Lecture 3

UIB2612
Sources of
TRIMESTER 1730
Fund
LEARNING OUTCOME

At the end of this session, students are expected

to:
 know that as conventional bank, IB also need
sources of funds to operate its business;
 know the available sources of fund for IB
 know how this sources of fund operates
INTRODUCTION

Like conventional banking, Islamic banks also

need funds to operate its banking activities.
Basically there are two main sources of funds
namely :
(a) shareholders’ working capital and
(b) deposits collected from customers.
…CONT

For a dual window banking operation, all

funds belonging to the Islamic banking
scheme are segregated from those related
to conventional banking and to avoid
comingling of the funds, a separate
accounting system is adopted.
…CONT

The original source of the funds has to be

ascertained to ensure it comes from “halal’
sources.
Under a dual window banking operation, the
initial paid-up capital is normally given on al-
Qardh Hassan basis (benevolent loan) by the
parent conventional bank, thus there shouldn’t be
any issues regarding the source of the funds as
there are Muslim scholars questioned on the
source of capital injected for the scheme.
ISLAMIC BANKS RELY ON
THE FOLLOWING
SOURCES OF FUNDS:
Capital & Equity;
Transaction deposits that are risk
free and yield no return; and
Investment deposits that carry the
risks of capital loss for the promise of
variable returns
CAPITAL & EQUITY
Capital is the amount injected into
the Islamic bank during the setting-up
stages i.e. the paid-up capital of the
Islamic bank.
Equity is usually the retained earning
of the Islamic bank that accumulated
during its operational period.
TRANSACTION
DEPOSITS
CURRENT ACCOUNT
Current accounts are based on the principle of Wadiah, whereby the
depositors are guaranteed repayment of their funds.
At the same time, the depositor does not receive remuneration for
depositing funds in a current account, because the guaranteed funds
will not be used for PLS ventures.
Rather, the funds accumulating in these accounts can only be used
to balance the liquidity needs of the bank and for short-term
transaction on the bank’s responsibility.
Deposits can be withdrawn through issuance of cheques, automated
machines or over the banking counter during banking hours.
Since deposit is placed under trust, Islamic banks normally do not
give any returns for this type of deposits
MODES OF OPERATION OF
WADIAH CURRENT
ACCOUNT
The bank accepts deposits from its customers looking for custody of
their funds and absolute convenience in their use in the form of CA
on the principle of al-wadiah yad dhamanah.
The bank requests permission from such customers to make use of
their funds so long as these funds remain with the bank.
The customers may withdraw a part or the whole of their balances at
any time they so desire, and the bank guarantees the refund of such
balances.
All the profits generated by the bank from the use of such funds
belong to the bank.
The bank provides its customers with cheque books and other usual
services connected with the CA.
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…CONT

Contract made between Depositor (provider of capital)

AND Bank (entrepreneur)
The amount deposited for a stipulated period by the
depositor will be used by the bank for investment
purposes according to the al-mudharabah principle.
The bank becomes wholly responsible and liable in the
management and investment the deposits in halal
business ventures.
Profits gained will be divided and distributed
accordingly, based on margins agreed upon earlier.
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SAVINGS ACCOUNTS
Savings accounts also operate under the Wadiah principle.
Savings accounts differ from current deposits in that they earn the
depositors income as it is depending upon financial results.
This is similar to current account except it does not have any
cheques facility.
Under strict principle of Al-Wadiah, the bank is not supposed to
give any returns. Nevertheless, if the bank decides to give some
returns, it is given as a hibah or a gift. To compete with local
conventional banks, local Islamic banks do give out hibah on
mas’lahah (public interest) reason.
CUSTOMERS DEPOSITS IN
SAVING ACCOUNTS
Mobilizes customers’ deposits under the contract of al-wadiah yad
dhamanah its modification on the payment of profit at the absolute
discretion of the bank.
This is a trust arrangement and involves the depositing (movable) or
monetary deposits with another person, for safe-keeping.
The depository acts as a trustee or guarantor, and guarantees
repayment of the deposits on demand.
Wadi'ah does not provide the depositors with the right to receive a
share of the profit.

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MODES OF OPERATION OF
WADIAH SAVING ACCOUNT
The bank accepts deposits from its customers looking for safe
custody of their funds and a degree of convenience in their use
together with the possibility of some profits in the form SA on the
principle of al-wadiah yad dhamanah.
The bank requests permission from such customers to make use of
their funds so long as these funds remain with the bank .
The customers may withdraw a part of the whole of their balances at
any time they so desire, and the bank guarantees the refund of such
balances.
The bank provides its customers with saving passbook books and
other usual services connected with the SA.

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DISCRETIONARY REWARDS
OF WADIAH SAVING
ACCOUNT
Under the principle of al-Wadiah, the bank is not obligated in any
way to give returns on depositors.
However, the banks at its absolute discretion, may reward its
customer a certain amount of return as deemed fit.
Calculation of profit is a follows:
 Cumulative daily

Balance for the

x Rate x 1/12
month
No. of days in the month

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INVESTMENT
DEPOSITS
GENERAL INVESTMENT
ACCOUNT
It is an investment account with pre-determined profit sharing ratio and
maturity period.
General investment deposits are contracted under the Mudharabah concept,
where depositors and the Islamic Banks agree at the time of placement, the
profit sharing ratio and the placement duration.
An investment account operates under the Mudaraba al-mutlaqa principle,
in which the Mudarib (active partner) must have absolute freedom in the
management of the investment of the subscribed capital.
The conditions of this account differ from those of the savings accounts by
virtue of:
1. a higher fixed minimum amount,
2. a longer duration of deposits, and
3. most importantly, the depositor may lose some of or all his funds in the
event of the bank making losses
GENERAL INVESTMENT
ACCOUNT BASED ON
MUDHARABAH
The bank acts as ‘entrepreneur’ and the customers as the ‘ provider
of capital’.
Both agree on show to distribute profits (if any) and in the event of
loss, the customer bears all the loss.

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MODES OF OPERATION OF
MUDHARABAH GENERAL
INVESTMENT ACCOUNT
The bank accepts deposits from its customers for GIA on the principle of
Mudharabah.
This investment is utilized as business capital by the bank. Customer will have
no authority to interfere with the management of investment.
Bank will has the right to manage the investments as it deems fit by investing
into businesses that are both Halal (permissible) and profitable.
The deposits will have to be for a specified period.
In basic Shariah relationship, the bank acts in this case as the ‘entrepreneur’ and
the customers as the ‘provider of capital’ and both will agree among others on
how to distribute the profits, if any, generated by the bank from the investment.
In the event of loss in the investment, the customer bears all the loss.
Modes of investment of the funds and the ratios of profit decided by the bank for
all customers.

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PROFIT ON MUDHARABAH
GENERAL INVESTMENT
ACCOUNT
Distribution of Profit:
 Bank in an agree predetermined ratio.
 This agreed distribution ratio must be stated in the contract.

Calculation of Profit:
 When an investment certificate is presented on or after the maturity date of the
investment deposit, profit due will be calculated.
 The formula can be as follows:
 Profit Amount:

Tenor Rate
Capital x x
12 100

21
 PROFIT ON MUDHARABAH GENERAL
22

INVESTMENT ACCOUNT

=Principal x Profit rate x (Days in Month divide by No. of Days in Year)

=50,000 x 2.50% x (28/365)
=RM95.89 for the month of March 2010
SPECIFIC INVESTMENT
ACCOUNT-I
It is a unique investment product where depositors will be advised on where
the funds will be invested, the minimum amount that they can invest, the
projected returns and the adherence risk that comes with it.
Special investment accounts also operate under the Mudaraba principle, and
usually are directed towards larger investors and institutions. The difference
between these accounts and the investment account is that the special
investment account is related to a specified project, and the investor has the
choice to invest directly in a preferred project carried out by the bank.
Generally, returns on specific investment account are very much higher,
however there are depositors who are keen to place their funds under this type
of deposits.
Any losses from the project shall be borne entirely by the depositors.
Generally, depositors for this type of deposits are by invitation only and
common projects that bank will use for this funds are real-estate related.
SPECIAL INVESTMENT
ACCOUNTS BASED ON
MUDHARABAH
Mobilizes customers deposits from government or corporate
customers under the contract of equity-financing.
The bank acts as the ‘entrepreneur’ and the customers as the
‘provider of capital’.
Modes of investment of the funds and the ratios of profit may
usually be individually negotiated.
Mudharabah SIA operates under the same basic principles as
Mudharabah GIA.
However, the Mudharabah SIA is more in tune with the
requirements of the client may negotiate the tenure of the investment
as well as the profit sharing ratio.

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DIFFERENCES
BETWEEN MUDHARABAH A
ND CONVENTIONAL FIXED
DEPOSIT

25
COMMODITY
MURABAHAH
This is another form of unique deposit contract.
Under this contract, the customer will purchase
commodity (normally crude palm oil or metal) from a
broker, say Broker A, and sold to the bank on
deferred payment (including customer’s profit
margin).
Once the ownership is transferred to the bank, the
bank will sell the commodity to another broker, say
Broker B at a discount for cash. Purchase and sale of
the commodity are considered “real transfer”.
http://iimm.bnm.gov.my/view.php?
id=72&dbIndex=0&website_id=14&ex=1216289403
&md=%C3%88%E2%80%9Em%20
…CONT

Any slip up on the transaction, one party may end

up holding the commodity. On maturity of the
deferred payment term, the bank will pay the
customer at the agreed sale price.
Technically, this product is a fixed profit rate
deposit account
 ISLAMIC INTERBANK
MONEY MARKET(IIMM)
Excess funds in the bank can also be invested with
another bank.
This type of transaction can either be placed under the
principle of Mudharabah or commodity murabahah. In
Malaysia, short term funds (say, one day to a week) are
normally placed under Mudharabah.
When a bank is short of funds, assume all their
investments have already been placed out/invested and to
recall the investment would result to a loss for the bank,
and there is an immediate need to cover its position (say,
due to certain unexpected withdrawal by its large
depositors or it has to make a large financing drawdown),
it normally makes a call to another bank with excess fund
to invest (technically, under conventional banking it is
termed as borrowing) by making placement with them.
…CONT

Unlike normal general investment account-i

placement where the profit sharing ratio has been
pre-determined by the bank, under interbank
money market system, the banks will negotiate
on the profit sharing ratio before making
placement.
If funds are placed under Commodity
Murabahah, same principle earlier mentioned will
apply.