SOURCES OF FUNDS
GENERAL INVESTMENT ACCOUNT
SPECIFIC INVESTMENTS ACCOUNT
SOURCE OF FUNDS
Source of Funds in Islamic bank is formulated
based on the Shariah concepts of:
Definition of Wadi'ah:
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 profits.
Pillars of Al – Wadi'ah:
Al-Muwaddi’ (Depositor, Owner of the property)
Al-Wadi’ (Depositee, Custodian of the property)
Al-Wadiah (Property for safe keeping)
Sighah (Offer (Ijab) and Acceptance (Qabul))
Islamic banks mobilizes its customer’ deposits in current
accounts on the contract of al-wadiah yad dhamanah
CONDITION OF AL-WADIAH
(Depositor, Owner of the
• Sound mind
• BUT not necessarily attained age of puberty
• Individual or institution
of the property)
• Same with above
• Custodian is not allowed to promise any rewards
(Property for safe
• Manageable by custodian
(Offer (Ijab) and
• In definite and decisive language
• Acceptance must be consistent with offer
• Offer and acceptance made at same time
• Both parties have the right to terminate contract
at any time
Definition of Mudharabah:
A joint-venture profit sharing contract whereby one party is the provider
of capital while the other is the entrepreneur.
Characteristics of Mudharabah:
The profit will be shared between parties whom involved in the
contract according to the terms of their agreement.
The losses will be borne by the capital provider who is the financier of
The entrepreneur suffers of their fruitless effort.
Pillars of Mudharabah:
Sahibul Mal (Owner of capital, fund provider)
Ra’sul Mal (Capital)
Al-Amar or Mashruk (Business ventures or project)
Ribh (Predetermined share of profit)
Sighah (Offer and acceptance)
CATEGORIES OF MUDHARABAH
• Unrestricted mandate
• Under unrestricted
fund, entrepreneur (bank)
has got the authority by the
capital provider (depositor)
to invest the funds in any
manner which they think
• Entrepreneur (bank) is free
to invest on how, where and
for what purposes the funds
should be invested. They
(depositor) will be no
restriction to entrepreneur.
• Restricted mandate
• The entrepreneur is
restricted in his activity in
carrying out the mudharabah
project in term of business,
method, time period or
SHAREHOLDERS FUND / EQUITY
Shareholder fund and equity in Islamic bank
is formulated based on the Shariah concepts
of Musharakah (Profit and Loss Sharing
Through shares :
Ordinary Shares quoted or unquoted
Special share (Minister of Finance)
Theory of Islamic
Pure profit –
Profit Sharing –
PURE PROFIT–SHARING MODEL
Pure Profit–sharing Model was the first
deposit model developed in Islamic banks.
This model enjoys much support amongst
most of Islamic economists.
It assigns a significance role to profit sharing
(mudharabah) on the both side of balance
sheet, the asset and liability side.
Also know as the Two-Tier Mudharabah
Concept based on two level of Mudharabah :
The first tier
The second tier
TWO-TIER MUDARABAH MODEL
The 1st Tier
• Between bank and depositor
• Put their money in the bank’s investment account and share profits with it.
• Depositors are considered to be provider of the capital (rabb al mal).
• The bank functions as a working partner or manager of funds (mudarib or amil).
• Between the bank and the entrepreneurs.
• Seek finance from the bank on the condition that profits accruing from their business shall
be shared between them and the bank in a mutually agreed proportion.
• But, the loss shall be borne only by the financier.
• Bank functions as the provider of capital.
• The entrepreneur is the manager of funds.
TWO WINDOW MODEL
The liability side of the bank’s activities is divided into
2 window :
The bank is required to pay the funds held in the current
account on demand, it is subjected to a 100% reserve
The Islamic precept – that funds of demand deposits are
a trust (amanah) that is held by the bank on behalf of the
The banks neither have a right to use these funds to
make profit nor it should be used for the purpose of
money creation through fractional reserve system.
Funds held in the investment accounts shall not be
subjected to any reserve requirement.
It is argued by the economists who have advocated
this model that investment accounts of Islamic banks
are not similar to time deposits of conventional
banks, which are used for credit creation.
PROFIT SHARING – COST PLUS
A profit sharing (mudharabah) on the liability
side of the balance sheet and cost-plus
technique of financing (murabahah) on the
Other Islamic/shariah permissible technique
of finance such as
mudharabah, musharakah, ijarah, etc. may
also be used on the assets side.
CUSTOMERS DEPOSITS IN CURRENT
Definition of Current Account:
An account into which customer can deposit
money and effect payments by the drawing of
The bank accepts its customer’s deposit and
undertake to honor any demand (invariably in
the form of cheque) made by
customer, provided there is available funds in
The Current Account is formulated based on
the Shariah concepts of:
MODES OF OPERATION OF WADIAH CURRENT
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.
MODES OF OPERATION OF MUDHARABAH CURRENT
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-
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
CUSTOMERS DEPOSITS IN SAVING
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.
MODES OF OPERATION OF WADIAH SAVING
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
The bank provides its customers with saving
passbook books and other usual services
connected with the SA.
DISCRETIONARY REWARDS OF WADIAH SAVING
Under the principle of al-Wadiah, the bank is
not obligated in any way to give returns on
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:
Balance for the
monthNo. of days in the
x Rate x 1/12
GENERAL INVESTMENT ACCOUNT BASED ON
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.
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
In the event of loss in the investment, the customer bears all
Modes of investment of the funds and the ratios of profit
decided by the bank for all customers.
PROFIT ON MUDHARABAH GENERAL INVESTMENT
Distribution of Profit:
Bank in an agree predetermined ratio.
This agreed distribution ratio must be stated in
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:
Capital x x
PROFIT ON MUDHARABAH GENERAL INVESTMENT
= Principal x Profit rate x (Days in Month divide by No. of Days in
= 50,000 x 2.50% x (28/365)
= RM95.89 for the month of March 2010
SPECIAL INVESTMENT ACCOUNTS BASED ON
Mobilizes customers deposits from government
or corporate customers under the contract of
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
DIFFERENCES BETWEEN MUDHARABAH AND CONVENTIONAL FIXED