible for any
loss or demage without is negligenceBoth of these characteristics are missing in
conventional bank deposits
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Islamic Modes used in Liability
Management
Mudarabah
Musharakah
Ijarah
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Mudarabah
It is a partnership agreement in which oneparty invests while the other manage the
business. Both Parties can decide any ratio of profit but
loss is to be borne by Financier (Rab ul Maal)alone.
There are two types of MudarabahRestricted Mudarabah (Mudarabah Muqayyadah)
Unrestricted Mudarabah (Mudarabah Mutlaqah)
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Musharakah
Musharakah means a joint pool of fundsformed for conducting some business in
which all partners contribute capital aswell as efforts.
They can agree on any ratio for
distribution of profit but the loss isshared as per the ratio of investment ofeach partner.
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Ijarah
Ijarah in Islamic Law refers to acontract in which a known benefit or
service is sold against a knownconsideration for a defined time or work
Types
Ijarat ul AshkhasIjaratul Ashya
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Types of Accounts in Islamic Banks
Current Account (Qarz-e-Hasan A/C)
PLS Account
Riba Free Certificates
Wakalatul Istismar (Investment Agency)arrangement
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It is based on the concept of Qarz-e-Hasanaand not on Ammanah
Account holder can withdraw its deposits atany time without giving any notice.
The bank can use it i.e. invest it.
The Depositors will not be entitled to anyprofits
The Depositors will not be liable for anylosses.
Current Account
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A Normal saving account product
Based on the concept of Musharaka
Equivalent to conventional partnership
Where all partners (including bank) have equitystake
All deposit accepted are invested in ShariahCompliant Business approved by the ShariahSupervisory Board.
All the partners share in the Financing businessMinimum deposit for profit eligibility= Rs. 5,000.
Minimum Balance to open Account = Rs. 500.
Profit announced every month credited in
January & July.
PLS Accounts
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A Certificate of Riba Free Investment (RFC)
Based on the concept of Musharaka
Available for five tenures
- 6 months- 12 months
- 2 years 3-years 5-years
Minimum deposit= Rs. 10,000.
Profit rates announced every month. Profits are paid in January and July
All deposit accepted are invested in Shariah CompliantBusiness approved by the Shariah Supervisory Board.
Riba Free Certificates
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Profit payment options:
Profit will be calculated on a daily productbasis.
Profit may be payable Monthly, Quarterly,
Six monthly, Annually or on maturity.
Riba Free Certificates
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On maturity the depositors principal and profitwill be reinvested on the same terms andconditions or on the customers instructions
returned to him/her.On premature Encashment, profits ratesapplicable to the nearest RFCs period will begiven and for broken period PLS rate will begiven.
In case of difference in the profit already paid oraccrued and the profit payable on encashment,the difference amount will be transferred to theCharity Account.
Riba Free Certificates
Encashment and pre-mature Encashment
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Profit Mechanics
The Profit Mechanics is explained in the foregoingsections.
Briefly the whole profit from the assets given in the poolis distributed among the funds providers on the basis ofweighted funds.
Income of the bank from other sources, such as servicecharges, proposal examination fees etc. is not dividedamong depositors.
Income allocable to equity holders come from three
sources,(1) Management Fee
(2) Income from other Sources
(3) Income allocated to equity from
distributable Income
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Distributable Profit The profit applicable on Deposits and RFCs is
based on weightages after the followingdeductions from the income of the Pool: Actual administration costs.
Management Fee based on pre-declaredpercentage of the total profit not exceeding 30 %.
Stabilization Reserve.
Note: The bank has to declare the percentage ofManagement Fee at the beginning of each month.
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Basis of Profit Calculations
Minimum Average Balance required for profitSharing is Rs. 5000
Average Balance Calculated on daily productbasis.
For the first month of deposit of money,average Balance is calculated on the basis ofnumber of days from the date of deposit toend of month and not the total number of
days of month. Profit is payable on the basis of daily product.
The tire of deposit and rates applicable isdecided on the basis of monthly average of
daily products.
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Specific weightages are assigned to all the
partners in the Musharaka pool comprising of:Saving Account Holders - Amount Tier Wise
RFCs depositors- Maturity Profile Wise
Equity of the Bank
If weightages are changed, the same areupdated on our website immediately
The weightages are changed on need basisonly.
NOTE:
The Weightage of Banks equity can not behigher than double the maximum weightageallowed to any depositor group.
BEGINNING OF THE MONTH
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Bank of Khyber: A Case Study
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BEGINNING OF THE MONTH
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Single pool of assets for both RFCs/Saving Accounts
Our typical pool comprises of:
Average Murabaha Balance Average Ijarah Balance
Average Placement Through Treasury
Placement with other Islamic Banking
Institutions Placement with SBP for SLR @ 11%
Balance in Non-earning account
Pool for RFCs/Saving Account
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SIZE OF THE POOL EQUITY SIDE
Avg. investment in the pool is calculated
for: Saving Account Holders - Amount
Tier Wise
RFCs depositors- Maturity Profile
Wise Equity of the Bank-
END OF THE MONTH
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SIZE OF THE POOL ASSET SIDE
The use of funds invested is ascertained by grossing up:
Average Murabaha balance (Based on those allocatedat the beginning of the month)
Average Ijarah balance (Based on those allocated atthe beginning of the month)
Average placement through Treasury.
11% of the average Deposits mobilised are added forthe purpose of Statutory Liquidity Requirement.
Balance (if any) is treated as kept in a non-earningcurrent account
END OF THE MONTH
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INCOME OF THE POOL
Return from earning assets of the pool (Murabaha, Ijarah& placement through Treasury) is calculated.
Net return is calculated by deducting proportionateadministration cost at actual and a management fee upto amaximum of 30% of the return on earning assets.
Stabilization Reserve is deducted to arrive at DistributableIncome
The Bank has discretionary powers to waive both theadministrative expenses and management fee fully or
partially.
END OF THE MONTH
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StatementA
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Statement of Average Funds employed
Statement B
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Break up of Pool IncomeStatement C
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Profit rates Declaration Sheet