deposites products (musharakah & mudarabah)

8/12/2019 Deposites Products (Musharakah & Mudarabah)

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BASIC SHARIAH RULES ANDPRINCIPLES FOR VARIOUS TYPESOF DEPOSITES PRODUCTS

Abdul Samad

Shariah Advisor

The Bank of Khyber


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WHAT IS BANK?

The name bankderives from the Italianwordbanco"desk/bench.

In practice, the word Bank means an

institution which borrows money from people

and lends money to people for interest orprofit and provided other financial services.
http://en.wikipedia.org/wiki/Italian_languagehttp://en.wikipedia.org/wiki/Italian_language


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BANKS ENGAGE IN THE

FOLLOWINNNG ACTIVITIES.

Accepting money

Processing of payments by way of telegraphictransfer, internet banking, or other means;

Issuing bank draftsand bank cheques

Lending money

Providing documentary and standby letter of credit,guarantees, performance bonds, securitiesunderwriting commitments and other forms of offbalance sheet exposures

Safekeeping of documents and other items in safedeposit boxes
http://en.wikipedia.org/wiki/Bank_drafthttp://en.wikipedia.org/wiki/Bank_chequehttp://en.wikipedia.org/wiki/Letters_of_credithttp://en.wikipedia.org/wiki/Performance_bondhttp://en.wikipedia.org/wiki/Safe_deposit_boxhttp://en.wikipedia.org/wiki/Safe_deposit_boxhttp://en.wikipedia.org/wiki/Safe_deposit_boxhttp://en.wikipedia.org/wiki/Safe_deposit_boxhttp://en.wikipedia.org/wiki/Performance_bondhttp://en.wikipedia.org/wiki/Letters_of_credithttp://en.wikipedia.org/wiki/Bank_chequehttp://en.wikipedia.org/wiki/Bank_draft


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WHAT IS ISLAMIC BANKING?

Islamic banking has been defined as

banking in consonance with the ethosandvalue system of Islam and governed, in

addition to the conventional good

governance and rick management rulesby the principle laid down by Islamic

Shariah.


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OBJECTIVES OF ISLAMIC BANKING

Shariah compliant banking, to enable Muslims

to do their banking transactiona Halal way. Achieving the goals and objectives of an

Islamiceconomy.


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DEPOSITS

A deposit is an account at a bankinginstitution

that allows money to be deposited andwithdrawn by the account holder. These

transactions are recorded on the bank's books.

All deposit appears as liability on Balance

Sheet of the Bank.
http://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Bank


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THE COMPANIES (INVITATION AND

ACCEPTANCE OF DEPOSITS) RULES 1987

Deposit means any deposit of money with,

and including any amount borrowed by acompany, but shall not include a loan raised

by issue of debentures or a loan obtained

from a banking company or financial

institution.


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DEFINITION OF DEPOSIT IN ISLAMIC

BANKING

AAOIFI STANDARADS

As per AAOIFI standards, the depositor is termed as

Investment Account Holder and the investment

account holder authorizes the Islamic Bank to investthe account holder funds on the basis of

Musharakah/Mudarabah contract.

Under this contract the Islamic Bank has right to use

Investment Account Holders funds only

To combinethe investment account holders funds with

1. its own funds

2. others funds


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DIFFERENCE IN DEPOSITS &

INVESTMENT ACCOUNTS

Investment Account Deposits Account

In Islamic Bankingthedepositsare only the

current accountsand

security deposits.

Allkinds of account holderare called depositors

PLSaccount holders are

actually investment account

holder.

PLSaccount holders are

also depositors

Investment account holders

are in participatory modes.

3. It is loanto the bank.


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DIFFERENCE IN DEPOSITS &

INVESTMENT ACCOUNTS

Investment Account Deposits Account

These are not guaranteed. These are guaranteed.

Their nature is investment It is liabilityof the bank

Returnpaid to the accountholders is their portion in

profitof the bank.

Interestpaid to thedepositors is treated as

bank expenses.


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CATEGORIES OF DEPOSIT IN ISLMIC

BANKING

The Shariah optionfor deposit mobilization can

be workedout by respecting two principles:

The aim of the exchange at hand must be

recognizes in Shariah.

The modalities to achieve the said must be

Shariah Compliant.


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CATEGORIES OF DEPOSIT IN ISLMIC

BANKING

Investment Account Depositors

Fixed Investment Accounts Current Account

Profit & Loss Sharing

Saving Accounts

Security Deposit


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FIEXD INVESTMENT ACCOUNT

The account holders who intend to keep theirmoney for a fixed period of time normally opensuch nature of account.

The life of account is fixed at the time ofopening of account. Within this period theaccount holder are not entitled to withdrawmoney from the account.

The owner of the fund seek a retune on theirfunds.


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FIEXD INVESTMENT ACCOUNT

Usually the bank assigns a high weightage to

these account holders, based on its amountand tenure so as to create a balance in profit

return.

The account holder can withdraw money with

special permission of the bank. In case ofearlier withdraw full amount of profit are not

paid, and instead profit is paid at a lower

rate.


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SAVING ACCOUNT

Those account holder having small amounts

of saving and need to withdraw for theiraccounts any time like Saving Account.

Banks provide this facility to encourage thesaving among the general public.


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CURRENT ACCOUNT

A current account is an account with a bank or a

financial institution. It enables account holders to make

or receive an unlimited number of payments as

frequently as they wish.

In this case the depositors concern:

Safekeeping of funds Maximum flexibility in their withdrawals

Without seeking any return


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GENERAL MOODES OF ISLAMIC

BANKING USED TO RAISE DEPOSITS

Investment Accounts

Islamic banks generally use Musharakah andMudarabah based product for obtaining investment

account.

These deposits are based on the Shariah principles

of profit and loss sharing, and the banks use them,along with its own funds in businesses which are

Shariah compliant.

Wakala model can also be used for Investment

Account.


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WHAT IS MUSHARAKAH?

The literal meaning of Musharakah is sharing.

The root of the word "Musharakah" in Arabic isShirkah, which means being a partner.

Under Islamic jurisprudence, Musharakahmeans where two or more than two persons

agree to contribute funds for conducting somebusiness in which all partners share the profitaccording to a specific ratio while the loss isshared according to the ratio of thecontribution.


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Management of Musharakah

Each partner has right to take part in Musharakah

management.

The partner may appoint a managing partner by

mutual consent.

One are more of the partners may decide not to work

for the Musharakah and work as a sleeping partner

If one or more partners choose to become no-working

or steeping partners. The ratio of their profit cannot

exceed from the ratio of their capital investment.


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Capital of Musharakah

All partners must contribute their capital in

terms of money or species at an agreedvaluation.

Share capital in a Musharakah can be

contributed either in cash or in the form of

commodities. In the letter case the marketvalue of the commodities shall determine the

share of the partner in the capital.


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Distribution of Profit

The ratio of profit distribution must be agreed at the

time of execution of the contract.

The ratio must be determined as a proportion on the

actual profit earned by the enterprise.

1. Not as percentage of partners investment.

2. Not in lump sum amount

A sleeping partner cannot share the profit

more than the percentage of his capital.


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Rule for loss

In the case of loss all the Muslim jurists areunanimous on the point that each partner

shall suffer the loss exactly according to the

ratio of investment


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WHAT IS MUDARABAH?

This is a kind of partnership where one

partner gives money to another for investingin a commercial enterprise.

The investment comes from the first partner

who is called Rab-ul-Maal(Investor)

The management and work is an exclusive

responsibility of the other, who is called

Mudarib (Working Partner).


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Types of Mudarabah

Al Mudarabah Al Muqayyadah (RestrictedMudarabah)

Rab-ul-Maal may specify a particular business ora particular place for the Mudarib.

In which case he shall invest the money in thatparticular business or place.

Al Mudarabah Al Mutlaqah (UnrestrictedMudarabah)

Rab-ul-Maal gives full freedom to Mudarib toundertake whatever business he deem fit.


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Capital of Mudarabah

The capital in Mudarabah may be either cash

or in kind. If the capital is in kind, its valuation is

necessary, without which Mudarabah

becomes void.


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Profit & Loss Distribution

It is necessary for the validity of Mudarabah

that the parties agree, right at the beginning,on a definite proportion of the actual profit to

which each one of them is entitled.

They can share the profit at any ratio they

agree upon.

Losses always by Rab-ul-Maal(Investor)


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