Deposit Taking Instruments

In previous articles, we defined Islamic finance and its principles. We also gave a brief history of Islamic banking and mentioned different models of Islamic banking being practiced globally.

In the next few articles, we shall look at the deposit taking instruments of Islamic banking and how they are applied in modern day Islamic banking.

These instruments have been developed based on the nature of the Islamic financial institution and needs of their customers.

Islamic financial instruments have continued to grow with the growth of Islamic finance in both the size and complexity.

Deposit tanking Islamic finance contracts may be classified into three broad categories; Profit and Loss Sharing (PLS) modes, debt based modes and Services (khidma) based modes.

An example of Profit and Loss Sharing (PLS) modes are Mudharaba and Musharaka.

Mudharaba is where the financier (investor or the bank) provides capital and the beneficiary provides labour and skills. Profits are shared on the pre-agreed ratio while loss is borne by the financier unless negligence, misconduct, or breach of contract on the part of the mudarib can be proven).

Musharaka (pure profit-and loss-sharing) is where the two parties have equity-like financing of the project and would share profits and losses. Profit is shared on agreed basis while loss is strictly shared according to capital contribution ratio.

Debt based modes include Murabaha, Salam, Istisna’, Ijarah, Tawarruq and Qardh.

Murabaha entails sale of goods or service with mark up on deferred payments basis, Salam is differed delivery of basic products while Istisna’ is differed delivery of manufactured products.

Ijārah is a lease with either operating or finance lease option. Tawarruq (commodity Murabaha) is also used as a deposit taking instrument. Pure lending is allowed only when benevolent loan or Qardh is used (used for current account deposits).

Under Services (khidma) based mode are; Wadi’ah (safe custody) and Wakala (agency contracts) are the most commonly used instruments for deposit taking.

In the advanced economies, Sukuk (Islamic Bonds)  . Some companies float shares through the capital market in order to raise funds for running their operations.

It is a common practice to see Islamic Banks using Wadiah (safe custody) and Qardh Hasan (Benevolent loan) contracts being used due to avoidance of Riba and complexity of working with other types of deposit taking instruments.

Number of banks also use profit sharing investment accounts (PSIA) where investors (depositors) receive a return that is determined ex post by the profitability of the bank or the pool of assets financed by these accounts.

As we alluded to earlier, there are several instruments that are used for deposit mobilization in Islamic Banking and Finance, these are: Mudaraba, Wadi’ah, Commodity Murabaha (Tawarruq), Qardh hasan, Musharaka and Wakalah

In our subsequent articles we shall ysystematically look at each and the above instruments in details so as to equip ourselves with the relevant understanding of each and every instrument as a liability product from both the Shari’ah and financial points of view.


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