ISLAMIC DEPOSIT AND INVESTMENT

ACCOUNT PRODUCTS IN ISLAMIC

BANKING
 Outline
• Introduction
• Definition of Islamic Deposit
• Types of Islamic Deposit Products
• Saving Account Deposit
• Current Account Deposit
• Term Deposit
• Others
• Definition of Investment Account
• Types of Investment Products
• Mudarabah Investment Account
• Wakalah Investment Account
 Introduction
• Deposit is the main source of funds of the banking
systems both in Conventional banking and Islamic
banking. It is considered as a low cost of source of
fund.
• Investment is one of the activities for the purpose of
generating a financial profit\income\return. It is
subject to risk.
 Definition of Islamic Deposit
• Section 2 (1) of IFSA.
• Keywords:
– accepted or paid in accordance with Shariah,
– it will be repaid in full or;
– proceeds shall not be less than the amount deposited.
– BUT not including money paid bona fide by way of
advance or a part payment under a contract, security
for the performance of a contract of loss, security for
the delivery up or return of any property, or to or by
persons set out in schedule 2.
 Types of Islamic Deposit Products
Types Saving and Term Deposit Others
Current (NIDC,
Account SBBA,
Overdraft,
Cash Line
Facility)

Underlying •Qard •Tawarruq •Bai‘ al-‘Inah

Contract •Tawarruq (Commodity •Tawarruq
(Commodity Murabahah)
Murabahah)
 Islamic Saving /
Current Account
Saving Current (Call/Demand Deposit)
• Aim for the customers who • Aim for the customers who keep
are looking for safe custody of excess liquidity available and
their funds. can be withdrawn on demand.
• Minimum requirement can be • Minimum requirement of deposit
as low as RM10. is higher than the saving
• Contracts used are qard and account.
tawarruq (commodity • Contracts used are qard and
murabahah). tawarruq (commodity
• Withdrawal through murabahah).
automated machines and over • Withdrawal through cheques,
the counter. automated machines and over
• No Overdraft Facility the counter.
• Overdraft Facility is available.
 Qard Deposit

• Some saving and current accounts are based

on loan (qard) contract.
• Deposit is treated as loan principal.
• The bank guarantees the return of the same
amount of principal without any profit.
• No hibah, either in the form of dividend or
gifts, are allowed.
• This product is covered by the Malaysia
Deposit Insurance Corporation (PIDM)
 Illustration

1. The bank accepts deposits from its customers

looking for safe custody of their funds. The
deposits are treated as loan (qard) by
depositors.
2. The bank is free to utilise the deposit at its
own risk and guarantee the payment of the
principal amount.
3. The customer may withdraw the deposit at
any time.
 Diagram

1 2
bank accepts bank is free
deposits from to utilise the
its customers deposit at its
CUSTOMER BANK own risk and
guarantee the
3 principle
Customer amount
may withdraw
at any time
 Tawarruq (Commodity Murabahah)
Deposit
• Tawarruq (Commodity Murabahah) Deposit is
considered as the latest type of deposit product
offered by the Islamic banking industry in
Malaysia.
• This deposit product offers the depositor with
monthly profit return.
• This product is covered by the Malaysia
Deposit Insurance Corporation (PIDM)
 Illustration
1. Depositor deposits money into the bank and appoints
the bank as his agent to purchase a specific
commodity such as metal or crude palm oil.
2. The bank purchases the commodity from Trader A
using the deposit money. The depositor receives
notification of ownership.
3. Depositor sells the commodity to the bank with
deferred payment price(cost plus profit).
4. The bank sells the commodity to Trader B for cash at
the cost price.
5. The bank pays to the depositor the monthly profit
return on an agreed basis.
 Diagram

Depositor

1. 3. 5. The bank pays to

Depositor deposits money into the Depositor sells the commodity the depositor the
bank and appoint s the bank as its to the bank at a murabahah sale price monthly profit return
agent to buy a specific commodity (purchase price plus profit) on deferred on an agreed basis.

Bank
2.
The bank buys the commodity on
4.
behalf of the depositor at a The bank sells the commodity
for cash at purchase price
purchase price (equivalent to the
deposit amount) on spot

Trader A Trader B
 Issues on Islamic Saving and Current Account

• The giving of hibah (gift) to the depositors .

• The advertisement of hibah, both in cash and kind,
prior to or at the time of the contract .
• Survivor-ship clause in the agreement of joint account.
• The law of inheritance pertaining to the amount
deposited.
• Deposit by a minor.
• Deposit from certain individuals and companies.
• Insufficient fund for cheque clearance and overdraft
facility in Current Account.
 Islamic Term Deposit
•Term deposit is a type of deposit service with a
fixed term that is available in most banks.
•The maturity terms range from a month to a
number of years. When a depositor opens a term
deposit, he/she understands that the money can
only be withdrawn after the term has expired or
by giving a predetermined number of days’ notice.
•The mechanism of Islamic term deposit
instrument is based on Tawarruq (also known as
Commodity Murabahah) transaction.
 Tawarruq ( Commodity Murabahah)
Term Deposit
• In Tawarruq (Commodity Murabahah) Term
Deposit, the depositor will sell a commodity to
the bank for a deferred price (cost plus profit),
and the bank will sell that commodity to a
third party for cash.
 Illustration
1.Depositor deposits money into the bank and appoints the bank as
his agent to purchase a specific commodity such as metal or
crude palm oil.
2.The bank purchases the commodity from Trader A using the
deposit money. The depositor receives notification of ownership.
3.Depositor sells the commodity to the bank with deferred payment
price(cost plus profit).
4.The bank sells the commodity to Trader B for cash at the cost
price.
5.The bank pays the deferred price to the depositor on agreed
basis.
 Diagram

Depositor
1. 3. 5.
Depositor deposits money into the Depositor sells the commodity Bank pays the
bank and appoint s the bank as its to the bank at a murabahah sale price Murabahah sale price
agent to buy a specific commodity (purchase price plus profit) on deferred on agreed term

Bank
2.
Bank buys the commodity on
4.
behalf of the depositor at a Bank sells the commodity for
cash at purchase price
purchase price (equivalent to the
deposit amount) on spot

Trader A Trader B
 Negotiable Islamic
Debt Certificates (NIDC)
• This is a form of ‘deposit’ instrument from the
customer to the bank.
• This instrument as practiced in Malaysia is based
on the principle of Bay‘ al-‘inah (sell and buy-
back).
• Being negotiable instrument, the depositors could
liquidate his holding of the certificate by selling
it to third party.
• The trading of NIDC (to third party) may be
transacted on the basis of bay‘ al-dayn (sale of
debt).
 Illustration
1. The bank will first sell the asset to the depositor.
2. Immediately thereafter, the depositor will resell the asset back
to the bank for a higher price to be paid in future.
3. Payment of cash price by the customer is treated as “Islamic
deposit” at the bank.
4. When the bank buys back the asset from the customer, the
bank repays the price deferred at a future date – maturity date.
Thus, the bank can be said to be indebted to the customer
5. To evidence the bank’s indebtedness, the bank issues debt
certificates to the customer (NIDC), to be redeemed upon
maturity date, the certificate cannot be cash-in before maturity
6. Upon the maturity time, bank shall pay the price of asset to the
certificate holder.
 Diagram
Sells asset
BANK DEPOSITORS
Customer enjoys
(e.g. equipments for RM100,00)
deposit facilities
Bay al-Inah

Method of payment: cash

(Deposited in customer’s account)

Buys-back asset
BANK DEPOSITORS

(e.g. equipments for RM150,00)

Customer may
sell NIDC to 3rd
Method of payment: deferred payment party
over a period of 5 years
Bank also issues NIDC to evidence indebtedness created
by the deferred payment sale
 Issues on NIDC

• NIDC is controversial because it is based on “sell

and buy-back” arrangement (bay‘ al -‘inah)
• “Sell and buy-back” or bay‘ al-‘inah has been
considered by most jurists as fictitious sale and thus,
a legal device (hilah) to circumvent the prohibition
of riba
• The practice is however approved in Malaysia on the
basis of the view in the Shafi‘i.
 Sale And Buy Back Arrangements (SBBA)
•SBBA is a short term deposit service facility with some returns to
the depositors/investors.
•In conventional perspective the practice is known as Repo.
•Duration for the placement is normally very short (one to 30
days).
•It involves the sale of an identified basket of Islamic commercial
papers by the bank to the customer for cash payment.
•This is followed by the promise of the bank to buy back the same
basket of Islamic commercial papers from the customer upon
maturity of the placement period (also on cash basis).
•The buy back price will incorporate a yield as the return/profit for
the depositor.
•SBBA is essentially debt instrument, the sales must be made on
cash basis to avoid the occurrence of sale of debt for another debt
(bay‘ al kali’ bi al kali’).
 Islamic Overdraft /
Cash-line Facility
Bai‘ al-‘Inah Tawarruq
• Customer, who is asking for • Customer appoints bank as an
the credit line facility, will agent to buy commodity on
purchase the asset from the deferred payment to be paid
bank for deferred payment either by installment or any
either by installment or any agreed payment method.
agreed payment method. • Thereafter, the customer
• The customer thereafter sells requests the bank as an agent to
the asset to the bank on spot sell the commodity to third
payment for cash. party on cash basis.
• The selling price is kept in a • The proceed of the cash price is
special account and become a
ready facility to be utilized. kept in a special account and
• No commitment fee for non- become a ready facility to be
usage of the facility. utilized.
• No commitment fee for non-
usage of the facility.
Definition of Islamic Investment Account
• Section 2 (1) of IFSA.
• Keywords:
- money is paid and accepted for the purposes of investment,
including for the provision of finance,
- in accordance with Shariah on terms that there is no express
or implied obligation to repay the money in full
- a) Either only the profits, or both the profits or losses,
thereon shall be shared between the person paying the money
and the person accepting the money; or
- b) with or without any return.
• The accounts are also called participating accounts that may
be seen as the alternative to the fixed-term deposit accounts
offered by the Conventional banks.
 Types of Investment Account Products
Types Mudarabah Wakalah
Investment Account Investment Account

Underlying Mudarabah Wakalah

Contracts
 Mudarabah Investment Account

• Mudarabah is a contract of profit sharing

whereby the customer is the investor / capital
provider and the bank is the manager.
• The customer and the bank will be sharing the
profit according to certain ratio or percentage
agreed at the time of the contract.
• The financial loss, if any, will be borne by the
customer as capital provider.
 Illustration
Capital
Works with Provides
capital capital

Mudarib (Manager)) Rabb al Mal (Capital

provider /
shareholders)

Profit
• Shared between mudarib + rabb al mal
• Profit sharing according to a contractually
agreed ratio
• Profit sharing cannot be a fixed amount /
a fixed percentage of capital contribution
Losses
• Borne solely by rabb al mal
• Mudarib will only be
personally liable if the loss is
caused by his negligence
 Types of
Mudarabah Investment Account
General Investment
Account (GIA)/Unrestricted
Investment Account (URIA)
• Mudarabah arrangement is of a
general mandate (mudarabah
mutlaqah)
• The customer cannot place
restrictions to the bank as to the
type of dealing, or project that the
bank can enter into with the
capital.
• The ratio of profit sharing is fixed
by the bank.
• The minimum investment amount
is lower than the SIA/RIA.
Special Investment
Account (SIA)/Restricted
Investment Account (RIA)
• Mudarabah arrangement is of a
specific mandate (mudarabah
muqayyadah)
• The customer can place
restrictions to the bank as to the
type of dealing, or project that the
bank can enter into with the
capital.
• The ratio of profit sharing can be
negotiated between the customer
and the bank.
• The minimum investment amount
is higher than the GIA/URIA.
28
 Illustration

1. The bank receives the money/investment from

the customer.
2. The bank manages the funds as a Mudarib by
involving in a sale or financing transaction with
customers who in need of cash for their working
capital, purchase asset for business or purchase
an Islamic sukuk from any Islamic issuer.
3. The bank and customer share the profit when
the investment is successful.
 Diagram

1.Customer deposits
money to the Bank
CUSTOMER BANK

2. The bank
INVESTMENT manages the
funds as a
Mudarib in an
investment
Profit Loss
Will be shared between the Will be borne by the
bank and customer customer alone.
according to the agreed
ratio.
 Wakalah Investment Account
• The agency contract used is known as wakalah
bi al-istithmar that refers to as an “investment
agency” contract where the investor (the
principal) appoints the bank (the agent) to
undertake investment activities on behalf of
the principal for a fee.
Types of Wakalah Investment Account

Wakalah bi al-istithmar Wakalah bi al-istithmar

with Fixed Profit with Floating Profit

• Investment is made in • Investment is made in

fixed income various instrument with
instrument, e.g: floating profit rate.
Murabahah.
• The investor will get a
definite profit.
 Illustration
•The bank as an agent/investment manager accepts
investment capital from the customer to carry out
Shariah compliant investment activities such as money
market, Islamic securities, Islamic unit trust and the
likes as agreed by the parties.
•Profit generated from the investment, if any, shall be
returned to the customer.
•The bank as an agent cannot guarantee the profit
expected from the investment.
•The bank, as an agent, is indemnified against losses as
a result of any transactions entered into in the course of
managing and investing the investment provided that
there is no fault and negligence of the part of the bank.
 Diagram
FIXED

appoints and
pays fee invests Specified
INVESTORS BANK (Agent)
investment
portfolios

Bank works as an agent (al-wakalah bi al-istithmar) to invest the money in specified investment
portfolio that provide a fixed return to the investors.

1) Fixed Income
Securities
2) Commodities
appoints and Murabahah
FLOATING

pays fee invests 3) Mudarabah

BANK
INVESTORS
(Agent)
Leverage using:
1) Buying and selling
share
2) Islamic Call Option

Bank works as an agent (al-wakalah bi al-istithmar) to invest the money in various investment
portfolios that provide non-fixed returns to the investors.
 Issues on
Islamic Investment Account

• Investment from certain individuals and

companies
• Investment of a minor
• Advertisement of gift prior to the contract
• The implication of mergers and acquisitions
• Variation of the ratio of profit and loss sharing
• Pre-mature withdrawal of mudarabah capital
investment