resource & deposit mobilization.pdf
TRANSCRIPT
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Muhammad Saarim GhaziAssociate Fellow IIBI - London
RESOURCE &
DEPOSITMOBILIZATIONBYISLAMIC BANKS
THE LIABILITYSIDE
Muhammad Saarim Ghazi
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AGENDA
Features of contracts used in deposit management
Shariah position of various deposits
Profit mechanics
Special considerations & recommendations for Islamic BankDetermining balances for profit entitlement
Summary: Profit/Loss Allocation mechanism
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Islamic banks may raise funds generally based on anyof the following five arrangements.
Amanah or Wadiah (Trust)
Qard-e-Hasan
Mudaraba (P/L Sharing)
Musharaka (P/L Sharing)
Wakalatul Istismar (Funds Mobilized on anInvestment Agency)
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AMANAHOR WADIAH (TRUST)
Amanah refers to deposit held in trust.
Amanah can not be used by the holder
If the bank have any explicit or implicit permission then these arecovered in Wadiah
Amanah entails absence of liability for loss except in breach ofduty
The depositors will not be entitled to any profits
The depositors can withdraw his deposits at any time withoutgiving notice
Characteristics
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QARD-E-HASAN
The relationship between depositor & the bank is thatof lender & borrower
Qard-e-Hasan can be used by the holder
Qard-e-Hasan does not entail absence of liability forloss; bank guarantees refund of entire amount even incase of loss(OIC Fiqh AcademyJeddah)
The depositors will not be entitled to any profit
The depositors can withdraw his deposits at any time
without giving notice
Characteristics
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It is a partnership agreement in which one partyinvests while the other manage the business
Depositors are Rabb-ul-Maal& the Bank is Mudarib
Profits are shared between depositors & bankaccording to a pre-agreed ratio
Losses are borne by Investors (Rabb-ul-Maal) on apro-rata basis while bank goes un-rewarded for all itsefforts
Mudaraba (P/L Sharing)
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It is a partnership agreement in which a joint pool of funds is formed,in which all partners contribute capital as well as efforts.
Bank & depositors are partners.
Profits are shared between partners on pre-agreed ratio.
Losses are shared according to ratio of investment
If bank invests its own money than bank will be investor just likeother depositors.
All participants in the investment pool will be partners amongthemselves & bank will also serve as the fund manager (Mudarib).
Relationship within the pool would be governed by the rules of
Musharaka & overall relationship between bank & the depositorsremain as Mudarib and Rabb-al-Maal.
Mudarabah + Musharaka (P/L Sharing)
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Depositors Investment $2000
Bank Investment $1000
Agreed Profit Ratio 50:50
Profit $300
Bank Share $200(1/3rd on its own +$100($200*50%))
Depositors Share $100
Example; Profit distribution in above case
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The model is used mostly for fund management by
investment banks or by commercial banks
Investors appoint bank as Wakeel (agent) to act on theirbehalf
The bank as a Wakeel would charge a fee from investorsfor providing service
Bank will get a certain commission, irrespective of theprofit or loss to the portfolio
So, all profits or losses, after deduction of fund-management commission, will be distributed among
investor(s)
Wakalatul Istismar(Funds Mobilized on an Investment Agency)
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Current Account Deposits
Amanah orWadiahMalaysian Practice Qard-e-Hasan Pakistani Practice
Saving (Deposit) Account
Mudarabah Musharakah
Investment (Deposit) Account
Musharakah Mudarabah
Investment deposit; Specific Purpose (Restricted Mudarabah)
Investment deposit; General Purpose (Unrestricted Mudarabah)
Deposit Mobilization
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Cash Management Account
Investment deposit; Specific Purpose (Restricted Mudarabah)
Investment deposit; General Purpose (Unrestricted Mudarabah)
Mudarabah Certificates
Mudarabah e.g. Meezan
Wakalatul Istismar
Wakalah
Deposit Mobilization Contd
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PROFIT MECHANICS
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The whole profit from the assets given in the pool isdistributed among the funds providers on the basis of
weighted funds
The profit sharing weightages are assigned based on theperiod & maturity of funds deposited with the bank
The basic rule is that the longer the period of maturity,the higher the weightages
The rationale behind this is that a longer-term depositoris adding greater value & taking a longer exposure
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Riba Free Certificates Weightages
RFCs 1.090
RFCs 1 year-Monthly 1.158
RFCs 1 year-Quarterly 1.168
RFCs 1 year-Six Monthly 1.178
RFCs 1 year-Maturity 1.192
RFCs 5 year-Monthly 1.910RFCs 5 year-Quarterly 1.920
RFCs 5 year-Yearly 1.940
RFCs 5 year-Maturities 1.984
Example: The Bank of Khyber - 2006
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The serious issue in this regard is assigning differentweightages, keeping in view the size of investmentaccount
The Bank of Khyber
Interest free PLS Saving Account
Less than 1 million 1.000
1 million upto 5 million 1.030
5 million upto 10 million 1.060
10 million &above 1.090
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Assigning different weightages to larger deposits as anormal practice should not be allowed keeping in viewthe principle of justice
Another aspect that Islamic banks have to bear in mindis that no deposit should be excluded from the profitentitlement
Example: A deposit with less than a 1 million averagemonthly balance will not be entitled to any profit
As a policy concept, above practice has to be avoided forthe dispensation of justice that is the reasondtre ofIslamic finance
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SPECIAL CONSIDERATIONS RECOMMENDEDFOR ISLAMIC BANK
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Banks should take into account the risk-exposurelimit of its clients. Widows & Retired Citizens, arenormally not in a position to bear the risk of loss.
Weightages given to various categories ofsavings/term deposits have to be indicated inadvance.
Banks should not be allowed to indicate ExpectedRates ofReturn as it opens a back-door to interest.
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DETERMININGBALANCESFOR PROFITENTITLEMENT
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The Islamic banks usually use daily credit balancesor daily product to calculate the profits.
This concept is applied to savings & term deposits.
More applicable for saving-type of accounts where
depositors are permitted to make withdrawals.
The calculation on daily product is just that thecalculation on the minimum balance or averagebalance
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Date Balance
June 1 $10,0002 $10,000
. .
. .
28
$10,00029 $1,000 (Withdrawal of $9,000)30 $1,000
Profit Calculation
28*$10,000 = $280,0002*$1,000 = $2,000
Total Use = $282,000
$282000/30= $9400
Example: Daily Product Basis
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SUMMARY: PROFIT/LOSS ALLOCATIONMECHANISM
Deposits in current accounts are usually not eligible for payment of any
profit.
All savings and term deposits, irrespective of size, should be eligible fora share in the profit of the investment pool, except where it may beuneconomic to do so.
The depositor, as sleeping partner, cannot receive a share of the profitthat is more than the proportional share of the term-deposit to the totaldeposits in investment pool.
Profit is calculated on the basis of daily credit balances rather thanbeing paid on the maximum or the minimum balance during the
agreed period, usually a month;
Weightages have to be assigned to deposits based on tenure forwhich deposits are kept;
Depositors wishing to withdraw their term-deposits in an
emergency without notice may be required to forfeit their profit.
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Thank You