ISLAMIC BANKING

OPERATIONS

TOPIC 4: DEPOSITS
RATIONALE FOR
CURRENT ACCOUNTS
• Designed for everyday financial transactions
• Alternative to notes and coins
• More convenient
• More hygienic
• Less risk of theft
• Record of every transaction
• Facilitates budgeting with ability to monitor income and
payments and search historical records
• Most salaries paid by electronic transfers
• Employees need a bank account
 CURRENT ACCOUNT
FACILITIES
• Transactions deposits
• Demand deposits
• High velocity
• Monthly cycle with salary credited to cover regular outgoings
• Payments facilities
• Debit card for ATM cash withdrawals and point of sale (POS) use
and cheque (check) book
• Standing orders and direct debits
• On-line payments to transfer funds domestically
• International payments using IBAN (International Bank Account
Number) and BIC (Bank Identification Code)
ISLAMIC CURRENT
ACCOUNTS
• Designation
• Qard hasan interest free loans
• Amanah trust deposits
• Wadiah custodian deposits
• Distinctiveness
• Deposits segregated with no co-mingling of funds
• Funds only used for Shariah compliant finance
• Returns
• No interest or other financial benefit
• Qualitative rather than quantitative benefits with wide
range of account services
ISLAMIC DEPOSIT
FEATURES
Account Return Benefit Guarantee

Current None Payments services Yes

Investment Variable Profit share with No

proportion agreed
contractually
 SAVINGS DEPOSITS
Suitable for funds excess to current needs
Client seeking a return for longer term savings usually in the form of interest
Determination of interest returns
Depends on bank’s expectation of being able to use the funds profitably
Depends on inter-bank offer rate on funds
Depends on central bank funding costs
Depends on interest rates offered by other banks to savers
Fixed versus variable rate deposits
Rates may be fixed for a one or two year period: a savings bond (non-tradable
and illiquid)
Usually rates are variable and set at the bank’s discretion
Rates to existing depositors may be lower than those offered to new clients
 ISLAMIC INVESTMENT
DEPOSITS
Mudarabah deposit characteristics
• Profit shares rather than interest returns
• Emphasis on investment rather than savings
Unrestricted
• Unrestricted investors share in the banks profits
• Profit rate declared unilaterally by the bank and may not correspond
to profits declared in audited financial report
Restricted
• Share in the profits of a particular third party project the bank
identifies
• Restricted pay higher returns but greater volatility
• Can be taken off balance sheet under AAOIFI standards
OPERATIONAL FEATURES OF
ISLAMIC INVESTMENT DEPOSITS
Profit smoothing
• The purpose of equalization reserves
• Displaced commercial risk
• Counter-cyclical with profits still paid in recessionary
period
Notice deposits
• Longer notice periods result in higher percentage profit
share
• Instant withdrawals either not permitted or if permitted
then no profit share paid
FOREIGN CURRENCY DEPOSITS,
KUVEYTTÜRK PARTICIPATION
ACCOUNTS
Maturity TL % $% €%

1 month 6.24 2.54 2.59

3 month 6.55 2.63 2.69

6 month 7.37 2.94 2.92

1 year 8.52 3.43 3.40

Minimum TL 50 $100 €100

deposit
CASE STUDY:
ISLAMIC BANK OF BRITAIN DEPOSITS
Maturity Expected profit rate Minimum deposit

60 day notice 1.00% ₤250

120 day notice 2.00% ₤500

Young person’s 1.00% ₤20

notice
18 months fixed 2.25% ₤1,000

24 months fixed 2.80% ₤1,000

CASE STUDY:
LLOYDS TSB ISLAMIC DEPOSITS

• Islamic current accounts

• Standard transactions services
• Islamic student and graduate accounts
• Interest free overdraft (qard hasan)
• ₤500 for first 6 months, ₤1,000 from months 7-9 and ₤1,500
from month 10
• Longer term tiered overdraft of ₤1,500 in years 2 and 3 and
₤2,000 in years 4, 5 and 6,
• Islamic business accounts
CASE STUDY:
DUBAI ISLAMIC BANK DEPOSITS

Current accounts
• Fee AED 25 per month unless minimum salary of AED
3,000 paid into account or linked to investment account
• Qard hasan salary in advance loan available

Investment accounts
• 1, 3, 6, 9 and 12 months
• Profit rates from 1.20% to 1.70% per annum
 CASE STUDY:
DUBAI ISLAMIC BANK WOMEN’S BANKING
Johara current accounts
• Opening balance of AED 500 for salary transfer
• Debit card with daily ATM limit AED 10,000
• Fee AED 25 per month
Johara investment deposits
• Minimum deposit AED 10,000, $ 3,000 or €3,000
• Waver of current or savings account fees if returns and transfers from
the investment account paid through current or savings account
• 1, 3, 6, 9 and 12 month deposits
• Profit rates from 1.20 to 1.70% annually paid quarterly
Shaatir savings accounts
• Designed for children
CASE STUDY:
JORDAN ISLAMIC BANK DEPOSITS
Current accounts
• Salary current accounts
• Call accounts without cheque (checking) facilities
Term and notice accounts
Specified investment account
• Bank appraises project
• No bank liability for losses unless it is negligent
Muqaradah bonds
• Based on a mudarabah structure
• Client buys at issuance or from the bank
• Redemptions through the bank
CASE STUDY: MAYBANK ISLAMIC
PREMIER MUDHARABAH ACCOUNT
Hybrid account
• Current account paying dividends
• Combines Wadiah (safe keeping) with Mudharabah (profit sharing)
Facilities
• Maybank card and cheque book
• Electronic banking
Benefits
• No monthly fee
• For deposits over RM 50,000 one month Islamic fixed deposit rate
• Personal accident takaful of RM 50,000 if death
• Medical takaful of RM 3,000
CASE STUDY: MAYBANK ISLAMIC
GENERAL INVESTMENT DEPOSIT RATES
Period (months) Profit Sharing Ratio Indicative Dividend
%
1 30:70 2.75
3 30:70 3.04
6 30:70 3.14
12 30:70 3.19
24 30:70 3.23
36 30:70 3.32
48 30:70 3.68
60 30:70 3.86
Rates for January – February 2013
SHARI'AH COMPLIANT ASSETS
Country $US million, 2010
Iran 314,897
Saudi Arabia 138,238
Malaysia 102,639
UAE 85,623
Kuwait 69,089
Bahrain 44,858
Qatar 34,676
Turkey 22,561
United Kingdom 18,949
Bangladesh 9,365

Source: The Banker, London, November 2010

TOP TEN ISLAMIC BANKS
Bank Assets, $ Profits, $ million
million
Bank Melli 57,003 266
Al Rajhi Bank 45,528 1,807
Bank Mellat 43,109 n/a
Bank Saderat 41,981 319
Kuwait Finance House 40,318 106
Bank Tejarat 34,546 396
Dubai Islamic Bank 22,835 137
Bank Sepah 22,502 388
Parsian Bank 19,783 405
Bank Maskan Iran 19,311 284

Source: The Banker, London, November 2010

COMMODITY MURABAHAH DEPOSIT
• Bank Negara (BNM) explained the introduction of the
commodity murabahah in its 2005 Annual Report on the Islamic
Financial System
• The commodity murabahah, among others, is a new feature in
the Malaysian Islamic banking industry although it has been used
extensively in the Middle East
• This is another form of deposits designed to generate liquidity
for Islamic banks and is structured as a trade transaction to
comply with murabahah principle
COMMODITY MURABAHAH DEPOSIT
• It is structured in such a way that a commodity is being
exchanged on spot basis and the settlement arrangement will be
structured in a manner to meet the various requirements
• In a deposit taking arrangement, the first sale from bank to
customer will be settled with cash (deposit amount) while the
second sale from customer to bank will be on deferred terms at
a pre-determined maturity date
• Similarly, in a financing arrangement, the first sale from
customer to bank will be settled with cash (disbursement
amount) while the second sale from bank to customer will be on
deferred terms payable at settlement (maturity) date
COMMODITY MURABAHAH DEPOSIT
• There are many types of CMD. A CMD structure will change
based on the following circumstances:
• Types of commodities utilized in the product. In Malaysia,
crude palm oil is common while in the GCC and Europe
copper is usually a popular choice for this transaction
• Some DTBs prefer to purchase the commodity through a
broker. Brokers usually earn $50 per $1 million transactions.
When DTBs act as an Agent, they earn a commission around
25 basis points (0.25%)
• In some structures, the DTBs purchase the commodity
directly from the Supplier
NEGOTIABLE ISLAMIC
CERTIFICATE OF DEPOSITS
• Islamic Negotiable Instrument of Deposit (INID) is concluded
on the basis of mudarabah and it is similar to a MIA
(Mudarabah Investment Account)
• INID is an Islamic negotiable instrument (INI) and can be
sold/traded in the Islamic money market
• The maturity is from 90 days up to 60 months (5 yrs). With a
nominal value of a minimum of RM50,000 and in multiples
thereof up to RM10.0M
• The profit or declared dividend rate depends on the Profit
Sharing Ratio (PSR)
• The return is equivalent to the time value of the depositor’s
money and comparable to conventional rates of interest

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NEGOTIABLE ISLAMIC DEBT
CERTIFICATE (NIDC)

• NIDC is concluded on the basis of Bay’ Bithaman Ajil (BBA), and is

an Islamic negotiable instrument (INI), which can be traded in the
Islamic money market

Mechanism:
• The bank sells its asset to a customer for immediate cash, whom
simultaneously sells back the asset to the bank for a credit price.
The deferred marked up credit price, is re-paid by the bank to the
customer within a period from overnight up to 365 days

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NEGOTIABLE ISLAMIC DEBT
CERTIFICATE (NIDC)

• The bank issues a Certificate of Debt (Shahadatu al-Dayn) as

evidence of the bank's debt to the customer. NIDC is based on an
‘inah transaction and may subsequently be traded as a debt to a
third party
• NIDC is based on an `inah contract and may be subsequently traded
as a debt to a third party (bai’ al-dayn)
• Negotiable Islamic Debt Certificate (NIDC) is concluded on the basis
of BBA, and is an Islamic negotiable instrument (INI), which can be
traded in the Islamic money market

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