Returns On Deposits Are Competitive
By
Ust Hj Zaharuddin Abd Rahman
One must bear in mind that the prohibition of interest in Islam does not mean that savings will not be rewarded. It also does not mean that the cost of financing would be zero. Instead of using the rate of interest to mobilise savings, Islamic banks mobilise funds on the basis of profit-sharing with the depositors. These funds are then passed on to corporate and other clients using sale- based, asset-based or financing and investment contracts. The most important among these are Murabahah, Mudarabah, Musharakah, Ijarah, Salam and Istisna.
The availability of these contracts not only fulfils the religious requirements of Muslim customers but also provides a wider set of products for all customers. Theoretical research has established that the contracts based on profit-sharing have several distinct economic advantages for society. They improve the allocation of resources; they ensure justice and fairness among the contracting parties; they lead to a more stable financial system; and they have a favourable impact on economic growth. (Munawar Iqbal, Thirty Years of Islamic Banking, p 35)
This writing will touch on the basics of Islamic banking deposit savings and investment account models. The models basically are based on:
 | Wadi'ah Yad Dhamanah (Savings Account-i) or "Qard" : There could be current or savings accounts in which deposits are made to be withdrawn at any time. These are current accounts on which banks pay no profit, but they are allowed to use these deposits profitably at their own risk. If there is profit, normally the bank will give out part of the portion to the depositor on the basis of "gift" (Hibah) and thats solely on the discretion of the bank. This product is based on Wadi'ah Yad Dhamanah concept, it is when the bank pools and utilises the fund. The bank's responsibility is in the form of guarantee and therefore it is compulsory for the bank to return the fund as and when requested by the customer. The bank may give Hibah to the depositor. The Hibah depends solely on the bank's discretion and cannot be promised by the bank. In good turn, if the bank gains high profit from their financing projects, the depositor will usually receive a good/ high Hibah. On the contrary, in the event of loss, the bank need not give any Hibah to customers. Furthermore, the depositors' money is still in custody and will not be reduced even though there is a loss. Therefore, justice prevails for both the bank and customer because :
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| | | Customers may enjoy Hibah, which is given by the bank for their money in safe custody whilst not having to bear any investment risk.
| | | | The rate or amount of Hibah solely depends on the bank's discretion and the bank usually gives away competitive Hibah for profitable investment in order to attract customers.
| | | | The bank is not obliged to pay anything to the customers if there is no profit from investment. Therefore, the bank will not be in a disadvantaged position
| | | | There is no Riba involved in this account and the investment is Shariah compliant.
Even though the bank is not obliged to give away Hibah to the customers, the bank must always reinforce their efforts to gain high profits and at the same time, able to derive competitive benefits from savings.
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| Mudarabah Account Mudarabah is a special type of investment contract. This contract is between a capital owner (called Rabbul mal) and an investment manager (called Mudarib). Profit is distributed between the two parties in accordance to the ratio that they agreed upon at the time of the contract. Financial loss is borne by the capital owner, the loss to the manager being the opportunity cost of his own labour, which failed to generate any income. Except of a violation of the agreement or negligence, the investment manager cannot guarantee either the capital extended to him or any profit generation (if profit is guaranteed then it is considered as Riba).
Under this concept the bank will manage customers fund as "Mudarib". Normally, the bank uses the fund to make a sale or finance transactions with clients who want cash for their working capital, purchase assets for business, or might purchase an Islamic sukuk from any Islamic issuer. Any profit attained from the business will be distributed based on the profit sharing ratio between the bank and the customer.
Under the concept, depositors will have a better chance to gain higher profit because the profit will be distributed based on profit sharing ratio. The most important aspect that must be kept in mind is, the entire profit obtained through this kind of contracts is halal. The Prophet Muhammad S.A.W. said: meaning "Verily, even though the (you manage to have) usury amount is huge; it will keep decreasing towards the end" (Narrated by Ahmad & Al-Hakim).
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| Other Mudarabah contracts for investment
Other types of Mudarabah concepts, which can be used in the Islamic deposit products are two tiers Mudarabah, where the bank invests its depositors money in established companies and investments. However, application of the concept is new in Malaysia. Under this model; an investor or depositor (Rabbul Mal) place his/her money in the bank (Mudarabah Special Investment Account [MSIA]). Consequently, the bank will become an investment manager (Mudarib) and simultaneously, the bank becomes an investor (Rabbul Mal) also in which they will invest the investment fund in selected Shariah-compliant companies and investment funds, therefore all of the selected companies will act as mudarib.
Through this model, the Islamic bank's main business is to obtain funds from the public on the basis of Mudarabah and to supply funds to businessmen on the Mudarabah basis also. Its gross income comprises the share in the actual profits of the fund users, in accordance with an agreed ratio of profit-sharing (For example, bank 20: customer 80). That actual income, after deducting the expenses incurred in managing the funds, is distributed in accordance to the predetermined profit sharing ratio.
Typically, in order to attract public attention to invest in one of these accounts, Islamic banks will make known their "Indicative rate of return". The public must not be confused with the rate and misjudged it as similar as the conventional interest rate (which is fixed from the beginning).
Firstly, : we must understand that the rate is only analytical and prediction based, which is normally in accordance to the bank's previous performance. Hence, the bank is not obliged to pay out the profit based on the indicative rate, but the effective rate or the actual rate return at time of maturity of the bank will conclude the actual amount of the profit which will be distributed to the investors.
Secondly; the indicative rate is dissimilar to interest rate as the conventional bank is obliged to pay out exactly as advertised (whether the bank makes profit or not it make no difference) and all money which is placed in the conventional accounts are based on loans, whereas funds, which are put into an Islamic account are based on the Mudarabah investment contract, which is approved by Shariah. No actual profit rate can be determined upfront, otherwise it will be considered as Riba. |
In order for the bank to calculate the indicative rate of returns, a simplified formula is as follows:
| The Calculation formula | : | Profit = Rate Of Return (ROR) x Profit Sharing Ration (PSR) divided by 100 = one-year profit rate. |
| Say that the bank's profit ROR for the year is 3, thus the calculation will be as below | : | 3 x 70 (for customer) divided by 100 = 2.10. |
Thus, the (2.10 per cent) in the above calculation is only an indicative rate based on the previous ROR, and it will be highlighted by Islamic bank to attract public confidence on the financial performance.
In addition to the general investment deposits mentioned above, there could also be a restricted specific investment accounts in which deposits are made for investment in a particular projects or companies. It is called "Restricted Mudarabah" (Mudarabah Muqayyadah), this will give an opportunity to the investors to make sure that their funds are invested in companies, investments as per client preference
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