Shari’ah Issues in Deposit

Unit 3 | 1

Shari’ah Issues in Deposit

Unit 3

Topics in This Unit

3.1- Introduction

3.2- Definition of wadi’ah

3.3- Shari’ah issues in wadi’ah

3.4- Promising fixed returns in mudarabah and wadi’ah

3.5- Qard hasan as a deposit account

3.6- Mudarabah as an investment account

3.7- Administration costs in mudarabah

3.8- Profit equalisation reserve (PER)

3.9- Corporate governance for the investment account holder (IAH)

3.10- Fixed deposit account

3.11- Negotiable instrument of deposit

3.12- Acceptance of funds from unlawful sources

3.13- Islamic financing insured by conventional insurance

3.14- Transfer of fund

3.15- Cash management deposit

3.16- Malaysia Deposit Insurance Corporation (PIDM)

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Unit At the end of this unit, you should be able to:

Objective
• Determine the Shari’ah issues in a mudarabah contract as
deposit
• Determine the Shari’ah issues in a qard hasan contract as
deposit
• Determine the Shari’ah issues in a tawarruq contract as
deposit
• Determine the different Shari’ah issues pertaining to
deposit

Key Terms

Wadi’ah Tawarruq Hibah/Gift

Guarantee Mudarabah Savings/Current

Account
Depositor Deposit

Qard hasan Custodian

ISLAMIC DEPOSIT

An Islamic deposit represents a very important

component in the capital structure of the Islamic
banks. A wide range of products has been offered
by Islamic banks under deposit by using different
underlying Shari’ah contracts. The most popular
deposit products offered are savings account based
on wadi’ah, investment deposit account based on
mudarabah and fixed deposit account based on
tawarruq. However, there some Shari’ah issues
related to each product and will be discussed further
in this unit.

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Unit 3.1 INTRODUCTION

A deposit account in banking consists of wadi’ah, mudarabah and tawarruq. Wadi’ah, or

safekeeping, is an instrument that allows a person to keep the wealth or assests belonging to
oneself with another person for safekeeping purposes. This mechanism was practised even
before the advent of Islam. Mudarabah is used as an investment that generates return for the
depositors; the structure of the investment is based on a mudarabah contract. In some banks,
they use qard hasan as the underlying contract for the savings account, and therefore the rules
of qard hasan will apply. The other deposit account is fixed deposit which uses a tawarruq
contract as a base for its structure. Mudarabah and tawarruq generate some gain for the
depositor but wadi’ah does not; it is just a safekeeping account which is not meant to generate
return. Nonethless, some banks do grant hibah to their clients based on their own discrection.
In this unit, the abovementioned accounts are discussed, in addition to other issues pertaning
to deposit such as accepting the fund from unlawful sources.

Unit 3.2 DEFINITION OF WADI’AH

The term wadi’ah is derived from the verb “wada’a” which means to leave, lodge or deposit.
Accordingly, wadi’ah in its literal sense means leaving something in someone else’s custody. As
a technical term, Muslim scholars have defined the term wadi’ah as follows:

1. Empowerment that is given to someone for keeping the owner’s wealth explicitly or
implicitly. This definition is suggested by the Hanafi scholars.
2. Representation in keeping the private goods in a specific way. This is the view of the
Shafi‘i and Maliki scholars.
3. The Majallah al-Ahkan al-Adliyyah defined wadi’ah as assets given to someone for
safekeeping without any return.

In light of the above definitions, it is clear that wadi’ah in the legal sense signifies a thing
entrusted to the care of another. The proprietor of the thing is known as mudi’ (depositor), the

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person entrusted with it is known as wadi’ or mustawda’ (custodian) and the deposited asset is
known as wadi’ah.

Wadi’ah, according to Islamic law, is a safekeeping contract based on the principle of trust
(amanah) and hence, not subjected to any liability except in cases of negligence and misconduct.
Therefore, safekeeping by a custodian is a meritorious act for a person who discharges the
right of a trust without any violation of the rules. In addition, the safekeeping shall be done
without any material return or compensation because the nature of this contract is based on
the goodwill of the keeper to keep the property for the depositor.

Unit 3.3 SHARI’AH ISSUES IN WADI’AH

The jurists collectively maintain that the custodian is not liable for compensation or damages in
the event of loss or damage to the deposit unless the damages happened as a result of negligence
or transgression on the part of the custodian. This view was based on the hadith of the Prophet
(p.b.u.h.) that says, “Whoever keeps his property for safekeeping, there is no compensation due
on him.” (Narrated by Ibn Majah). However, they differ in the criteria of determining whether
a particular act is due to negligence, transgression or otherwise. The views of the scholars
regarding this issue can be noted in the following possibilities.

1. Utilising the Deposit

All the jurists unanimously agree that the custodian is not allowed to use the deposit
without the prior consent from the depositor. The custodian is also obliged to guarantee
the deposit if he utilises it for any purpose, be it for trading or other activities. This rule
is applicable in both situations (where the consent of the depositor has either been
obtained or not) and the utilisation resulted in the damage or loss of the deposit. In the
instance where the depositor allows the custodian to trade with the deposit, the scholars
differ in their rulings regarding profit gained from the trading activities. Malik, al-Layth
and Abu Yusuf maintained that if the custodian returns the deposit in full, the custodian
is entitled for the profit, though he is both usurper and custodian. Abu Hanifah, Zufar
and Muhammad maintained that the custodian has to pay back the principal and give
away the profit as charity. A group says that both the principal and the profit belong to
the owner of the deposit, that is, the depositor.

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In this respect, the scholars differ in their views with regard to utilising the deposit for
profit-generating activities. Since wadi’ah is supposed to be a safekeeping contract and not
an investment tool, the custodian must be able to guarantee the capital to the depositor
at any point in time when the depositor needs the deposit. Unless the custodian can
guarantee the capital, he is not allowed to utilise the deposit for any trading activities.
In the current banking system, the bank will usually have enough liquidity to return
the capital to the depositor at any point in time. Therefore, the depositor shall give the
consent to the institution to utilise the fund and the institution can give a portion of the
earned profit to the depositor as gift (hibah) which is given upon the sole discretion of
the bank.

2. Travelling with the Deposit

Scholars discuss a situation where the custodian travels with the deposit entrusted to
him. In such a situation, if the deposit is damaged or lost, is it considered as negligence
on the part of the custodian? In this case, the jurists differ regarding the custodian’s
right to travel with the deposit and the resulting rulings if he does as follows:

(a) Abu Hanifah held the view that a custodian has the right to travel with the deposit,
provided that the depositor did not explicitly forbid him from doing so, and the
travel route is safe. Thus, he ruled that the wadi’ah contract is unrestricted by any
geographic area unless such a restriction is explicitly stipulated in the contract.
Therefore, if the custodian travels with the deposit and it results in any loss or
damages, he is not liable for compensation. However, it should be noted that,
in such a situation, the custodian must have taken all necessary precautionary
measures in order to avoid the deposit from being lost or damaged.
(b) Maliki scholars stipulated that a custodian has no right to travel with a deposit,
unless the deposit was given to him during a journey. Thus, they ruled that under
normal circumstances, the custodian must keep the deposit in the same place where
it was handled. However, he is allowed to re-deposit it with a trustworthy person in
the same area if he embarks on a journey. On such occasions, the custodian is not
liable if the deposit is lost or damaged.
(c) Shafi‘i and Hanbali scholars also stipulated that a custodian is not allowed to travel
with a deposit. In the case where the custodian needs to travel, he has to return
the deposit either to the depositor, his legal agent or legal authorities. The scholars
argued that the custodian holds the deposit as a voluntary uncompensated act, and
therefore, he is not bound to keep it. However, if the custodian is to travel with the
deposit, then he will be liable for compensation in the case of loss or damage.

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From the above discussion, it is obvious that travelling with the deposit is prohibited in
the view of the majority of jurists. It appears that the consideration for such a view is the
safety of the deposits. Therefore, if the security of the deposit can be guaranteed, then
the custodian shall be allowed to travel with the deposit. In modern day transactions,
the actual cash deposited by the customer in the bank is always subjected to being used
or transported from one place to another or from one institution to another. Such a
move is allowed as long as the bank has taken all the necessary steps to ensure the safety
of the deposit and it can be handed over to the depositor upon request.

3. Entrusting Deposits to a Third Party

The deposit is a trust given either to a person or an organisation that is entrusted to
safekeep it. Therefore, the custodian does not have the right to entrust the deposit to
a third party without any valid reason. However, according to Abu Hanifah and Malik,
there is no objection to placing the deposit with immediate families of the custodian as
this will facilitate the safekeeping. The families are assumed to be equally responsible
towards the obligation of the custodian in ensuring the safety of the deposit. In
such a situation, if the deposit is lost or damaged, the custodian is not liable for any
compensation. Similar rules apply in a situation where the custodian entrusts the
deposit to a third party in order to protect the deposit from any threat or damages. This
is because the depositor is deemed to have given implicit permission for taking such
measures in order to ensure the safety of the deposit.

In contemporary practice, if the deposit is given to an individual for safekeeping, they

will usually prefer to keep it in a safe place such as a financial institution. In this case,
there shall be no restriction on the individual to keep the asset or deposit it with an
institution as long as the safety of the deposit is assured. Similarly, if the asset is kept by
a financial institution (bank) in the wadi’ah account, the bank shall have the freedom to
allow other institutions or agencies to keep the money as long as the bank can guarantee
the return of the deposit upon the request of the depositor.

4. Mixing Deposits with Other Properties

The custodian is obliged to ensure that the deposit is separated from his own asset if
both are similar items so as to avoid any confusion and mixing of the deposit. This is to
avoid any disputes that may arise with the depositor on the actual amount of the deposit.
The jurists are in agreement that in a situation where the custodian can easily identify
and separate the mixed property from his own, there is no liability due on him as he
shall be able to return the deposit to the depositor upon request. For instance, if the

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deposit is in the form of cash (money), it can be placed in the account of the custodian
under a separate name so as to differentiate his money from the depositor’s money. In
the case where the mixing of the deposit makes it impossible to identify the deposit
separately, Abu Hanifah maintained that such an act is considered as negligence on the
part of the custodian. Therefore, the custodian is responsible to return the deposit or
the equivalent value.

In present day transactions, the issue of identification does not arise at the institutional
level, particularly in dealing with cash deposit. The depositors account is separated
from others and the question of mixing does not arise except in a situation where
there are technical problems. Such a situation can normally be overcome as most of
the institutions have their own data backup system in case the main system suffers a
breakdown or encounters any problem.

5. Violating Depositor Conditions

This is a situation where a depositor makes it a condition that the custodian holds
the deposit in a specific place or in a specific manner, but the custodian breaches this
condition. In such a situation, most jurists agreed that the custodian is liable in the case
of a loss, or damage, if he had placed the deposit in a place which is less secure then
the one requested by the depositor. However, he will not be held liable if the deposit is
placed in a place that is equally or more secure than the place required by the depositor.

The main concern again in this issue is the safety of the deposit. In this respect,
the depositor should not put any restrictions on the custodian which might lead to
difficulties in discharging his duty to safeguard the deposit. The option shall be open
as long as the custodian can ensure the safety of the deposit. Since wadi’ah is based on
trust, there must be mutual trust between the contracting parties and both shall take the
responsibility of ensuring that their respective obligations are discharged accordingly.

Unit 3.3.1 SHARI’AH ISSUES IN AN ISLAMIC SAVINGS

ACCOUNT

There are several Shari’ah legal issues related to the savings account that need to be considered.
Among these issues are:

1. The giving of hibah to the depositors. It is important to note that the hibah given to
the depositors is solely at the discretion of the bank and it should not be promised

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upfront. If it is promised upfront, it is tantamount to a gain from a loan which can then
be considered as riba. Therefore, the bank shall not, under any circumstances, promise
any return from the savings account. There are tendencies among some institutions
to promise some gifts if the customer opens an account with them. This practice must
also be avoided as promising something is similar to giving returns for the deposit and
the same rules apply in this situation. What the bank can do is to provide any gift but
without mentioning or propagating it in their advertisements. This can be considered
as hibah. However, it is better to avoid such a practice.
2. The advertisement of hibah prior to or at the time of the contract is disallowed based on
the above argument.
3. In event of death, the law of inheritance is applicable and it is the obligation of the heirs
to ensure that the deposit is distributed according to the rules of faraid, i.e., the Islamic
law of inheritance. The bank is allowed to disburse the amount to the legal heir(s) who
have obtained legal authority to collect the deposit. It is not the responsibility of the
bank to investigate whether the legal heir has distributed the amount according to the
faraid ruling or not.
4. Deposit by a minor. If a child applies to open an account, it shall be done with the
permission of his or her guardian. The guardian shall have the right to monitor the
movement of funds from the account and all transactions have to be done with the
guardian’s permission.
5. Deposits from dubious sources. If the bank is aware that the source of the deposit is
from an illegal income, then the institution is morally bound to reject the fund from
being deposited into the account. The institution must also comply with regulations
such as abiding by the Anti-Money Laundering Act 2001 (AMLA) and other related
regulations concerning the acceptance of deposits.

Unit 3.3.2 SHARI’AH LEGAL ISSUES IN THE ISLAMIC

CURRENT ACCOUNT

The principles applicable to Islamic savings account would be equally applicable to an Islamic
current account. Among the legal and Shari’ah issues peculiar to current accounts are:

1. Insufficient fund for cheque clearance. In the instance where there is insufficient fund
for a cheque clearance, the bank shall apply the principle of qard hasan (benevolent
loan) or any Shari’ah facility and try to recover the amount from the customer as soon

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as possible. The bank, however, is allowed to levy certain reasonable charges for such
negligence on the part of the depositor.
2. `Overdraft facility. The bank can allow overdraft facility to the customer based on the
same principle mentioned above in the case of insufficient fund for cheque clearance.

Unit 3.4 PROMISING FIXED RETURNS IN MUDARABAH

AND WADI’AH

This is related to Islamic deposit accounts based on either a mudarabah or wadi’ah account.
Conventionally, all deposit accounts other than the current account have a fixed return which
is promised upfront by the bank. This fixed return is interest payable to depositors or account
holders. Islamic depositors are equally interested in receiving some return from their deposits.
The issue arises whether Islamic financial institutions (IFIs) can promise any kind of fixed
return to their depositors in both mudarabah and wadi’ah contracts.

1. Mudarabah: For mudarabah, any promised return to this account is not acceptable.
This is the basic feature of mudarabah contract which imposes on the capital provider to
take the risk of the loss of capital. Neither the capital nor the profit can be guaranteed.
In all mudarabah-based accounts, any stipulation of any fixed return will render the
contract null and void. The IFIs may publish the historical rate of return or may publish
an estimated rate of return for the respective maturity period of the mudarabah-
based account. This quotation of the estimated profit is not a liability on the IFIs.
Any promotional gift can be advertised to the public for them to open a mudarabah
account as this is not deemed as interest because the bank is not a borrower under the
mudarabah contract.
2. Wadi’ah: The same prohibition of promising fixed returns applies to wadi’ah-based
accounts. Wadi’ah that involves money has been deemed as qard by Muslim scholars.
The depositor under a wadi’ah contract is deemed as the lender, and the custodian, which
is the bank, is deemed as the borrower. Under this description, the borrower/custodian
(bank) is not in the position to stipulate or promise any fixed returns to wadi’ah account
depositors. This is a clear-cut prohibition for wadi’ah contracts. Unlike the mudarabah
contract, any promotional gifts to open a wadi’ah-based account is prohibited from

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being advertised. Any advertisement leading to the act of giving away some gift, either
in terms of cash or kind, is not permissible for this account.

How do these accounts operate to reward the depositors?

Depositors under mudarabah-based accounts will share the profit with the bank on an agreed
profit-sharing ratio. As for wadi’ah-based accounts, the IFIs have absolute discretion to reward
the depositors either in cash or in kind. This cannot be published or advertised to avoid the
prohibition of riba in wadi’ah-based contracts.

Hibah in Wadi’ah Contract

One of the methods in accepting deposits by Islamic financial institutions in Malaysia is based
on the concept of wadi’ah yad dhamanah. Some of the Islamic banking institutions give hibah to
wadi’ah depositors as a token of appreciation for the depositors’ confidence in the institutions.
However, one of the concerns is that this practice of giving hibah to wadi’ah depositors will
become an urf or norm forbidden by Shari’ah. In this regard, the Shari’ah Advisory Council
(SAC) was referred to on the issue as to whether the practice of giving hibah by the Islamic
banking institution to wadi’ah depositors is permissible

Resolution

The SAC, in its 35th meeting dated 22 May 2003, resolved that the practice of giving hibah by
Islamic banking institutions to wadi’ah depositors is permissible. Nevertheless, such practice
shall not become a norm in order to avoid this practice from becoming an urf that resembles a
condition in a deposit contract based on wadi’ah.

Basis of the Ruling

In current banking practices, deposited monies by the customers will be used by the bank
for certain purposes such as financing and investment. From the Shari’ah perspective, monies
deposited into a deposit account based on wadi’ah yad dhamanah is equivalent to a loan based on
qard hasan in which the bank must refund the deposit to the customer upon request according
to the agreed terms and conditions. Thus, the requirements of qard hasan and its effects are
also applicable in deposit account products based on the concept of wadi’ah yad dhamanah.

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A hadith of Rasulullah (p.b.u.h.) provides:

Rasulullah (p.b.u.h.) said: “The best person among you is one who does his best to
settle his debt”.

In a qard hasan contract, a condition that gives benefits to the lender is not allowed. For instance,
a condition requiring the borrower to give a free accommodation or offering a cheap price to the
lender, and giving a reward or gift in return for the lender’s kindness.

The practice of giving hibah by a borrower to a lender is recommended in Islam. However,

it must not be a condition in the contract so as to avoid the element of riba as stated in the
following hadith:

“From Ali r.a. who said, Rasulullah (p.b.u.h.) had said: Every loan that gives benefit (to the
lender) is a riba.”

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Unit 3.5 QARD HASAN AS A DEPOSIT ACCOUNT

Qard hasan is used to replace the wadi’ah contract due to its flexibility. In addition to that, most
of the issues in a wadi’ah contract are not present in a qard hasan contract. However, the issue
of qard hasan is related to whether the hibah extended by the bank is permissible or not.

Hibah for Loan Contract (Qard)

A qard hasan contract is one of the contracts used to manage liquidity in Islamic finance. The
contract obliges a borrower to return the loan amount to the lender without contracting to pay
any additional return.

However, in normal practice, a borrower sometimes give hibah at his own discretion when
paying off the debts. The issue here is whether the practice of giving hibah complies with
Shari’ah.

Resolution

The Shari’ah Advisory Council in its 55th meeting held on 29 December 2005/27th Zulkaedah
1426 resolved that the practice of giving unconditional hibah in a loan contract is permissible.
Nevertheless, the Council advised that such practices should be implemented wisely so as to
avoid it becoming a norm (urf) which can make it a condition attached to the loan contract.

Basis of the Ruling

Even though the act of giving hibah by the borrower to the lender is recommended in Islam, it
cannot be conditional in the contract as it may amount to riba. Any addition to the amount of
qard hasan upon repayment, whether in terms of amount, attributes, the giving of an asset or
benefit, is permissible as long as it is unconditional.

The ruling on the giving of hibah to a lender is similar to the ruling on giving a loan with a
benefit, which is prohibited if such hibah is conditional in the contract, but it is allowed if it is
not made as a condition.

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Adaptation (Takyif) of Wadi’ah Yad Dhamanah as Qard Hasan

According to the SAC, the ruling applicable on qard hasan may also be adapted or applied in
wadi’ah yad dhamanah.

Resolution

The SAC, in its 6th special meeting dated 8 May 2008, has resolved that the ruling on wadi’ah
yad dhamanah, which involves money, may also apply the rules of qard hasan in terms of its
parameters (dhawabit) and its subsequent effects.

Basis of the Ruling

The SAC’s resolution is based on the following considerations:

1. In the current financial context, wadi’ah is a contract whereby the asset owner deposits
his asset to another party on a trust basis for safekeeping;
2. The majority of fiqh scholars classify wadi’ah as a trust contract (yad amanah) whereby
the deposited asset for the custody of the wadi’ah recipient is treated as a trust. The
wadi’ah recipient is obliged to replace the wadi’ah asset within his custody in the event of
damage or loss of the wadi’ah asset due to his negligence. Nevertheless, the majority of
scholars view that if the financial institution utilised the deposited money, the contract
becomes a contract of qard hasan;
3. The OIC Fiqh Academy has resolved that “deposits in current accounts, either deposited
at Islamic or conventional financial institution, is a kind of loan from the fiqh perspective
since the financial institution that receives the deposit guarantees such deposit and it
must refund the deposit upon request”; and
4. The contemporary scholars’ view in relation to the rules on wadi’ah asset deposited at
Islamic financial institutions is consistent with the view of classical scholars who held
that the rulings of qard hasan are applicable in the instance where the wadi’ah recipient
utilised the wadi’ah asset with the consent of the depositor.

Qard Hasan Principles in Islamic Finance

The application of the qard hasan concept in a correct manner that fulfils the Shari’ah
requirements would definitely benefit the contracting parties. However, if it is inappropriately
applied, it would potentially tarnish the image of the Islamic financial system. Among the
issues that may arise in Islamic finance relating to the application of qard hasan are:

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1. Whether qard hasan in its true sense implies a gift that does not require repayment or
otherwise. This refers to the situation where an Islamic financial institution decides to
bring a case of a defaulted customer based on qard hasan to court; and
2. Since Islamic financial institutions provide financing by utilising the deposits of
customers who expect returns, financing based on qard hasan does not effectively
serve such a purpose because qard hasan is not meant to generate profits, rather it is
benevolent or tabarru’ by nature.
In this regard, the SAC was referred to on the issue as to whether a financing product based on
qard hasan principles is allowed since the application of this concept in a financing product
may contradict the original meaning of qard hasan according to Shari’ah. The SAC was also
referred to on the issue as to whether the word “hasan” may be taken out from the term “qard
hasan” that has generally been accepted in the Islamic financial system.

Resolution

The SAC, in its 51st meeting dated 28 July 2005, has resolved that financial products based on
the qard hasan principle are permissible. However, the word “hasan” shall be taken out from
the term “qard hasan” to imply that it is an obligation for the borrower to repay his qard to the
lender or financier and such obligation shall be borne by the heirs of the borrower in the case
of his death before the total settlement of his loan obligation.

Basis of the Ruling

The scholars define qard as affectionately giving a property to a party who will benefit from
it and who will subsequently replace it. The scholars have unanimously agreed that qard is
permissible based on Al-Quran, Sunnah and ijma.

The following Quranic verse is regarded as a basis for the permissibility of qard:

“Who is that will grant Allah a goodly (sincere) loan so that He will repay him many
times over? And (remember) it is Allah who decreases and increases (sustenance),
and to Him you shall all return.”

According to scholars of tafsir, the term qard hasan in the context of the above verse refers to
acts of contributing for the sake of Allah (s.w.t.) (infaq). The term qard literally means loan
and not infaq. Nevertheless, the scholars of tafsir stated that the term qard used in this verse
is intended to dignify the status of mankind since Allah (s.w.t.) had chosen to communicate
using common and understandable vocabulary with mankind. The permissibility of qard in

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the context of the loans is based on the literal meaning of the above verse since Allah (s.w.t.)
will not probably mention and equate commendable matters like infaq with forbidden matters.
This indicates that qard is permissible.

In relation to the recommendation that Islamic financial institutions shall not use the word
“hasan” in the term qard hasan, the SAC justified its decision based on the following arguments:

1. The fiqh scholars had never elaborated the term qard hasan specifically but only
discussed the concept of qard and its permissibility in Shari’ah. Generally, qard hasan
relates to matters pertaining to contribution for the sake of Allah (s.w.t.) (infaq); and
2. The word “hasan” as used in Al-Quran refers to an infaq that is given sincerely for
rewards from Allah (s.w.t.).
Based on this fact, it is concluded that the use of the term qard hasan to refer to a loan especially
in the muamalat context in Islamic finance is inaccurate. This is because qard as defined by fiqh
scholars is a loan (qard) that must be settled. Thus, the term qard is seen more appropriate for
an interest free loan as practised in the current Islamic finance industry.

Combination of Advance Profit Payment Based on Qard and Murabahah

Contract

There was a proposal from an Islamic financial institution to offer an Islamic investment deposit
account product with a fixed return. In implementing this product, the Islamic financial
institution proposed to apply a commodity murabahah contract to create indebtedness of the
Islamic financial institution to the depositors or investors. One of the new features of this
product is the advance profit based on qard given to depositors upon the opening of the account.

In this regard, the SAC was referred to on the issue as to whether the combination of advance
profit payment based on the qard and murabahah contract in the structure of the proposed
product is permissible in Shari’ah.

Resolution

The SAC, in its 4th special meeting dated 29 November 2007, has resolved that a combination
of advance profit payment based on the qard and murabahah contract is not allowed.

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Basis of the Ruling

There is a clear prohibition from the sources of Shari’ah in relation to the combination of
qard with any contracts of exchange (‘uqud mu’awadhat). Among others, there is a hadith of
Rasulullah (p.b,u.h.) that prohibits the combination of sale and qard:

“Ismail bin Mas`ud had told us from Khalid from Hussein al-Mu`allim from `Amru
bin Shuaib from his father from his grandfather: ‘Verily Rasulullah (p.b.u.h.) forbids
the combination of salaf (debt) and sale, two conditions within a sale, and profit
without guarantee (without taking a risk).’”

Unit 3.6 MUDARABAH AS AN INVESTMENT ACCOUNT

Mudarabah is a principle most commonly used in Islamic finance and banking. According to
the mudarabah principle, a person that has capital will give his capital to another person whom
he trusts to run a business venture. He will not interfere with the business but rather give the
partner the independence to run it. In return, the partner will give back the amount of capital
plus a share of the profit at the end of the business period.

In the context of deposit, the depositor provides capital to an Islamic bank to run its banking
operations. For allowing the bank to use the deposit , the depositor is entitled to a share of the
profits agreed by the depositor and the bank. The share can be a third or half of the profits,
depending on the initial agreement between the depositor and the bank. This agreement is set
at the beginning of the contract. The bank does not guarantee the depositor that the business
will be profitable although the bank will conduct the investment on a best efforts basis to
ensure it is profitable. In the event of a business failure, the depositor will bear the losses.

Application of a Mudarabah Contract in a Current Account Product

The Shari’ah Advisory Council (SAC) of Bank Negara Malaysia addressed the issues of
mudarabah in a current account product in their resolutions. According to the SAC, there was a
proposal from an Islamic banking institution to introduce a current account product based on
mudarabah. This account is different from the wadi’ah current account whereby the payment of

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dividend to customers is at the sole discretion of the bank. In the mudarabah current account,
customers are entitled to share some of the profits generated based on a pre-agreed profit
sharing ratio upon the opening of the current account.

In this regard, the SAC was referred to on the issue as to whether the current account product
based on mudarabah is permissible from the perspective of Shari’ah.

Resolution

The SAC, in its 4th meeting dated 14 February 1998 and 59th meeting dated 25 May 2006, has
resolved that the current account product based on mudarabah is permissible in Shari’ah as
long as the requirements of mudarabah are fully complied with.

Basis of the Ruling

The resolution by the SAC is in line with the permissibility of a mudarabah contract in deposit
instruments. In addition, withdrawal of the deposit from the mudarabah current account
may be made at any time. This is because the condition that the mudarabah capital shall exist
has been satisfied by the requirement to maintain a minimum balance limit in the current
account. Thus, if the depositor withdraws the whole deposit amount, the mudarabah contract is
considered terminated since it is deemed as withdrawal of the mandate in capital management
by the rabbul mal. “(the depositor)” This is in line with the unanimous view of the four schools
of law that a mudarabah contract is revoked or terminated upon express revocation, or implied
action by the rabbul mal withdrawing the mandate in managing the capital.

Indicative Rate in Islamic Banking

The indicative rate uses the profit rate declared by every Islamic banking institution. In a
mudarabah contract, the actual profits distributed will only be known after the contract has
matured based on a pre-agreed profit-sharing ratio. In the general context of Islamic banking
in Malaysia, most of the investment portfolios are in the form of fixed returns such as financing
based on the bay bithaman ajil concept. Hence, the bank can determine from the very beginning
the expected returns for a certain period. Therefore, for an investor who has invested his money
for a certain period of time, the profit distribution (according to the agreed profit-sharing ratio)
should appropriately be made according to the bank’s expected profit.

A proposal was made that the profit rate to be given to investors may be determined at the
time the contract is executed if the expected profit rate is known based on the asset portfolios

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held. The issue raised here is whether it is permissible in Shari’ah to indicate profit rate in a
mudarabah contract.

Resolution

The Council, in its 9th meeting held on 25 February 1999/8 Zulkaedah 1419, resolved that the
application of indicative profit in an Islamic banking mudarabah contract is permissible based
on the following conditions:

1. The Islamic bank’s indicative profit rate is only regarded as a reference of the expected
return that will be received; and
2. If the actual profit rate received by the Islamic bank at the time the contract matured is
different from the indicative profit rate agreed upon the inception of the contract, the
profit rate paid to investor must be based on the actual profit rate.

Unit 3.7 ADMINISTRATION COSTS IN MUDARABAH

Administrative Costs in a Mudarabah Deposit Account

There is a proposal from Islamic banking institutions to charge administrative cost to the
depositors (sahibul mal) of mudarabah deposit accounts. The issue is whether the bank as the
mudarib can charge administrative cost from the Shari’ah perspective.

Resolution

The Council, in its 16th meeting held on 11 November 2000/12 Sya’aban 1421, resolved that
banks cannot impose administrative cost on the depositors (sahibul mal) in mudarabah deposit
accounts. If the bank requires additional amount to cover the administrative cost, it should be
taken into account when deciding on the profit-sharing ratio agreed by both parties.

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Unit 3.8 PROFIT EQUALISATION RESERVE (PER)

The relevant issue is whether the “extra” profit paid under the profit equalisation reserve (PER)
will be tantamount to a fixed return. This profit is paid from the PER to smoothen the payment
of profit at the rate which is competitive to the rate in the market, particularly the interest
rate paid for conventional accounts. This cannot be deemed as interest as the extra profit is
taken from the reserve account and not paid by the bank. What is prohibited from the Shari’ah
perspective is any promised fixed return that is paid by the bank from their shareholders’ fund.
The PER is an account which is created from the surplus return of the profit to maintain a
good and competitive rate of return to Islamic depositors. Any conditions or modes of profit
allocation in any investment contract which include any clause or condition that may result
in the probable violation of the principle of sharing the profit will not be acceptable. Any
condition, term or mode of profit allocation with such an effect would render a partnership
contract void.

The issue of PER has been addressed in the SAC BNM resolution. According to SAC, the profit
rate declared by an Islamic financial institution usually fluctuates due to fluctuation in income,
provisioning and deposits. If the declared profit rate is often fluctuating and uncertain, it may
potentially affect the interest and confidence of investors.

Hence, there was a proposal to introduce the PER to create a more stabilised rate of return to
maintain the competitiveness of Islamic financial institutions.

Profit equalisation reserve is a provision shared by both the depositors/investors and the Islamic
financial institutions. It involves an allocation of a relatively small amount of the gross income
as a reserve, in times when the Islamic financial institution is making a higher return compared
to the market rate. The PER will then be used to top-up the rate of return in situations where
the Islamic financial institution is making a lower return than the market rate. Under this PER
mechanism, the rate of return declared by the Islamic financial institution will be more stable
in the long run.

In this regard, the SAC was referred to on the issue as to whether the PER mechanism may be
implemented in Islamic finance, specifically in the context of mudarabah investments.

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Resolution

The SAC, in its 14th meeting dated 8 June 2000, has resolved that the proposal to implement
PER is permissible.

Basis of the Ruling

According to the general method of investment in Islam, distribution of profit between the
Islamic financial institution and the investors shall be based on an agreed ratio. Notwithstanding
that, in order to ensure the sustainability of the Islamic financial system and market stability,
the PER mechanism may be implemented on the condition that transparency shall be taken
into account.

Even though this method may reduce the return to the investors or depositors in times when
the Islamic financial institution is making a higher profit, it generally allows the rate of return
to be stabilised for a long term and ensures a reasonable return to the investors when the
institution is making a relatively lower profit. This is considered a fair mechanism as both the
Islamic financial institution and investors/depositors jointly contribute and share the benefits
of PER.

This is also in line with the concept of the waiving of right (mubara’ah) allowed by the Shari’ah
which means waiving a portion of the right to receive profit for the purpose of achieving market
stability in the future.

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Unit 3.9 CORPORATE GOVERNANVE FOR THE INVESTMENT

ACCOUNT HOLDER (IAH)

Rights of Investment Account Holders (IAHs)

The Islamic Financial Services Board (IFSB) stipulated a very clear principle that governs the
mudarabah account. This is known under the right of investment account holders (IAHs).
Under the corporate governance standards:

Principle 2.1: IIFS shall acknowledge IAHs’ right to monitor the performance of their
investments and the associated risks, and put into place adequate means to ensure
that these rights are observed and exercised.

IIFS should acknowledge the IAH’s right to access all relevant information in relation to their
investment. The IAHs’ right to monitor the performance of their investment should not be
misconstrued as a right to intervene in the management of the investments by the IIFS. The
Guiding Principles require that IIFS shall have an internal guideline that sets out:

1. The eligibility of the IIFS employees who are responsible for managing investment
accounts operated by the IIFS;
2. The adequate protection of the IAH’s investments.
3. The disclosure of relevant and material information to the IAH; and
4. A proper and disclosed basis for profit allocation and investment policies to be based on
the risk expectations of the IAH.

The IIFS shall inform the IAH from the outset when opening their investment accounts that it
is in accordance with the principle of mudarabah:

The IIFS shall be liable for losses arising from their negligence, misconduct or breach of their
investment mandate; and

The nature of the relationship with IAH has implications on the profit-sharing basis and risk
exposures.

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The investment in a mudarabah account

IFSB stipulated the following principle:

Principle 2.2: IIFS shall adopt a sound investment strategy which is appropriately aligned
to the risk and return expectations of IAH (bearing in mind the distinction between
restricted and unrestricted IAH), and be transparent in smoothing any returns.

The IIFS is to implement an investment strategy which is aligned to the risk and return
expectations of the IAH as mutually agreed in the investment account contracts between the
IAH and the IIFS. They should take into account the consideration of any restrictions that may
be imposed by the IAH.

Unit 3.10 FIXED DEPOSIT ACCOUNT

Islamic Fixed Deposit (Commodity Murabahah)

Islamic fixed deposit is a special product offered by some IFIs for a short term tenure of 3
months. In a fixed deposit, the customer will be awarded with a higher rate of return for the 3
months’ tenure plus a rollover of another 3 months.

Table 3.1 Islamic Fixed Deposit-i (Commodity Murabahah Concept)

Features Description
Shari’ah concept Tawarruq
Eligibility Individuals (18 years and above) and& non-individuals
1 month – RM 5,000
Initial deposit
2 months up to 60 months – RM 1,000
Profit rate Fixed rate determined upon placement
Note: The above information may change depending on the promotion package of each Islamic bank.

The murabahah purchase & sale transactions of an identified commodity will be performed by
an IFI with the commodity brokers.

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1
Customer

Commodity
3
Deferred Customer then sells
Bank acting Commodity the commodity to
Spot Price +
2 as agent profit $ the Bank on deferred
Customer appoints payment.
the Bank as his agent Commodity
to buy commodity
Spot Price $ Bank as principal
from Commodity
Trader 1 on cash
4
basis.
Commodity Commodity The Bank sells the
Spot Price $
Trader 1 commodity to
Commodity Trader 2
for cash.
Commodity
Trader 2
Figure 3.1 Fixed Deposit (Islamic) Commodity Murabahah Modus Operandi and Process Flow

Steps taken are as follows:

1. Customer approaches the bank to place his money under a term deposit account for a
specific tenure.
2. Customer appoints the bank as his agent to buy a commodity from Commodity Trader
1 on cash basis.
3. Upon payment of the commodity price (which is equivalent to the deposit amount) to
the bank, the bank undertakes to purchase the commodity from the customer under a
murabahah contract on a deferred payment basis.
4. The customer then sells the commodity to the bank at an agreed sale price on a deferred
payment basis. The sale price comprises of:-
(i) The deposit amount.
(ii) The profit (return) on the deposits.
5. The bank sells the commodity to Commodity Trader 2.
6. Upon maturity of the customer’s deposit, the bank will pay the customer the deposit
amount and the profit.

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Table 3.2 Product features

Features Description
Islamic scheme
Types of account Individual / joint account
SMEs

Deposit Product based on Tawarruq

An Islamic financial institution made a proposal to offer a deposit product and financing based
on the concept of tawarruq or commodity murabahah.

In brief, the mechanism of deposit murabahah commodity involves the following transactions:

1. The customer (depositor) appoints the bank as an agent to purchase metal commodity
from metal trader A (seller) on a cash basis in an established metal commodity market;
2. The bank will thereafter purchase the metal commodity from the customer on a deferred
sale at a cost price plus profit margin;
3. Next, the bank will sell back the metal commodity to metal trader B in the metal
commodity market.
As an agent purchasing the metal commodity on behalf of the customer, the bank receives
cash from the customer for the price of the commodity which is deemed as a deposit in the
bank’s account. As a result of the transaction, the bank assumes liability (the cost price of the
commodity plus profit margin) to be paid to the customer upon maturity. The price of the
commodity purchased by metal trader A and the commodity’s price when sold to metal trader
B are the same.

Resolution

The Council, in its 51st meeting held on 28 July 2005/21 Jamadil Akhir 1426, resolved that deposit
and financing products based on the concept of tawarruq, known as commodity murabahah,
is permissible.

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Unit 3.11 NEGOTIABLE INSTRUMENT OF DEPOSIT

Islamic Negotiable Instruments of Deposit based on Mudarabah

According to the SAC of BNM, there was a proposal to introduce Islamic Negotiable Instrument
of Deposit (INID) in the Islamic Interbank Money Market. INID is a money market instrument
which is structured based on a mudarabah contract with a floating profit rate, depending on
the amount of dividend declared by the Islamic financial institution from time to time. This
instrument is tradable in the secondary market in order to enhance its liquidity.

Under the INID mechanism, an investor will deposit a sum of money with the Islamic financial
institution which will then issue the INID. As the entrepreneur, the Islamic financial institution
will be issuing an INID certificate to the investor as evidence of the deposit acceptance. Upon
the maturity date, the investor will return the INID certificate to the Islamic financial institution
and will receive the principal value of INID with its declared dividend.

In this regard, the SAC was referred to on the issue as to whether the INID product based on
mudarabah is permissible by Shari’ah.

Resolution

The SAC, in its 3rd meeting dated 28 October 1997, has resolved that INID products based on
mudarabah is permissible.

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Unit 3.12 ACCEPTANCE OF FUNDS FROM UNLAWFUL

SOURCES

Among the main functions of Islamic banking institutions in Malaysia are accepting deposits,
and providing financing facilities and investments. All of these activities are carried out in
accordance with Shari’ah principles. Through Shari’ah compliant activities, Islamic banking
institutions manage to generate profits and the benefits are shared with the investors and
shareholders.

Even though Islamic financial activities have been closely regulated and supervised, the
financial institutions cannot avoid accepting deposits in which the sources may be non-
Shari’ah compliant or a mixture of Shari’ah compliant and non-Shari’ah compliant activities.
The compliance status of the sources may probably be unknown and uncertain. Sometimes,
the institutions may also receive a request from customers who select the Islamic financing
facility but choose to have it insured under conventional insurance.

In relation to Islamic banking deposits, is it permissible for the Islamic banking institution to
accept every deposit without screening its source?

Resolution

The council, in its 58th meeting held on 27 April 2006/28 Rabiul Awal 1427 resolved that Islamic
banking institutions may, generally, accept any application for the placement of deposit or
investment fund from individuals or corporate customers without the need to investigate
the status of the sources of fund; whether it’s Shari’ah compliant, non-Shariah compliant or a
mixture between the two. But if the IFI knows that the sources of the fund is not permissible
(such as money obtained through gambling), what would its position be?

Views of scholars on dealing with parties who holds haram assets

The scholars have categorised the persons who own haram property into three groups:

1. Those who owns all haram property;

2. Those who owns a mixture of haram and halal property; and
3. Those who owns property which is of unknown status, i.e., whether halal or haram

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Those who owns assets which are entirely haram

Some of the scholars have distinguished between the person who acquires haram property with
or without the consent of the original owner. According to Ibn Taymiyyah, it is not permissible to
enter into a transaction or dealing with a person that entirely owns property by way of stealing,
robbery, fraud or other prohibited or unjustified means (the person is aware that the property
was wrongfully acquired). Ibn Rushd held that it is not permissible for any Muslim to deal with
anyone who owns haram property if he knows of the fact. In such a case, he is considered to be
the accomplice of the former.

Those who own assets which is mixed between halal and haram

The classical scholars held different views on the rulings of transactions that are entered into
with a person who owns property that is a combination of halal and haram.

1. The Hanafi school of law and some Maliki scholars view that it is permissible to do
the transaction with the person if the halal property owned is more than the haram
property. Al-Samarqandi, who is a Hanafi scholar, said that a person is not allowed to
receive a gift from another who acquires it (the gift) by way of riba or when the gift is
given by a cruel person, and it is known that the latter owns more haram property than
halal property.
2. The Shafi’i school and Maliki and Hanbali scholars held that it is discouraged (makruh)
for a person to enter into a transaction with another person who owns property that is
mixed between haram and halal, even though the haram property is less than the halal
property.
3. Al-Syaukani and al-Muhasibi, on the other hand, allows the transaction with a person
who owns mixed property without looking into the portion of halal or haram property.
The justification forwarded by them is that the Prophet (p.b.u.h.) and his Companions
performed transactions with the non-Muslim Badwi in Madinah despite the fact that
they generally acquired the property or asset through unlawful means such as riba,
robbery and so on.
4. The Maliki school of law and the minority of Hanbali scholars opined that the transaction
entered into with a person who owns mixed property is prohibited (haram).

Those who owns asset which is not known whether it is halal or haram

The scholars generally held the same view that the transaction entered into with this category
of people is permissible.

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Unit 3.13 ISLAMIC FINANCING INSURED BY CONVENTIONAL

INSURANCE

Taking into account the co-existence of the Islamic financial system along with the conventional
financial system, customers have the freedom to choose the most suitable financial services
according to their needs. Thus, there is a possibility that the customers may choose to subscribe
to a conventional insurance to insure their Islamic financing facility. This situation raises the
issue of whether the acceptance of conventional insurance policy money by an Islamic banking
financier upon the death of the customer is permissible in Shari’ah.

Resolution

The Council, in its 5th meeting held on 30 April 1998/3 Muharram 1419 resolved that an Islamic
banking institution may accept the conventional policy claim payment from the deceased
customer who had taken up a conventional insurance policy to insure his Islamic financing
facility.

Unit 3.14 TRANSFER OF FUND

Bank Negara Malaysia’s Kompilasi Keputusan Majlis Penasihat Shari’ah Kebangsaan states, “the
transfer of interest amount from any conventional account (not limited to fixed deposit only)
into an Islamic banking scheme account is prohibited.” (“BNM’s Resolution”). There were cases
whereby customers had instructed a bank’s branch office to close their conventional deposit
accounts and the branch had transferred the whole amount available (including interest) into
Islamic deposit accounts.

According to the following clause in the Shari’ah Compliance Framework (SCF) to ensure that
the staff are aware of the requirement: “In the event of a transfer of fund from a conventional
fixed deposit account to an Islamic deposit account, the interest portion derived from the
conventional fixed deposit should not be transferred into the Islamic deposit account.” From
the reading of BNM’s Resolution, any interest portion for all accounts (not limited to fixed

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deposit) must not be transferred into the Islamic account. Certain scenarios pertaining to the
implementation of such requirement are as follows:

Table 3.3 Transfer of the fund

Type of Original Implementation of the
Scenario Feature of the Account Comments
Account BNM’s Resolution
The restriction is not
applicable in the case
Conventional Generally, does not grant
1. Not applicable. of transfer of fund
Current Account. interest to the customer.
from a Conventional
Current Account.
To segregate the interest
Generally grants interest to portion throughout the
the customer but percentage existence and utiliszation
The restriction is not
is very low. There is no of the account is not
practical in the case
Conventional maturity to the tenure. practical. It would require
2. of transfer of fund
Savings Account. Hence ; there is no fixed the staff to historically
from a Conventional
interval within which track the accounting
Savings Account.
interest (if any) will be records and the quantum
granted. would normally be very
minimal.
The restriction shall
be carried out in the
Grants interest at the end of The interest portion case of a transfer
the maturity period. obtained by the customer of fund from a
a t the end of the maturity conventional fixed
In the event the fund is must be segregated and deposit account into
being rolled over after the should not be transferred Islamic accounts.
Conventional maturity, the interest gained
3 into the Islamic account.
Fixed Deposit. may be capitaliszed and The issue is whether
added into the principal Difficulty in we can only segregate
amount. This will happen implementation of the the latest amount
at the point of the roll over requirement may arisebe of interest gained
after each maturity. faced in this case. and not those before
being rolled over and
capitaliszed.

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Unit 3.15 CASH MANAGEMENT DEPOSIT

A cash management deposit is known in some banks as “whole tail lockbox service”.
Currently, the collection and deposit of cheques are through the deposit machine and over-the-
counter. With this initiative, further convenience will be provided to the customers when they
are given the following options:

• To deposit the cheque through a Pos Malaysia postal box or at the counter;
• To deposit the cheque through a lockbox at the payee corporations’ (e.g. Celcom
and Maxis) premises; and
• To deposit the cheque through a lockbox at strategic locations such as petrol
stations and so on.
The Islamic financial institution offering the cash management deposit will appoint vendors
for the collection of cheques from various sources, scanning, verification/validation, data entry,
posting files and sending the cheque images to BNM for clearance as well as providing report
updates on the collection position at the end of the day.

Things to consider in order to ascertain if there is any Shari’ah issue pertaining to this kind of
arrangement:

• A closer look at the fee structure in the network collection of deposit, and the
relationship between the bank and other providers of this facility.
• Is there a fee imposed by the provider?
• If yes, who is going to pay that amount, the bank or the client? Both are acceptable
as long the fee is disclosed and agreed upon between the parties involved
(including the client) to ensure transparency in the transaction and remove any
elements of gharar.

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Unit 3.16 MALAYSIA DEPOSIT INSURANCE CORPORATION

(PIDM)

There are some relevant issues addressed by the Shari’ah Advisory Council of Bank Negara
Malaysia, related to the deposit and these issues will be discussed in this unit as part of the
issues discussed in deposit.

The Malaysia Deposit Insurance Corporation (PIDM) was established in 2005 to provide Islamic
and conventional deposit insurance. The initiative to establish a deposit insurance system aims
at strengthening the consumer protection infrastructure as one of the main agendas in the
ongoing development of the Malaysian financial system. The deposit insurance system will
strengthen incentives for financial institutions to adopt sound financial and business practices
and enhance public confidence in the financial system by providing explicit protection of
deposits.

Unit 3.16.1 SHARI’AH CONCEPT FOR THE OPERATION OF

ISLAMIC DEPOSIT INSURANCE

Deposit insurance is a mechanism that enables PIDM to protect depositors against loss of their
deposits placed with banking institutions in the unlikely event of a bank failure. To enable the
depositors of Islamic banking institutions to enjoy the same protection, the SAC was referred
to ascertain the appropriate underlying Shari’ah concepts for the operation of Islamic deposit
insurance.

Resolution

The SAC, in its 80th meeting dated 7 January 2009, has resolved that the application of kafalah
bi al-ujr (guarantee with fee) as the underlying Shari’ah concept for the operation of PIDM
in managing Islamic deposit insurance fund is permissible. Based on the concept of kafalah
bi al-ujr, the premium paid by the member institutions of PIDM offering Islamic banking
services is considered as an ujrah or fee for PIDM and thus, belongs to PIDM. As the premium
is considered as a fee, PIDM may structure it in the form of absolute or proportionate value.

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Unit 3.16.2 COMMINGLING OF FUNDS CONTRIBUTED

BY ISLAMIC AND CONVENTIONAL BANKING
INSTITUTIONS IN DEPOSIT INSURANCE

Under the deposit insurance arrangement, Islamic and conventional banking institutions
are required to be members of PIDM and pay the annual premium that serves as a source of
fund for the deposit insurance scheme. Apart from being utilised to make payments to the
insured depositors in the event of a wind-up of any banking institution, the fund is also used
for investment in Shari’ah compliant instruments as well as to defray the expenses of PIDM.

In this regard, the SAC was referred to on the issue as to whether the accumulation of premium
contributed by Islamic and conventional banking institutions into one single fund is allowed
by the Shari’ah.

In addition, the SAC was also referred to on the issue as to whether the government may make
it mandatory for all Islamic banking institutions to be members of PIDM.

Resolution

The SAC, in its 26th meeting dated 26 June 2002, has resolved that the premium or fee
contributed by Islamic and conventional banking institutions shall be segregated and shall
not be accumulated into one single fund. In the event of the dissolution of PIDM, the SAC, in
its 29th meeting dated 25 September 2002, has resolved that two separate liquidation processes
for both funds shall be executed. In addition, the SAC, in its 80th meeting dated 7 January
2009, has also resolved that the government may make it mandatory for all Islamic banking
institutions to be members of PIDM as there is no Shari’ah impediment for the imposition of
such requirement.

Basis of the Ruling

The premium or fee contributed by Islamic and conventional banking institutions shall be
segregated to avoid commingling of funds between Islamic and conventional deposit insurance
schemes. This is also to ensure that the Islamic deposit insurance fund is invested in Shari’ah
compliant instruments.

The commingling of premium funds of Islamic and conventional banking may raise uncertainties
on the Shari’ah compliance status of the Islamic banking premium fund. Separate liquidation

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processes shall also be executed in order to ensure that the rights and priority in the payment
of the protection are accorded to the rightful parties.

Unit 3.16.3 GUARANTEE LIMIT FOR ISLAMIC BANKING

DEPOSIT BY PIDM

In executing the guarantee on Islamic banking deposits, the SAC was referred to on the issue
as to whether PIDM may guarantee the principal value as well as the profit realised but not yet
distributed by the Islamic banks.

Resolution

The SAC, in its 29th meeting dated 25 September 2002, has resolved that there is no restriction
on the execution of guarantee on wadi`ah deposits. Mudarabah deposits, however, shall only
be guaranteed by a third party (in this situation, it may refer to PIDM). However, the insurance
deposit shall not give priority to guarantee mudarabah profit that has not been declared.

Basis of the Ruling

The aforesaid resolution of the SAC is based on the following considerations:

1. PIDM may limit the guarantee coverage as it is in line with the principle of kafalah that
allows the kafil to determine the guarantee limit;
2. There is no Shari’ah impediment in executing the guarantee on a deposit based on
wadi’ah; and
3. Deposit insurance should not give priority to guarantee mudarabah profit that has not
been declared as it should be used to settle the claims and liabilities of a higher priority.

Unit 3.16.4 DEFINITION OF THE TERM “DEPOSIT” IN

ISLAMIC DEPOSIT INSURANCE

As the winding-up date of an Islamic banking institution might take place before the payment
of the monthly declared profit/hibah, the SAC was referred to ascertain the definition of deposit
payable to the depositors in the event of the winding-up of an Islamic banking institution.

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Resolution

The SAC, in its 30th meeting dated 28 October 2002, has resolved that the definition of deposit
that is payable in the event of the winding-up of an Islamic banking institution refers to the
principal amount plus the profit/hibah which has been credited into the account, including
declared profit/hibah not yet credited until the date of the winding-up of the Islamic banking
institution. Nevertheless, any additional value (whether termed as profit/hibah) for the period
between the winding-up date and the date of payment is subject to the discretion of PIDM. In
addition, the SAC has also resolved that the value guaranteed by PIDM shall be clearly stated
in the ‘aqad or contract.

Basis of the Ruling

The aforesaid SAC’s resolution is based on the consideration that the criteria and definition of
the term “deposit” may be determined based on the common practice of the financial industry.
This is in line with the following fiqh maxims:

1. “Something which has been identified as a custom is considered like a stipulated

condition.”
2. “Something which has been acknowledged as common practice among the traders is
considered as agreed condition among them.”

Unit 3.16.5 STATUS OF PIDM’S CLAIM AGAINST

DEPOSITORS’ CLAIM IN THE EVENT OF THE
WINDING-UP OF AN ISLAMIC BANKING
INSTITUTION

Upon the winding-up of an Islamic banking institution and its inability to fulfil its obligation
to return the deposit to the depositors, PIDM will pay the depositors either partial or the whole
amount of the deposits from the Islamic deposit insurance fund. Subsequently, PIDM will claim
the amount paid from the Islamic banking institution. In this regard, the SAC was referred to
ascertain the status of PIDM’s claim against the depositors’ claim in getting refund from the
Islamic banking institution.

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Resolution

The SAC, in its 26th meeting dated 26 June 2002, has resolved that the priority of PIDM’s claim
against the depositor’s claim in getting refund in the event of the winding-up of an Islamic
banking institution would depend on the type of deposit paid by PIDM. For example, if PIDM
paid for a guaranteed wad’ah deposit, PIDM’s claim is considered equal to the wadi’ah depositors
and so forth.

Basis of the Ruling

Deposit products of Islamic banking institutions are structured based on different types of
contracts, hence, leading to different legal consequences. The priority of repayment of the
deposits, therefore, depends on the ‘aqad or contractual relationship concluded between the
depositor and the Islamic banking institution.

Since wadi’ah as practised by the Islamic banking institutions has the same effect of qard
from fiqh perspective, Islamic banking institutions are obliged to guarantee and return the
whole amount deposited into the wadi’ah account. For mudarabah-based deposit, the Islamic
banking institutions are not obliged to guarantee or refund the whole amount of mudarabah
capital or the profit, unless the loss incurred is due to the negligence or mistake on the part of
the financial institution as the mudarib.

Notwithstanding the above, based on the contract of kafalah bi al-ujr concluded by PIDM and
Islamic banking institutions, PIDM bears the responsibility to guarantee mudarabah loss on
the basis of a third party guarantee. In this regard, Islamic banking institutions are obliged
to give priority to satisfy the rights of the wadi’ah account depositors before the mudarabah
account depositors. This is because the Islamic banking institutions owe direct responsibility
towards the wadi’ah account depositors.

Unit 3.16.6 APPLICATION OF MUQASAH IN ISLAMIC

DEPOSIT INSURANCE

Usually, after an Islamic banking institution has been declared insolvent, an offset (muqasah)
process will take place to determine the amount of deposit that should be paid by PIDM to the
depositors. Under this process, the payable amount will be determined based on the difference
between the deposit amount and the outstanding amount of financing or debt owed by the
customer to the Islamic banking institution. For example, if a customer has a deposit of RM

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100,000 and at the same time, he has an outstanding financial or debt obligation of RM 50,000,
the customer is eligible to receive a payment of RM 50,000 only.

In this regard, the SAC was referred to on the issue as to whether the offset process between the
depositors and the Islamic banking institution as illustrated above is permissible in the process
of deposit repayment by PIDM and the liquidator.

Resolution

The SAC, in its 32nd meeting dated 27 February 2003, has resolved that the offset process
between the depositors and the Islamic banking institution is permissible to be applied in the
process of deposit repayment by PIDM and the liquidator.

Basis of the Ruling

In principle, muqasah is permissible in Islamic transactions. Muqasah can be carried out in

two manners, namely, al-muqasah al-ittifaqiyyah (mutually agreed by both parties) and al-
muqasah al-jabariyyah (determined by the authority to ensure justice). Most of the Islamic
financial institutions have included an offset clause in the Islamic financing agreements, and
it is enforceable based on the consent of the customer who signs the agreement. This is in line
with the following fiqh maxim:

“The original rule of a contract is the mutual consent or agreement by both contracting
parties and the consequence of the contract is based on (rights and responsibilities) agreed in
the contract.”

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SUMMARY

• Deposit in Islamic banking consists of wadi’ah and mudarabah, and fixed deposit
based on tawarruq.

• Wadi’ah is a trust-oriented transaction not subjected to liability unless the custodian

violates the limits. Thus, the act of safekeeping is a meritorious act.

• There are two types of wadi’ah, namely wadi’ah based on custodianship (wadi’ah yad
al-amanah) and wadi’ah with guarantee (wadi’ah yad al-dhamanah).

• Among the important Shari’ah issues related to wadi’ah is the giving of hibah by the
bank to the depositor. The hibah given to the depositors is solely at the discretion of
the bank and it should not be promised upfront and should not be advertised by the
bank.

• A mudarabah account is an account meant for investment that generates return. Among
the issues addressed in the mudarabah account are the indication rate disclosed up
front, the PER, and the rights of the IAH.

• The other account is fixed deposit based on tawarruq, and among the issues addressed
in this account is the agency in the structure of tawarruq.

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QUESTIONS AND PROBLEMS

Question 1.
What are the different issues in the wadi’ah as a saving account?

Question 2.
What are the different issues in mudarabah as an investment account?

Question 3.
Discuss corporate governance with regards to the investment account holders.

Question 4.
Is the profit gained from the trading of the deposit permissible?

Question 5.
What is the view of jurists on the deposits that are mixed up in a manner that they cannot be
identified and separated?

Question 6.
Is the trustee liable to guarantee if he violates the conditions given by the depositor?

Question 7.
Can an Islamic bank accept the fund from unlawful sources? Discuss the views of the scholars
pertaining to this.

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• Shari’ah Advisory Council of Bank Negara Malaysia.

Resolution, Second Edition 2010.

• Ahmad, Ausaf & Khan, Tariqullah. Islamic Financial

Instruments for Public Sector Resource Mobilization.
Jeddah: Islamic Development Bank, Islamic Research and
Training Institute, 1997.

• Ahmad, Ausaf. Contemporary Practices of Islamic Financing

Techniques. Jeddah: Islamic Development Bank, Islamic
Research and Training Institute, 1993.

• Wahbah, Zuhaily, Financial Transactions in Islamic

Jurisprudence, Dar al Fikr, Syria.

• Ibn Rushd. The Distinguished Jurist’s Primer. Reading, UK:

Garnet Publishing, 2003.

• Niazi, Liaquat Ali Khan. Islamic Law of Contract. Lahore:

Research Cell, Dyal Sing Trust Library, 1991.

• Hammad, Nazih. ‘Aqd Al-Wadi‘ah Fi Al-Shari‘ah Al-

Islamiyyah. Damascus: Dar al-Qalam, 1993.

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