Liability Products in Islamic Mode of

Operations in Prime Bank Limited

Kawsar Ahamad
Associate Fellow of IIBI, London, UK
PGD (Islamic Banking & Insurance), MBM, M.Sc. (Math)
Senior Executive Officer
Corporate Banking Division
Prime Bank Limited

05 March 2013
 Presentation Outline

• Flashback –Conventional Economics

• Concept of Wealth in Islam
• Shari’ah Principles in Islamic Finance
• Various Contracts in Islamic Finance
• Positive Injunctions and definite prohibitions
• Riba; the main feature of Islamic banking
• Rationale for Prohibition of Riba
• Prohibition of Riba by Other Religious belief
• Scenario of Islamic banking in Bangladesh and PBL
• Operational Mechanism with different modes of deposit
mobilization by PBL
• Status of deposit of PBL (IBB).
 Shari’ah and Finance
Islam & Components
of Shari’ah
I`tiqadiyah `Amaliyah Akhlaqiah
(Belief) (Dealings) (Morality)

Ibadah Muamalah
(Human with Creator) (Human with human)

Economics / Finance Family Law Criminal Law Politics

Issues in Islamic finance

 Operational Mechanism of Islamic Banks

Sources Uses of Funds

 Owners Equity  Statuary Liquidly Reserve
(SLR) : 19 % [out of 19 %,
(Entrepreneurs + Public-IPO) Cash Reserve ratio
(CRR):6%]
 Securing funds through
For Islamic Bank: SLR: 10 %
different types of accounts
 Investment
• Al-Wadiah (Current Account)
Bai-Muajjal, Bai-
• Mudarabah ( Deposit Account) Murabaha
• Wakalah (Investment Deposit) Bai-Salam, Bai-Istisna
• Qard Al- Hasan (Cost free Mudarabah, Musharakah
deposit)
Ijara Tawarruk
 Investment Mode in IB

Buying -Selling Partnership Partnership in Ownership

 Amanah or Wadeah

Amanah or Wadiah (trusts):

Amanah refers to deposits held in trust.
A person can hold a property in trust for another, sometimes by
express contract and sometimes by implication of a contract.
Amanah entails absence of liability for loss except in breach of duty.
Under this arrangement the bank treats the funds kept with the bank as
an Amanah or as a trust and cannot use these funds for its operations;
Islamic banks does not guarantee the refund of the deposit in case of
any damage or loss to the amanah resulting from circumstances
beyond its control.
As all Islamic banks treat such deposits as loans so saying that they
do not guarantee is against the actual practice.
 Wadiah or Amanah……

In Wadiah,
• a bank is deemed as a keeper and trustee of funds
and has the depositors’ permission to use the funds
for its operations in a Shari’ah compliant manner.
• Deposits under wadiah take the form of loans (qard)
from depositors to Islamic banks and the bank
guarantees refund of the entire amount of the deposit.
• While these deposits can be withdrawn at any time,
the depositors are not entitled to payment of any
return.
 Mudarabah or
profit - loss sharing partnership

• The depositors provide the capital for the bank to invest in

profitable businesses.
• The depositor is the Rab-ul-maal (Investor) and
• the bank is the Mudarib (Fund manager).
• The banks place the depositors’ funds in different pools for
investment in Shari’ah compliant assets. The profits from these
assets are shared between the depositors and the bank according
to a pre-determined ratio agreed
• The profit sharing weightages are assigned based on the various
tenures and the amount invested under this arrangement.
• In case of the unlikely event of loss, the depositors have to bear
the loss on a pro-rata basis while bank goes un-rewarded for all its
efforts.
 Qard

• If the bank gets authority to use current accounts funds to invest in

its own operations, Amanah transforms into a (non-interest bearing)
loan and the customers are guaranteed repayment of their funds on
demand but have no right to receive any profit on their balances.
• In that sense current accounts with Islamic banks are similar to
current accounts with conventional banks as regards the obligation
of the bank to return the credit balance upon demand.
• The deposit amount is considered as a loan by the depositor to the
bank.
• The relationship between the depositor and the bank is that of
lender and borrower whereby the customer is simply the lender and
the bank is the borrower.
 Features of Current Account Deposit of
Islamic Banks
• Current account deposits taken based on Amanah or Wadeah, Qard
( in some GCC Countries)
• Current account deposits in Islamic Banks are governed by rules of
Qard (Good Loan / benevolent Loan)
• Banks right is to use the fund-because bank is taking risk of loss
• Banks responsibility is to refund full amount irrespective of profit or
loss to the bank
• Depositors are guaranteed to receive full amount with no return-
because they are not expose to any risk
• However, Bank at its discretion, may share the profit, as gift or Hiba,
with he depositors
• And share of such gift or Hiba must be in lump sum amount ,
not reference to any time or amount or both.
 Savings Account Deposit of Islamic
Banks

• Savings account deposit taken on the basis of Mudarabah

• There are two types of Mudarabah
• For Restricted Mudarabah, Bank as a Mudarib invest the fund as
specified area
• For Unrestricted Mudarabah, bank accumulate the deposit pool and
invest the same at its discretion in a Shari’ah Complaint venture
• The profits among the depositors and the bank according to a pre-
determined ratio agreed
• Loss, the depositors have to bear the loss on a pro-rata basis while
bank goes un-rewarded for all its efforts.
• In Mudarabha, the bank is also share the loss in the sense,
having no return for efforts given.
 Fund Mobilization Methods of PBL (IBB)

• Al –Wadiah Current Deposit A/C;

• Mudaraba Savings Deposit A/C;
• Mudaraba Short Notice Deposit A/C;
• Mudaraba Term Deposit A/C;
• Mudaraba Hajj Savings A/C;
• Mudaraba Contributory Savings Scheme A/C;
• Mudaraba monthly benefit deposit scheme A/C;
• Mudaraba Education Savings Scheme A/C etc.
 Flexible Terms & Conditions

 Less Profit Rate

 No Hidden Charge

 Halal Income ( 85 % Muslim Majority Country)

 Privileges for retaining 10 % SLR instead 19 %

 Concluding Remarks

• Regarding objections and argument about difficulties in changing

the system Please reminded of Mahatma Ghandi who said “BE the
change YOU want to see in the world.”
• We should equally be inspired by the long journey to freedom by
Nelson Mandela who, against all odds, continued to fight apartheid
from inside one of the world's harshest prisons, himself becoming a
universal symbol of freedom. It was Nelson Mandela's iron will and
unshakable belief as well as personal sacrifices he made that made
it possible for him to overcome all odds.
• And we must not forget the strenuous struggle carried out by all
the Messengers of Allah, including Prophet Muhammad (pbuh) with
his Companions to secure a better life for the community.
“Injustice anywhere is the
threat to Justice
everywhere”