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GE20803 DEPOSIT & FINANCING
OPERATION OF ISLAMIC BANKING

DEPOSIT MOBILIZATION BY ISLAMIC
BANKS

BY DR. HANUDIN AMIN
LABUAN FACULTY OF INTERNATIONAL FINANCE

UNIVERSITI MALAYSIA SABAH

BRIEF INFORMATION ON DEPOSIT
MOBILIZATION BY ISLAMIC BANKS

Like conventional In Islamic banks, Factors like Major source of Unlike Islamic banks,
banks, customer deposits are used to philosophical, moral funds for Islamic deposits in
deposits are both finance the purchase legal and economic conventional
sources of funds and banks besides framework is
liability products in of assets such as play a role in shareholders’ funds explained by
Islamic banking houses, vehicles, differentiating the
land and building management of liquidity preference
deposits in Islamic theory explains why
banking from that of people need money

conventional for transactions,
banking precautions and
investments -
making demand
deposits, savings

deposits and
investment deposits

are of utmost
importance

TWO MAIN FUNCTIONS OF ISLAMIC
DEPOSITS

Transaction function Investment function

• Wadiah dhamanah current and • Al-mudarabah investment account
savings account
• Al-ghornm bil ghonm – no profit can
• Current or demand deposits do not be gained without taking risk (no
pay any return both in conventional reward without risk)
and Islamic banking
• The incentive to place money in
• But conventional savings pay interest mudarabah deposits should revolve
while Islamic savings do not around profits

• Transaction function of Islamic • Subject to systematic risk
deposits is conducted via the contract
of wadiah dhmanah – has no profit • Subject to operational risks
motive
• Mudarib can abuse his responsibility
• Benefits – ease of cash withdrawals (thus moral hazard is a serious factor
on call & protection of deposits to account for in decision making
when people plan to place their
• Current account is used to make savings in the mudarabah deposits
payments to third parties while
savings account is intended for safe-
keeping and convenience purposes

MICRO LEVEL OF MUSLIM BEHAVIOR
ON SAVINGS

1. In Islam, savings will Hoarding:
always means surplus 1. Idle cash 20,000
income to be placed for 2. Zakat 0.025 x 20,000 = 500
investment purposes – 3. Cash balances = 19,500
thus keeping money in
circulation. All savings Savings:
must be invested again in 1. Cash invested 20,000
the economy. Otherwise, 2. Profit 10% 2,000
it is hoarding (ihtikar) 3. Wealth 20,000

2. Hoarding money is +2,000=22,000
prohibited in the religion 4. Zakat 22,000 x 0.025 = 550
of Islam. Why it is so? 5. Wealth after zakat = 21,450

3. Does hoarding money
better?

WHY DEPOSIT NEEDED IN ISLAMIC
BANKING?

DEPOSITS ARE DEPOSITS
THE MAIN PROMOTE
SOURCE OF
FUNDS CREDIT
CREATION

(e.g. Islamic
mortgage)

DIRECT LINK TO DEPOSITS
ECONOMIC ALLOW TO CATER
THE FINANCIAL
GROWTH AND
PROSPERITY NEEDS OF
SURPLUS UNITS

Transaction motive Current account

What are purposes Precautionary motive Savings account
of different types of
deposits?

Investment motive Islamic fixed
deposit

Does penalty impose by an
Islamic bank when a current

account holder has an
insufficient fund for payment
to a third party, but the check

has been issued?

LECTURETTE #1

TRUE/FALSE QUESTIONS:
1. Both Islamic and conventional savings deposits

are considered as a major source of funds for
both banking systems, therefore, the savings
deposits are similar
2. Liquidity preference theory explains muslim
behavior to hold money in an Islamic bank

TYPES OF DEPOSITS

Demand Savings
deposits accounts

Investment Negotiable
deposits instruments
of deposits

DEMAND DEPOSITS

• Definition – a bank account that entitles the account holder to
receive his or her funds on demand using checks

• Common features of demand deposits facilities offered by Islamic
banks:

1. Customers – who have the capacity to enter into a contract (i.e. 18 years old)
2. For businesses, clubs, societies and associations, certificates of registration

and documents such as MAA and minutes of meetings relating to the
opening of the account must be presented (i.e. as evidence of the
establishment)
3. Banks are of their discretion to determine the minimum amount required
during the opening the account
4. A cheque book will be supplied by the bank to the account holder
5. Withdrawals can be made with the issuance of cheques or other written
instructions given by the account holder
6. The cheques issued by the account holder will be honoured by the bank but
is subjected to the availability of funds of the account holder
7. Islamic banks may impose a service charge for servicing and maintaining the
account
8. Account holder can terminate the account provided a notice is given in
advance

DEMAND DEPOSITS

• Wadiah current accounts – guarantee the paying back of money but Shariah Principle used:
not any return: Wadiah yad dhamanah – the bank

• The bank’s responsibility is in the form of guarantee and pools and utilizes the fund
therefore it is compulsory for the bank to return the fund as and
when requested by the customer

• If the bank earns high profit the depositor, but to compulsory, to
receive hibah

• At a loss, the bank will not give any hibah to customers

Shariah Principle used: • Qard hassan current account– a benevolent loan:
Qard hassan– deposits are treated as
• The bank is free to utilize these funds at its own risk
qardh or a benevolent loan by the
depositors • The depositor in its role as the lender is not entitled to any return
as this would constitute to riba

• The bank owes the depositor only the principal amount borrowed

• Less popular – commercial consideration that any profits gained
by the bank cannot be given (i.e. hiba) to depositors

• Mudarabah current account– profit sharing basis: Shariah Principle used:
• The depositor brings capital, the bank brings a personal effort Mudarabah– the depositors
contribute capital (deposited funds)
• At a profit, it is distributed according to PSR ratio and the bank is a mudarib

• At a loss, the depositor borne the loss
• The depositor has no control over the management of the

project

• Customers entitle to earn dividends based on the profit made by
the bank from the investment

WADIAH CURRENT ACCOUNT

DEPOSIT FUNDS
~safe-keeping
~CUSTOMER GIVES PERMISSIONS TO THE
BANK TO UTLISE ANY SUM OF MONEY

DEPOSITED
~ Wadiah yad dhamanah (an Islamic bank is a

custodian)
~ The principal amount is guaranteed by the

bank

1

5

CHEQUE BOOK

Hibah at the bank’s 4 100% 3 2
discretion PROFIT

QARD HASSAN CURRENT ACCOUNT

Depositors give a benevolent loan to the
Islamic bank. The Bank is free to utilize the
funds at its own risk. The depositor serves as a
lender and is not entitled to any return as this

would constitute riba

Banks find it difficult to market such product
as there is no return for account holder

1
4

CHEQUE BOOK

100% 3 At a bank’s
risk

PROFIT 2

MUDARABAH CURRENT ACCOUNT

INVESTS FUNDS FOR TRANSACTIONS
USING CHEQUE AND INVESTMENTS.

PSR= 30 % CUSTOMERS
70 % AN ISLAMIC BANK

1
5

CHEQUE BOOK

100% 30% 2
70%

PROFIT

3

LOSS

IN THE MARKETPLACE

• Maybank Islamic Berhad offers an Islamic
checking account based on al-wadiah yad
dhamanah and mudarabah

• Current account-i à a current account
based on the Shariah concept of Wadiah
Yad Dhamanah (safe custody), with
checking facility. Flexibility of making
unlimited withdrawal s at home branch and
outstation withdrawals of RM10,000.
Protected by MIDC

• Premier mudarabah account-i à A Shariah-
compliant current account that pays
indicatie dividends, plus premium banking
and takaful benefits. A combination of safe
custody (al-wadiah yad dhamanah) and
profit sharing (mudarabah). Provides a
cheque book

Islamic banks offer products for
savings, checking (demand) and

fixed deposits, structured to
comply with Shariah principles

SAVINGS DEPOSITS

• Definition – a bank account that offers to account holders who
seek safe custody of their funds and wish to save money as well
as to earn an income from that savings

• Common features of savings deposits facilities offered by
Islamic banks:

1. Customers – individual account, minor account, joint account, club
and associations

2. A passbook will be supplied by the bank to the account holder
3. Withdrawals can be made either over the counter or ATM
4. Islamic banks may impose a service charge for withdrawal,

replacement of ATM card etc
5. Account holder can terminate the account in writing and must sign

necessary documents
6. Hibah is given at a bank’s discretion (i.e. not compulsory)
7. The savings account facility has no profit sharing characteristics

except for contracts under the concept of al-mudarabah
8. As for minors below the age of 15 years, the savings account must

be under the name of their guardian (i.e. trust account)

SAVINGS DEPOSITS

Wadiah Yad al-Damanah (Safekeeping with Guarantee):

• Banks guarantee the deposits
• Banks can use the deposits
• Banks replace or compensate whatever gets lost
• Banks are expected to give the deposits whenever they are requested by the owners
• According to many scholars, this category is most suitably termed as qard – loan. Some do

not even consider this type in Islamic law.

Wadiah Yad al-Amanah (Act of Trust):

• By definition, keeping with trust.
• No compensation in case of loss or damage
• No reward for keeping
• No right at all to use the property
• This type of wadiah is also called Amanah
• The Apostle of Allah (saws) said: “he who accepts a trust property (as a trustee) has no

liability”

WADIAH SAVINGS ACCOUNT

DEPOSIT FUNDS
~safe-keeping
~convenience
~ Wadiah yad dhamanah (an Islamic bank
is a custodian)
~ The principal amount is guaranteed by

the bank

1

4

Hibah at the bank’s 100% 3 2
discretion

PROFIT

IN THE MARKETPLACE

• Bank Muamalat offers an Islamic
savings account account based on al-
wadiah yad dhamanah principles

• BSAà Al-wadiah yad Dhamanah. Basic
features à minimum initial deposit is
RM 20.00, withdrawal can be made
using ATM, MEPS throughout the
country

• WSA à Al-wadiah yad Dhamanah.
Minimum deposit RM 100.00.
Withdrawals can made as similar as
BSA

NORMAL CALCULATION OF HIBAH

• Daily Average Balance x (number of days/365) x hiba rate = Profit
(RM, hiba):

• For example, hiba rate from 16 Jun until 15 July is 2.0%, daily
average balance is RM 5,000, the deposit is kept for one month (Jun
2012, 30 days) so the hiba will be; and

• RM 5,000 x (30/365) x 0.02 = RM8.22

• In essence the amount of RM8.22 will directly be credited into the
current account-i holder after the rate and the calculation for the profit
has been made. The computation of the hibah rate is anchored in the
performance of the bank, size of the deposit, period of the saving and
the policy of the bank, which may differ from one bank to another

CALCULATION OF HIBAH WHEN TIER
MATTERS

• Mutli- hibah rates (effective 16/12/2015-15/01/2016 and 16/01/2016 – 15/02/2016)

• Examples Range Rate (% p.a)
Tier Up to RM 1,000 1.05 %
Tier 1 RM 1,001 to RM 5,000 1.85 %
Tier 2 RM 5,001 and above 2.54 %
Tier 3

• Hence compute WSA with a balance of RM7,000 for whole of January 3, 2016 based on
the above hibah rates:

31/365 x 1.05% x 1,000 = RM 0.89
31/365 x 1.85% x 4,000 = RM 6.28
31/365 x 2.54% x 2,000 = RM 4.31
Total Hibah = RM 11.48

LECTURETTE #2

• Multi- hibah rates (effective 16/12/2015-15/01/2016 and 16/01/2016 – 15/02/2016)

Tier Range Rate (% p.a)
Tier 1 Up to RM 1,000 1.15 %
Tier 2 RM 1,001 to RM 5,000 1.95 %
Tier 3 RM 5,001 and above 2.34 %

Hence compute WSA with a balance of RM10,000 for whole of January 3, 2016 based on the
above hibah rates

INVESTMENT DEPOSIT

• Definition – a bank account that allows customers to keep money for
investment motives, be it short-term or be it long-term

• Common features – the following are among the common features
of the investment deposit:

1. Minimum amount of deposit (e.g. 5,000)
2. Types of customers who can operate an investment account (i.e.

individuals, joint individuals, firms and corporations & societies,
associations and clubs)
3. Withdrawal and renewal process
4. Distribution of profits (i.e. Profits are distributed between the owner of
the capital and the entrepreneur based on PSR such as 70:30 – Islamic
banks: Customers)

Mudarabah

Al-Mutlaqah Al-Moqayyadah

MUDARABAH ACCOUNT

INVESTS FUNDS
PSR= 70 % CUSTOMERS
30 % AN ISLAMIC BANK

1

2

100% 70% 30%
LOSS 3
PROFIT

ELABORATION

Key elaboration:

• Suppose you deposit RM20,000 with a bank and the PSR is 30:70,
30% is to the bank, 70% is to you

• The bank takes the money to invest in a project. It does not
guarantee that the investment will be profitable

• Now suppose there is a net profit of RM1,000. The profit is shared as
follows – 30% x 1,000 = RM300 for the bank, 70% x 1,000 = RM700 for
you. Your account would then show a balance of RM20,700
(RM20,000 + 700)

• In the even of a loss, say, RM500, you as depositor will be the only
one to bear the loss. The loss is 100% for you (100% x –RM500=-
RM500) while the bank is 0%, Your account would then show a
balance of RM19,500 (RM20,000 – RM500=RM19,500)

CALCULATING DIVIDEND FOR
MUDARABAH ACCOUNT

• Using the following information, compute the total amount of
dividends earned by an investment depositor of an Islamic bank is
he/she deposits RM50,000 on 17th July 20xx to be held for the next
three months:

Date of profit being Actual profit declared PSR (Customer: Bank)
declare by Islamic bank

16 June 20xx 8% 80:20

16 July 20xx 7.5% 80:20

16 August 20xx 8.5% 80:20

16 September 20xx 8.5% 80:20

16 October 20xx 9% 80:20

SOLUTION

• PROPOSED SOLUTION:

Date of profit being Actual profit PSR (Customer: Profit earned Dividend
declare declared by Bank) by customer earned
Islamic bank (2)
16 July 20xx (3) (4)
16 August 20xx (1) 80:20
16 September 20xx 6% -
16 October 20xx 7.5%

8.5% 80:20 6.8% 283.33

8.5% 80:20 6.8% 283.33

9% 80:20 7.2% 300

RM866.66

IN THE MARKETPLACE

BIMB introduces a first in Islamic
banking, that is, al-awfar
investment account-1. NOT CIMB
ISLAMIC. Minimum initial deposit is
that of RM1,000 – 1 month tenure.
RM500 – 1- 60 months tenure:
PSR=70 Bank: 30 Customer

NEGOTIABLE INSTRUMENTS OF
DEPOSITS

• Definition – refers to a sum of money deposited with the
bank and repayable to the bearer on a specified future date

• Common features of the instrument:

1. Two Shariah principles used, BBA and Mudarabah
2. A certificate of investment will be supplied by the bank to the

account holder
3. Equivalent to the conventional certificate of deposits (CDs)
4. A bank-issued short-term security that documents a deposit and

specifies the profit rate and maturity date
5. As bearer instruments
6. May be issued based on BBA or Mudarabah as above

NEGOTIABLE INSTRUMENTS OF
DEPOSITS

Negotiable Islamic Islamic Negotiable
Debt Certificate Instruments of
(NIDC) Deposit (INID)

The Islamic bank sells the bank’s The depositor places money with
asset to the depositor at an agreed the Islamic bank and REPAYABLE to
price on CASH BASIS. The Islamic the depositor (THE BEARER) on a
bank, in turn, buys the similar asset
specified future date at the
from the depositor at PRINCIPAL NOMINAL VALUE + DIVIDEND
VALUE + PROFIT and done at an

agreed FUTURE DATE

NEGOTIABLE ISLAMIC DEBT
CERTIFICATE

1-SELL ASSET, RM50K 1
MOP: CASH - ‘ISLAMIC DEPOSIT’

2

2-BUY BACK ASSET, RM50K +
PR%

MOP: DEFERRED OVER A
PERIOD OF SAY 4 YEARS

• 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

• The bank issues a Certificate of Debt (Shahadah al-Dayn) as
evidence of the bank's debt to the customer

• NIDC is done on an inah transaction & may be subsequently
traded as a debt to a third party

NORMAL CALCULATION OF NIDC

Bank sells an asset to its customer

• Selling Price (SP) RM1,000,000
• Profit margin ( r ) 7.5% p.a
• Tenor (months) ( t ) 6
182.5
or, days to maturity

Bank purchases from the customer SP x [ 1+ r* t / 365 ) ]

1,000,000 x [ 1 + (0.075 x 182 / 365) ] 1,037,500

Customer’s profit 37,500

ISLAMIC NEGOTIABLE INSTRUMENTS
OF DEPOSITS

1- CONTRIBUTES 100% CAPITAL 1

2

2-REPAYABLE TO THE BEARER
ON A SPECIFIED FUTURE DATE,

NOMINAL VALUE + DIVIDEND

• The maturity is from 90 days up to 60 months
• Similar to a MIA
• Can be sold or traded in the IMM
• Profit or declared dividend rate depends on the PSR
• Return is equivalent to the time value of the depositor’s money

NORMAL CALCULATION OF INID

• Profit Sharing ratio in favor of customer (PSR) 80 : 20

• Deposit placement (D) RM1,000,000
• Declared dividend rate ( r ) 7.5% p.a
• Tenor (months) ( t ) 6
182.5
or days to maturity

Proceeds D x [ 1+ r* ( t /365 ) ]

1,000,000 x [1 + (0.075 x 182 / 365) ] 1,037,500

Customer’s profit 37,500

IN THE MARKETPLACE

• Bank Muamalat offers a Negotiable Islamic
Debt Certificate (NIDC)

• Done on BBA principle
• The bank sells the NIDC to the customer at

an agreed price on cash basis
• The bank buys back the NIDC at

principal+profit at an agreed future date
• Tenors of issuance vary from 1 mth – 5

years
• Minimal nominal amount issued is

RM10,000,000 in multiples of RM 1,000,000
• Fixed return over the entire tenor of the

investment