20 - Saving & Current Account Deposits (Wadiah, Mudharabah & Al-Qardh)

Shariah principles applicable to savings account are Al-Wadiah, Mudharabah and Al-Qard. However, Al-Qard is commonly offered by Islamic banks in the Middle East. Let's us examine the principle/concept and brief operation aspects of each type of deposits.

1. Al-Wadiah Deposits (Savings & Current Account)

Al-Wadiah is a contract (akad) between the Owners of good and the Custodian of the goods. The role of the Custodian (in banking perspective, the bank) is to protect the goods from damaged, destroyed, stolen etc. Basically, the contract is entered between both parties to ensure safe custody.

In Malaysia, SAVINGS ACCOUNT offered by Islamic banks is under the contract of Al-Wadiah Yad Dhamanah (Guaranteed Custody). The core of this arrangement is that the bank has authority to use the depositors' money and guarantee to return the same when the depositors need it. Most Islamic banks (particularly in Malaysia) requires the depositors to give their consent for the bank to use the depositors' money but for some Islamic banks, they kept it silent i.e. no consent is required.

As trustee under this Guaranteed Custody contract, the bank is not allowed to mention or promise any rewards in the form of profits or gifts (“hibah”) on the deposits it received. Similarly, the depositors too cannot demand any reward or return from the Bank on their savings placement.

It seems, BNM National Shariah Council (NSC) had made decision disallowing payment of profit or "hibah" for Al-Wadiah deposits. However, in practise, Islamic banks in Malaysia (except the International Islamic banks or IIB) are giving "hibah" in monetary form (as gesture of appreciation by the bank to the Depositors) and somehow, the Shariah Committee (SC) of the individual Islamic bank does not prevent but kept silent about this "hibah" issue.  Perhaps, the SCs allow payment of "hibah" due to "maslahah" (public interest) in order for Islamic banks to compete as alternative to the conventional savings deposit account where paying "interest" is standard for all types of savings deposit accounts.

The Writer opines that as long as the Islamic banks maintain this view, we may not be able to clearly differentiate between the Islamic from the conventional savings deposit. We have to make a stand when it comes to Shariah compliant issue. Anyhow this is just the personal view of the Writer. Perhaps, Shariah scholars can share their views to clarify this issue.

What are the differences between Islamic from conventional savings account. In summary, the differences are as follows:-

Chart 1

It is interesting to note that although payment of "hibah" is somehow practise in Malaysia, NSC decision that NO free gifts or inducement items (e.g. free umbrella, coin box etc) should be given to new depositors is being strictly adhered by Islamic banks. So, unlike conventional banks where new savings depositors are given free gift such as an "umbrella with the bank's logo", new Al-Wadiah savings depositor normally do not enjoy such gift.

There is a Shariah opinion allowing Islamic banks to give gifts to loyal depositors whom have maintain their accounts with the bank for example, more than 6 months. If such gifts are given, it should be given without any differentiation or category such as special gift to those whom maintain deposit amount of more than RM10,000 and the like. It should be given to all depositors whom meet the same criteria irrespective the balances in their accounts.

As for CURRENT ACCOUNT, it is also offered under the principle of Al-Wadiah Yad Dhamanah. Unlike savings account holders whom are given passbooks, Current Account depositors are given cheque books where it can be issued to pay 3rd parties or withdraw cash for own use.

Technology has changed the operations of banks in Malaysia where previously banking counters/banking halls are the busiest place in  a bank, nowadays withdrawal of cash, transfer of funds, bills payment etc can be done through the Automatic Teller Machine (ATM) or deposit cash via the Cash Deposit Machine (CDM). Banking transactions can also be done on-line through Internet banking services and now fund transfer can also be done via mobile phone. To-date there is no Shariah issue relating to services using technology but it would be interesting to observe what Islamic banks will do when one day, conventional bank grant loans such as overdraft without requiring the customer to sign any agreement or go to the bank, suffice with just an application via the Internet.

2. Al Mudharabah Savings.

Another popular savings account offered by Islamic Bank is Al-Mudharabah savings accounts. Under this concept, the depositors shall entrust the bank to utilize the deposits for its financing and investment activities without any interference from the depositors.

Note : Mudharabah principle shall be discussed in details in next session.

Profit earned from the bank's  investment will be shared between the Bank and depositors in accordance with the agreed profit sharing ratio (PSR). It is interesting to note that under Mudharabah savings, the profit-sharing-ratio (PSR) is only valid for one (1) day. At end of the day, whatever PSR during the day is terminated but it will be automatically renewed the next day. To operate in this manner, the Bank need to seek consent from the Depositors on this automatic profit sharing renewal arrangement on condition the PSR remained unchanged.

If the Bank decides to change the PSR, it still need to advise the depositors in writing by giving sufficient time such as 14 days to object the change in the PSR. Without any objection, the bank can change the PSR without any written acknowledgment or consent from the depositors. If the depositor objected to the change in the PSR, the bank reserves right to request the depositor to withdraw the money.

This type of arrangement must be clearly explained to depositors to ensure transparency. So when a new depositor intends to open a Mudharabah savings account, the depositor MUST BE VERBALLY advise by the counter staff of this arrangement before opening the account instead of just asking the depositors to read the fine line (most depositors do not read the standard terms) in the application form.

Since this savings account uses Al-Mudharabah principle, the depositors are exposed to risk i.e. losses (if any) is to be borne by the depositors. Likewise, this possibility must also be highlighted to the depositors. To match risks with rewards, profit rates payable to Mudharabah savings account holders are normally higher than conventional savings deposits rates.

Looking at the above conditions, what is so attractive about Al-Mudharabah savings deposits? Compare to Al-Wadiah Savings where granting of "hibah" is an issue, there are no profit payment issue under Mudharabah Savings products. In addition, depositors under Mudharabah savings account enjoy MULTI-TIER profit sharing ratios normally structured as per Chart 2 below:-

Chart 2

If you review Chart 2, higher PSR is given to depositors with high deposit amount. Thus, generally the profit rates for Mudharabah savings are higher than conventional savings "interest" rates.

One important aspect of Mudharabah savings deposits is that all depositors MUST SIGN A WAIVER FORM FOR THE CREATION OF PROFIT EQUALISATION RESERVES (PER) account by the Bank. PER is a reserve account (allowed by BNM and an important item in the Islamic accounting ) where the bank places undeclared profit amount i.e. this amount is deducted from the gross profit before distribution and placed in a reserve account i.e. PER, to support the Al-Mudharabah profit rates in conventional bank interest hike situation, to avoid Islamic banks from exposing to what is known as  "deposit displacement risk" due to outward movement of deposits from the Islamic banks to conventional banks due to sudden hike in conventional deposit rates. Under such situation, in order to remain competitive, Islamic banks may need to match the conventional savings rate.

We have to admit that there are three (3) types of depositors in our banking system as follows:

(a) those who seek high return and can switch from Islamic to Conventional or vise verse (basically non-Muslims); 

(b) those who only want to deal with Islamic bank; and

(c) Muslims who are still indifferent on the type of banking system (still does not understand the implication of "riba" to a Muslim) as long as they can get high return on their investment. This type of Muslims behave like (a) above. They are among the group who accuses Islamic banking financing products as expensive and prefers to take "riba" product to enjoy lower pricing. As mentioned in this blog banner, the Writer will provide examples in later session to prove that conventional bank loans are move expensive than Islamic financing products.

3. Al-Qard (Benevolent loan)

Al-Qard deposits is very popular savings product in the Middle East. Qard literally means a debt or loan "without interest, profit or hibah (gift)". There should be no promise of return or reward either by the borrower or the lender. In this perspective, the Bank is the borrower by providing safe keeping services to the Depositors. The bank can also charge certain fees for its service, for example, fees for ATM, internet banking services etc which are normally offered free of charge in Malaysia.

Islamic banks in Malaysia may not be able to promote this type of deposit product since depositors in Malaysia are already been exposed to receiving return for the "money" kept by the Bank but a number of countries in the Middle East, they are able to promote this product since Customers requires save keeping.

The Bank reserves the rights to use the Al-Qard deposits as it like, this include providing lease or debt financing to other customers.

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