This document provides an overview of deposit and investment products offered by Islamic banks. It discusses the key principles and structures of various Sharia-compliant deposit accounts, including current accounts based on wadi'a or qard models that provide safekeeping of funds without returns. Savings accounts also use wadi'a or mudharaba models to allow modest discretionary returns. Investment accounts are based on mudharaba and provide profit-and-loss sharing, with returns distributed periodically. The document outlines types of investment deposits and also discusses some of the implementation issues around providing guarantees or gifts within Islamic banking deposit products.

1. Deposit and investment
Products in Islamic Banking
Jubril Salaudeen Abdullahi PhD

2. Learning Objective
• To demonstrate the nature of products
• T show how the are structured
• To point out their Implications
• To present their Offerings
• To show the obligations

3. What are financial deposit products
• Mobilization of funds from depositors/savers to borrowers/investors is an
important task of a financial intermediary in the economy.
• Financial intermediaries attempt to achieve this goal by creating and
selling a variety of financial products to channel funds between the savers
and entrepreneurs such that investment opportunities emerge and increase.
• Higher savings are necessary for higher investment. Firms usually reinvest
their own savings; and the savings of households are passed to firms,
either directly through the purchase of stocks and bonds or indirectly
through financial intermediaries

4. …cont…
• In the longer-term, higher saving rates results in higher economic growth While
needs related to returns, liquidity, maturity, safety, stability and the like are
important for the Muslim saver, he / she has a unique concern - Shari’a
compliance.
• Hence, even if there is possibility of a trade-off between the other concerns,
Islamic deposit products allow no trade-off in the matter of Shari’a compliance.
• Islamic banks are engaged in mobilizing savings from savers by offering Shari’a
compliant products that also vary with respect to other dimensions of return,
risk, liquidity, maturity, safety, stability and the like.
• The underlying concept for each product is simple and can be compared to an
existing conventional financial instrument.
• On the deposit end, Islamic banks normally operate three broad categories of
accounts: current, savings, and investment (general and special) accounts.

5. CURRENT ACCOUNT (WADI’A/QARD) DEPOSIT
• As in the case of conventional banks, the current account is essentially a
safekeeping arrangement between the depositors and the bank, which
allows the depositors to withdraw their money at any time
• It permits the bank to use the depositors' money for liquidity purposes.
• This account gives no return to the depositors and more often than not,
the banks make no service charges in this regard.
• As in the case of conventional banks, Islamic banks provide a broad range
of related services that ensure easy access to withdrawals whenever and
wherever needed, such as, checking facility, automated-teller-machine
cards, charge cards, traveler’s checks, telephone banking, branch service,
standing instructions, statement request facility, balance enquiry facility,
remittances and the like.

6. The product above is based on various alternative Shari’ah models such as:

7. 1. Wadi’a-wad-dhamana or guaranteed
deposits
• Wadi’a refers to the action of leaving an item with a person who is
not the owner for the purpose of safe-keeping for a temporary period
of time.
• Under this mechanism, the deposits are held as amana or in trust
and utilized by the bank at its own risk.
• The depositor does not share in the risk or return in any form. Any
profit or loss resulting from the investment of these funds accrues
entirely to the bank.
• Another feature of such deposits is the absence of any condition with
regard to deposits and withdrawals. The term “wadi’a account” or
“trust account” is used for such deposits.

8. 2. Qard or benevolent loan by the depositor
• In this case, the bank operates "qard hasan current account".
• As in above, the bank is free to utilize these funds at its own risk.
• The depositor in its role as the lender is not entitled to any return as the
latter would constitute riba.
• In fact, any kind of benefit passed on to the depositor that is a part of the
agreement, is deemed to be riba.
• The qard hasan model is less popular than the wadi’a model among
bankers because banks would like to provide additional benefits to their
depositors for marketing purposes.
• Under qard hasan framework, benefits to a lender (the depositor in this
case) are rightly looked at as being against the spirit of this model.

9. SAVINGS (WADI’A/MUDHARABA) DEPOSIT
• This deposit account serves the need for the safekeeping of one’s
surplus funds while providing a modest return.
• Here, the bank has the discretion to periodically pay the depositors a
positive return, depending on its own profitability.
• Such payments are considered lawful in Islam since they are not a
condition for lending, nor are they predetermined.
• The savings account holders are allowed to withdraw their money as
they please.
• The objective of a modest return is provided by using alternative
models.

10. 1. Wadi’a Model
• This model is similar to the one of current deposit. This model is quite
popular in South East Asian countries.
• The principal amount of deposit is guaranteed. The bank guarantees the
withdrawal of funds from this account anytime the customer may wish to
do so.
• Savings deposit however, differs from current account deposit in that the
bank now provides a return to the depositor, purely at its discretion as a
gift. Such gift is not part of the contract.
• Generally, the gift or reward on deposit is granted if the customer meets
the minimum deposit required under this account. Such reward is variable
in nature since it is profit based and is discretionary on the part of the
bank.

11. 2. Mudharaba Model
• The bank now requires the depositors to authorize the bank (or
appoint the bank as mudharib) for the purpose of investing the.
funds. Depositors however, have the right of withdrawal.
• Profits are calculated on the basis of the minimum balance
maintained for a time period (say, a month). The minimum balance
maintained is deemed as the investment for that time period.
• A minimum balance is required to be maintained in order to qualify
for a share in profits.

12. 3. Al Qard Al Hasan Model
• This model is primarily used by Iranian banks.
• As in the case of current accounts, this model essentially views
deposits as loans from savers to the banks.
• The functioning of such product is similar to wadi’a-based products
highlighted above.
• Although no dividends are payable to qard hasan depositors, banks
provide a range of benefits including non-contractual gifts to their
customers.

13. Investment Products

14. INVESTMENT (MUDHARABA) DEPOSITS
• This is the core deposit product of an Islamic bank. The product is based on the concept of
mudharaba and as such, is also known as profit-and-loss sharing (PLS) deposit or participatory
deposit. It can be seen as the Islamic counterpart of the conventional fixed deposit product that
cannot be withdrawn prior to a maturity date.
• At times, such deposits allow withdrawal, but only at the cost of foregoing the profit share.
• The profit-sharing ratio varies from bank to bank and from time to time, depending on supply
and demand conditions.
• The rate of return could be positive or negative, but in practice, the returns are usually positive
and quite comparable to the rates that conventional banks offer on their term deposits.
• Islamic banks always bear in mind that since investment accounts are based on the Mudharaba
principle, there is always a chance that the rate of return could be negative. In that case, they
should remove the loss incurred from the deposit account. Such a scenario would disrupt the
system by decreasing the bank’s credibility.
• To prevent that imbalance in the system, Islamic banks set aside part of their profit in a
stabilization fund to compensate for losses so that depositors have a stable return
• There are several types of investment deposits:

15. 1. General Investment Deposits
• This is a popular deposit product of Islamic banks under which an
investment pool is established. The pool includes investment deposits
of different maturities.
• The funds are not tied to any specific investment project but are
utilized in different and continuous financing operations of the bank.
• Profits are calculated and distributed at the end of the accounting
period, which is either three months, six months or one year.

16. 2. Special Investment Deposit
• o This deposit account is similar in all respects to general investment
deposit except that the depositor should meet the required minimum
to invest in this product, and the holders of the special investment
accounts (usually government and large corporations) have the
option to choose specific projects that they wish to invest their funds
in.
• As a result, the funds in special investment accounts normally end up
in large popular investment projects and institutions known for their
solid credibility and high rates of return.
• The modes of investment of the funds and the ratio of profit
distribution may usually be individually negotiated.

17. 3. Limited and Unlimited Period Investment
Deposits
• As the name suggests, investment deposits under the limited
contract are accepted for a specified period, which is mutually
determined by the depositor and the bank.
• The contract terminates at the end of the specified period but profits
are calculated and distributed at the end of the accounting period.
• In case of the unlimited, the period is not specified. Deposits are
automatically renewable unless a notice of three months is given to
terminate the contract. No withdrawals or further deposits are
permitted in this kind of contract, but customers are allowed to open
more than one account. The profits are calculated and distributed at
the end of the accounting period.

18. IMPLEMENTATION ISSUES IN DEPOSIT PRODUCTS

19. Gifts in Wadi’a and Qard
• When deposit products are modeled after wadi’a or qard, the
customer does not participate in any way in risk. The nominal value of
deposits is not allowed to decline if the bank incurs losses instead of
profits. As we have discussed above, banks invariably provide gifts or
bonus – in cash and in kind and various other benefits to the
depositor. These constitute reward for the depositor.

20. Guaranteed Return in Mudharaba
• Investment deposits are modeled after the classical contract of
mudharaba. As such, the depositor as the rabb-ul-mal is exposed to
the possibility of both profits and losses and the possibility of
guaranteeing the nominal value of deposits or guaranteeing a
minimum rate of return does not exist. However, local law may
mandate such a guarantee. Because of this practical requirement, the
question of guarantee has been repeatedly subjected to scrutiny and
as a result, one may observe a wide range of views in this matter.

21. …cont..
• One view asserts that such a guarantee could be provided by the
state as a third party.
• Another view calls for a radical departure from the classical
mudharaba in the light of wide spread fraud in dealings.
• Still another view calls for a special “parental” treatment of “small
depositors”. There is yet to be a consensus on such concessions for a
deposit modeled after mudharaba.

22. End of Presentation
Thank You