mihe presentation.pp
TRANSCRIPT
Markfield Institute of Higher Education
Presented By
Bashir Uj Jaman
Alternative Model For
Profit Distribution on Deposit
You can reach Bashir at [email protected]
How does depositor get benefit from Conventional Banks ?
---By fixed Interest
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative Model for Profit Distribution on Deposit
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
What is wrong with predetermined Interest?
How does it effect Economy?
Alternative Model for Profit Distribution on Deposit
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative Model for Profit Distribution on Deposit
Riba BankOf Kuffar
Deposit taking onX% interest
Investment with (X+Y)% interest
Fixed rate of x% interest to depositors forces to charge fixed rate of (x+y)% interest to customer, hence if no chance of investment with expected interest,
Money will not be invested. Sometimes customers are forced to pay more than ROI
Impact of predetermined interest
What is the solution for Islamic banks?
Instead of predetermined interest, islamic bank sets pre determined
profit ratio. eg; 80%:20%.
So actual profit will be determined after getting outcome from investment
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative Model for Profit Distribution on Deposit
Practice of design of deposit account around the world based on
Qard a Hasana/ Wadia- Iran, Client can’t demand profit.Current account
Mudaraba – Savings account
Murabaha (Bai al ina & Tawarruk) – Malaysia, fixed deposit account.term deposit
Wakala- by treasury department to raise fund for special purpose. Bank receives agency fee. Long term deposit account.
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative Model for Profit Distribution on Deposit
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative Model for Profit Distribution on Deposit
Comparison - conventional vs Islamic Approach
Conventional/Riba Bank Islamic Bank
Predetermined first to last fixed approach
No loss sharing
Last to first variable approach
Profit/Loss sharing
Restricted, Unethical higher interest rate investment
Profit is fixed
Flexible, Ethical, realistic investment
Profit increases if ROI increase
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Logic behind profit distribution
Alternative Model for Profit Distribution on Deposit
Conventional-Time is money. The higher the duration the higher the percentage.
Islamic-Not only duration but the higher the risk, the higher the profit
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Sharia requirement for declaring profit distribution method.
Do you know the percentage of your profit in your account with Islamic Bank?
Alternative Model for Profit Distribution on Deposit
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Currently, bank keeps it profit first and then distribute remaining profit to mudaraba depositors based on weightage system. So It is called two tier Profit Distribution.
Alternative system is a Income sharing ratio (ISR) based system treating different mudaraba depostors individually.It is a single tier profit distribution which distributes profit to bank and depositors at a time.
Example will make it clear
Alternative Model for Profit Distribution on Deposit
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative model for profit distribution on deposit
Table A: Profit Distribution Based on Current Weightage system.
DepositorsName
TypeOfMudarabaDeposit
DepositAmount(Tk.)
Weightage
InvestmetAmount(Tk.)
Income fromBank’sInvestment
Collective Income DistributionRatio betweenBank: Client
1 2 3 4 5 6 7
A Curret 100 .5
B Savings
100 .6 20% (on
300* 25:75
C Term Deposit
100 .7 Investment)
Total 300 1.8
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative model for profit distribution on deposit
Table Al: Determination of amount of Investment Income and collective distribution thereof
Tier 1: Income Investment
Share of Investment Income as per Col. 7
Total Bank Client
8= Col. 5 x Col. 6
9= Col. 8 X 25%;
10= Col. 8 X 75%
Tk.300 x 2O% = Tk.60
Tk.15 Tk.45
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative model for profit distribution on deposit
Table A2: Distribution of Clients’ portion of Income of Tk.45 (Column 10) to individual type of depositors according to Weightage at column 4 above
Tier 2: Depositors Name Weightage Profit Distribution
A .5 Tk.45x.5-* 1.80 =Tk.12.50
B .6 Tk.45x.6-* 1.80 =Tk.15.00
C .7 Tk.45x.7~1.80 =Tk.17.50
Total 1.8 Tk.45.00
Problem with Existing System
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative model for profit distribution on deposit
In the first step of the Weightage formula (in the name of Collective PSR or Profit Sharing Ratio, Col. 7), the Bank sets aside its own share from the Investment Income.
Factors that affect/distort the distribution pattern, changing due amount of profit to individual types of depositors under Weightage System are:
i) Change of Weightage of any one (or more) type of the Mudaraba depositmix (Current, Savings & Terms Deposit etc.).
ii) Change in the Proportion of individual deposit type, among the total Deposit mix.
iii) Inclusion of any new deposit product.
ISR (Income Sharing Ratio) based Module for distribution of profit to Mudaraba Depositors
: Depositor/ Client
Type ofMudaraba
Deposit
DepositAmount
(Tk.)
Income SharingRatio (ISR)
InvestmentAmount
(Tk.)
Income from Bank’sInvestment
Bank’s Share
Client’sShare
Total
1 2 3 4 5 6 7 8
A Current 100 37.50% 62.50% 100.00
B Savings 100 25.00% 75.00% 100.00 20%
% 300* (on
C Term 100 100.00 Investment)
12.50% 87.50%
Deposit %
Total 300
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
ISR based Single tier profit distribution would be as under:
Table X: Client wise Profit Distribution
Income Sharing Ratio (ISR) Profit Retained
Rate of Profit (on deposit) Retained by the Bank
Client’s Profit Rate
by Bank (Tk.)
Profit to client (Tk.)
Client/Depositor
9=Col. 8 X Col. 4 10= Col. 8 X Col. 5
11=Col. 3 X Col. 9
12= Col. 3 X Col. 10
13= Col. 1
7.50% 12.50% 7.50 12.50 A
5.00% 15.00% 5.00 15.00 B
2.50% 17.50% 2.50 17.50 C
Total 15.00 45.00
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative Model for Profit Distribution on Deposit
Comment:
Inputs or given data/ information are same both for Table A & Table X. The former distributes profit on Weightage basis and the later on ISR basis. Both the systems’ ultimate profit distribution amount is identical. So apparently no significance of using a new Module is felt upto this level
Comparison:
To see the significance of the methods let us think to change a single data under both the methods. Say, we just want to pay C a bit higher profit than he earns this year. Other data would remain unchanged. Under Weightage system we shall change a data in Table A (that is Weightage against C at Col. 4 would now be .9 instead of .7). Similarly under ISR based system C’s ISR shall be 5 : 95 instead of 12.50 : 87.50 for Bank & C respectively (Col. 4 & 5 of Table X). Effect of change is now summarized in the Comparison Table:
Comparison Table: Result of Weightage based Vs. ISR based Profit Distribution Modules
Result of Weightage & ISR(From Table A-A2 & X-X1)
Result under Revised Weightage
Result under Revised ISR
Client/ Depositor
Weightage
ISR Client’s Profit under both
Weightage Client’sProfit
ISR Client’sProfit
Bank Client System (Tk.)
(Tk.) Bank Client (Tk.)
1 2 3 4 5 6 7 8 9 10
A .5 37.50% 62.50% 12.50 .5 11.25 37.50% 62.50% 12.50
B .6 25.00% 75.00% 15.00 .6 13.50 25.00% 75.00% 15.00
C .7 12.50% 87.50% 17.50 .9 20.25 05.00% 95.00% 19.00
Total of Clients’ Profit
1.8 - - 45.00 2.0 45.00 - - 46.50
Profit Retained by Bank
- 15.00 - 15.00 13.50
Total Distributable*Investment Income
60.00 60.00 60.00
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative Model for Profit Distribution on Deposit
Analysis:
Analysis of this Comparison Table clearly reveals that subsequent decision to pay ‘C’ a bit higher profit than he was earning earlier under Weightage system causes A & B to lose although Weightage of A & B is not altered.
In weightage syestem, additional profit of Tk.2.75 (Tk.20.25-Tk.17.50) paid to ‘C’ is actually deducted from A & B at the rate of Tk. 1.25 and Tk.1.50 respectively. Bank’s portion of profit remains the same as Tk.15.
But under ISR System additional Tk.1.50 paid to C is sacrificed by the Bank. Neither profit of A nor that of B is cut down. Rather additional Tk.1.50 paid to ‘C’ cuts the Bank’s portion of Profit by the corresponding amount.
So it becomes obvious that under Weightage base any subsequent agreement with any depositor affect profit of the existing depositors; whereas under ISR base, consequence of the subsequent agreement is taken care of at the Bank’s cost without causing any loss to the existing depositors.
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative Model for Profit Distribution on Deposit
When an Islamic Bank goes for a new deposit product
say for example, Haj Deposit or different Mudaraba bonds, the Bank assigns higher Weightage to attract new clients.
Surprisingly some of such products are offered Weightage much higher than 1; such as 1.2, 1.35 etc,
Causing the existing or pioneer deposit holders lose their due rate i.e. they are deceived irrationally.
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative Model for Profit Distribution on Deposit
It should have been the Bank (not other depositors) who to sacrifice for the higher profit offered by the Bank.
It is ethically wrong to cut the rates of the existing clients down (Weightage remaining the same) without any consent (consultation even) from those whose interest is hampered.
A software designed according to this Module would enable to arrive at the actual rate of attained profit each month for different Mudaraba deposits and the same may be displayed electronically on the 1st day of the following month
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative Model for Profit Distribution on Deposit
Conclusion:
Islamic banking is based on ethical standard.
In some cases ignorance may be ignored;
But whenever wrong or discrepancy is detected, that should be stopped or rectified immediately.
In Islam none is advised, even to make charity from others’ purse. Any reward to anybody should be from one’s own pocket or at least the original donor should be informed.
Islamic banking is an emerging market. it is yet being evolved. So any better thing from anybody may be adopted without hesitation for the greater interest of the ideology.
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
Alternative Model for Profit Distribution on Deposit
References:
An alternative module to distribute profit on deposits under Islamic banking by Afzalul Haq
The Writer is the First Vice President and Head of Islamic Banking of Bank Asia Ltd. He can be reached at email [email protected].
Article Available at :
http://csbib.org/publications/an-alternative-module-to-distribute-profit-on-deposits-under-islamic-banking-afzalul-haq#more-48
http://www.islamicbankingway.com/2010/11/21-investment-fixed-deposit-account.html
Central sharia Board of Islamic Bank Bangladeshhttp://csbib.org/
Islamic Finance in a Nutshell by Brian Kettellhttp://books.google.co.uk/books?id=CgjsYcxNLuUC&pg=PA130&dq=types+of+deposit+account+in+islamic+banks+non+specialist&hl=en&ei=pIj8TI23Jsv1sgbO06GUBA&sa=X&oi=book_result&ct=result&resnum=1&ved=0CC4Q6AEwAA#v=onepage&q&f=false
Markfield Institute of Higher Education
Presented by
Bashir Uj Jaman
May Almighty help us to get benefit
from this presentation.
Zazak Allahu khairan for listening
Any Question ?
Alternative Model for Profit Distribution on Deposit