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ISLAMICBANKING AND
FINANCE
Mahyuddin Khalidemkay@
salam.uitm.edu.my
SOURCE OF FUNDS
SAVING/INVESTMENTS AND THE UNDERLYING SHARIAHCONCEPTS
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MUAMALAH CONTRACT2
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CATEGORIES OF CONTRACT3
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CONTENT
SOURCES OF FUNDS SHAREHOLDER FUND
DEPOSITORS FUND
CURRENT ACCOUNTSAVING ACCOUNT
GENERAL INVESTMENT ACCOUNT
SPECIFIC INVESTMENTS ACCOUNT
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SOURCE OF FUNDS
Source of Funds in Islamic bank is formulatedbased on the Shariah concepts of:
Wadi'ah
Mudharabah
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AL-WADIAH
Definition of Wadi'ah: A trust arrangement and involves the depositing (movable) or
monetary deposits with another person, for safe-keeping.
The depository acts as a trustee or guarantor, andguarantees repayment of the deposits on demand.
Wadi'ah does not provide the depositors with the right to
receive a share of the profits. Pillars of Al Wadi'ah:
Al-Muwaddi (Depositor, Owner of the property)
Al-Wadi (Depositee, Custodian of the property)
Al-Wadiah (Property for safe keeping)
Sighah (Offer (Ijab) and Acceptance (Qabul))
Islamic banks mobilizes its customer deposits in currentaccounts on the contract of al-wadiah yad dhamanah(guaranteed custody)
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CONDITION OF AL-WADIAH
Essentials Conditions
Al-Muwaddi
(Depositor, Owner of the
property)
Capable
Sound mind
Intelligent
BUT not necessarily attained age of puberty
Individual or institution
Al-Wadi(Depositee, Custodian
of the property)
Same with above Custodian is not allowed to promise any rewards
or return
Al-Wadiah
(Property for safe
keeping)
Manageable by custodian
Storable
Sighah
(Offer (Ijab) and
Acceptance (Qabul))
In definite and decisive language
Acceptance must be consistent with offer
Offer and acceptance made at same time
Both parties have the right to terminate contract
at any time
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MUDHARABAH
Definition of Mudharabah:
A joint-venture profit sharing contract whereby one party is the providerof capital while the other is the entrepreneur.
Characteristics of Mudharabah:
The profit will be shared between parties whom involved in thecontract according to the terms of their agreement.
The losses will be borne by the capital provider who is the financier ofthe project.
The entrepreneur suffers of their fruitless effort.
Pillars of Mudharabah:
Sahibul Mal (Owner of capital, fund provider)
Mudharib (Entrepreneur)
Rasul Mal (Capital) Al-Amar or Mashruk (Business ventures or project)
Ribh (Predetermined share of profit)
Sighah (Offer and acceptance)
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CATEGORIES OF MUDHARABAH
Mudharabah al-Mutlaqah
Unrestricted mandate
Under unrestrictedinvestment fund,entrepreneur (bank) has gotthe authority by the capitalprovider (depositor) to investthe funds in any mannerwhich they think appropriate.
Entrepreneur (bank) is free
to invest on how, where andfor what purposes the fundsshould be invested. They(depositor) will be norestriction to entrepreneur.
Mudharabah al-Muqayyadah
Restricted mandate
The entrepreneur isrestricted in his activity incarrying out the mudharabahproject in term of business,method, time period orplace.
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SHAREHOLDERS FUND / EQUITY
Shareholder fund and equity in Islamic bankis formulated based on the Shariah concepts
of Musharakah (Profit and Loss Sharing
contract).
Through shares :
Ordinary Shares quoted or unquoted
Special share (Minister of Finance)
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DEPOSITOR FUND
DepositManagement in
Theory of IslamicBanking
Pure profit
Sharing Model
Profit Sharing
Model
Two Window
Model
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PURE PROFITSHARING MODEL
Pure Profitsharing Model was the firstdeposit model developed in Islamic banks.
This model enjoys much support amongstmost of Islamic economists.
It assigns a significance role to profit sharing(mudharabah) on the both side of balancesheet, the asset and liability side.
Also know as the Two-Tier MudharabahModel.
Concept based on two level of Mudharabah : The first tier
The second tier
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TWO WINDOW MODEL
The liability side of the banks activities is divided into2 window : The bank is required to pay the funds held in the current
account on demand, it is subjected to a 100% reserverequirement .
The Islamic precept that funds of demand deposits are
a trust (amanah) that is held by the bank on behalf of thedepositors.
The banks neither have a right to use these funds tomake profit nor it should be used for the purpose ofmoney creation through fractional reserve system.
Funds held in the investment accounts shall not besubjected to any reserve requirement.
It is argued by the economists who have advocatedthis model that investment accounts of Islamic banksare not similar to time deposits of conventionalbanks, which are used for credit creation.
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PROFIT SHARING COST PLUS
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PROFIT SHARING COST PLUS
MODEL
A profit sharing (mudharabah) on the liabilityside of the balance sheet and cost-plus
technique of financing (murabahah) on the
asset side.
Other Islamic/shariah permissible technique
of finance such as mudharabah, musharakah,
ijarah, etc. may also be used on the assets
side.
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CUSTOMERS DEPOSITS IN CURRENT
ACCOUNTS
Definition of Current Account:An account into which customer can deposit
money and effect payments by the drawing ofcheques.
The bank accepts its customers deposit andundertake to honor any demand (invariably inthe form of cheque) made by customer,provided there is available funds in the
account. The Current Account is formulated based on
the Shariah concepts of:
1. Al-Wadiah
2. Al-Mudharabah
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MODES OF OPERATION OF WADIAH CURRENT
ACCOUNT
The bank accepts deposits from its customerslooking for custody of their funds and absoluteconvenience in their use in the form of CA on theprinciple of al-wadiah yad dhamanah.
The bank requests permission from such customersto make use of their funds so long as these fundsremain with the bank.
The customers may withdraw a part or the whole oftheir balances at any time they so desire, and thebank guarantees the refund of such balances.
All the profits generated by the bank from the use ofsuch funds belong to the bank.
The bank provides its customers with cheque booksand other usual services connected with the CA.
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MODES OF OPERATION OF MUDHARABAH CURRENT
ACCOUNT
Contract made between Depositor (provider ofcapital) AND Bank (entrepreneur)
The amount deposited for a stipulated period by
the depositor will be used by the bank for
investment purposes according to the al-mudharabah principle.
The bank becomes wholly responsible and liable
in the management and investment the deposits
in halal business ventures.
Profits gained will be divided and distributed
accordingly, based on margins agreed upon
earlier.
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CUSTOMERS DEPOSITS IN SAVING
ACCOUNTS
Mobilizes customers deposits under thecontract of al-wadiah yad dhamanah itsmodification on the payment of profit at theabsolute discretion of the bank.
This is a trust arrangement and involves thedepositing (movable) or monetary depositswith another person, for safe-keeping.
The depository acts as a trustee or guarantor,
and guarantees repayment of the deposits ondemand.
Wadi'ah does not provide the depositors withthe right to receive a share of the profit.
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DISCRETIONARY REWARDS OF WADIAH SAVING
ACCOUNT
Under the principle of al-Wadiah, the bank isnot obligated in any way to give returns on
depositors.
However, the banks at its absolute discretion,
may reward its customer a certain amount of
return as deemed fit.
Calculation of profit is a follows:
Cumulative daily
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Balance for the
monthNo. of days in the
month
x Rate x 1/12
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GENERAL INVESTMENT ACCOUNT BASED ON
MUDHARABAH
The bank acts as entrepreneur and thecustomers as the provider of capital.
Both agree on show to distribute profits (if
any) and in the event of loss, the customer
bears all the loss.
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MODES OF OPERATION OF
MUDHARABAH GENERAL INVESTMENT ACCOUNT
The bank accepts deposits from its customers for GIA on
the principle of Mudharabah. This investment is utilized as business capital by the bank.
Customer will have no authority to interfere with themanagement of investment.
Bank will has the right to manage the investments as it
deems fit by investing into businesses that are both Halal(permissible) and profitable.
The deposits will have to be for a specified period.
In basic Shariah relationship, the bank acts in this case asthe entrepreneur and the customers as the provider of
capital and both will agree among others on how todistribute the profits, if any, generated by the bank from theinvestment.
In the event of loss in the investment, the customer bears allthe loss.
Modes of investment of the funds and the ratios of profitdecided by the bank for all customers.
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PROFIT ON MUDHARABAH GENERAL INVESTMENT
ACCOUNT
Distribution of Profit:Bank in an agree predetermined ratio.
This agreed distribution ratio must be stated in
the contract.
Calculation of Profit:
When an investment certificate is presented on
or after the maturity date of the investment
deposit, profit due will be calculated. The formula can be as follows:
Profit Amount:
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Tenor Rate
12 100Capital x x
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PROFIT ON MUDHARABAH GENERAL INVESTMENT
ACCOUNT
= Principal x Profit rate x (Days in Month divide by No. of Days in
Year)
= 50,000 x 2.50% x (28/365)
= RM95.89 for the month of March 2010
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SPECIAL INVESTMENT ACCOUNTS BASED ON
MUDHARABAH
Mobilizes customers deposits from governmentor corporate customers under the contract ofequity-financing.
The bank acts as the entrepreneur and thecustomers as the provider of capital.
Modes of investment of the funds and the ratiosof profit may usually be individually negotiated.
Mudharabah SIA operates under the same basic
principles as Mudharabah GIA. However, the Mudharabah SIA is more in tune
with the requirements of the client may negotiatethe tenure of the investment as well as the profit
sharing ratio.
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DIFFERENCES BETWEEN MUDHARABAH AND CONVENTIONAL FIXED
DEPOSIT
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END OF CHAPTER28