Professional Course CPDIS

CERTIFIED PROFESSIONAL DIPLOMA IN

ISLAMIC BANKING

ISLAMIC BANKING SERVICES

Module 5
Prepared By:
Prof. Dr. Abdussalam Ismail Onagun
CEO, Qitmeer Smart Consultancies,
Member of Executive Council SCIE, Al-Qasimiyah University
Islamic Banking Services

Module 5
 Objectives of this Module

At the end of this session, you will be able to

understand:
• To study the most important Islamic Banking Services in
the Islamic Financial System.
• To understand the Islamic Banking Services related to
sources of Funds.
• To know the sources of funds and its types.
Sources of Funds in Islamic
Banking

4
Introduction
• Islamic banks are Islamic financial institutions that work on collecting funds
and investing them according to the guidelines of the Shari‘ah (revealed
laws) in a way that can serve the society of the Islamic solidarity, achieve
the justice of distribution and put funds in the sound Islamic track.

• Islamic banks aim from investing funds to build the individual and society,
and thus their responsibility becomes have great importance in the society.

• Accordingly, interaction and conformity between them and society become

of considerable necessity as well as to realize the Maqasid Shariah..
Definition of sources of Funds
Sources of Funds:
• Islamic banks are deposit-taking institutions but do not pay interest
on deposits. Their sources of funds include shareholder
investments, savings accounts, current accounts, and investment
accounts, classified as either.

• There are two kinds of sources of funds

• internal sources of funds
• External sources of funds
Category of sources of funds
• Sources of the funds of the Islamic bank are the first starting point towards forming an
investing policy of the bank.
• Therefore, these resources should be studied well so that we can decide the favorability
extent of these resources to the different forms of investment. Thus, this research will
touch upon the basic sources of funds in the Islamic banks.
• There are two Categories : Firstly, internal sources of funds which are the rights of the
ownership of the bank that include
The capital,
Reserves and
Retained earnings.

• Secondly, External sources of funds which are the deposits in the Islamic banks. They
are one of the most important resources of the bank ever.
Internal Sources of the Funds

• There are three Types: They are the rights of the ownership of the
bank which include the capital, reserves and retained earnings:
1 – Regulatory Capital:
• Capital for the Islamic financial institutions and especially banks
is the insurance (safety valve) that absorb the expected loses
which may occur in the future. In addition, capital is the basic
source of the funds to start the activity. Also, capital is the safety
and protection and the source of trust for the depositors. (Al-
‘Awadi, 1999).
2 – Reserves
The second international sources of funds is:

Reserves:
• They are the funds that are set aside from the benefits of the bank in a form of
legal or special reserve in order to support the financial position of the bank. The
basic laws of the banks include the bases of the legal reserve formation. Their
formation often stop when they reach a specific ratio of the capital of the bank.

• Islamic banks forms different reserves categories required to support their

financial positions, keep the safety of their capitals and maintain the stability of the
values of their deposits and the balance of their earnings.
 3 – Retained Earnings
Retained Earnings:
• They refer to the portion of the net income which is retained by the
corporation to reinvest them afterwards to support the financial position
of the bank. This does not include the profits that are decided to be
distributed and were not asked by some shareholders yet.

• When the Islamic bank retains some profits, this does not conflict with
the rulings of the Islamic Sharee‘ah because it (i.e. the bank) acts as a
Mudaarib (speculator) with the money of the depositors.

• Therefore, the Islamic bank can withhold a specific part of the profits
to face what it may experience of unusual conditions.
 Second Category
External Sources of the Funds:
• Deposits in the Islamic banks are one of the most important resources
of the bank ever. They also are considered the main resource that the
Islamic bank depends on in most of the investment operation.

• According to the domain of the Islamic banks, deposit is an agreement

according to it the depositor pays an amount of money to the bank in
one of the different means of payment.
.
External Sources of the Funds
• This will create a call deposit or for a specific term decided by the
agreement of the two parties. Amongst the main activities of the
Islamic banks is mobilizing and attracting the savings from individuals
through the systems of deposits that are in conformity with the Islamic
guidelines:
• Current Accounts Deposit (call or demand deposit)
• Saving Accounts Deposit
• Investment Accounts Deposit
 Current Accounts (call or demand deposit)
Current Accounts Deposit
• Current Accounts Deposit are the deposit that the customer has the
right to call or demand them in anytime, whether it is through using
checks or orders of banking transfer for other customers. Banks do
not pay any revenues for them because they do not have stable
credit that may be zero in anytime. This does not give the bank the
chance to include them in its plan of investment.
Current Accounts Deposit
• Therefore, Islamic banks depends on, as a kind of encouraging the
owners of these deposits, making no expenses for them. Furthermore,
Islamic banks grants those who have current accounts presents from
their net profits which decided by the board of directors in the case if
the banks made high level of profits.
Underlying Contract for Current Accounts
• Current accounts represent an important factor of the bank activity
through providing the short-term financing and emergent and pressing
financing reserves for those who have productive activities in society.
Moreover, currents accounts represent one of the important elements of
liquidity for the bank investment projects that can be need from time to
another for short-term financing requirements.

• Islamic bank can allow the owner of the current deposits to get Qard
(interest free loan) that may exceed their current accounts according to
the conditions that the bank board of directors decide. Also, they can
benefit from the services of the Islamic bank.
Qard (Current Account)

❑ Deposits in Current Accounts are “non interest bearing loans” from Customer
to the Bank.
❑ Deposits in Current Accounts should not be treated as Amanah (trust).

AMANAH (Trust) QARD (Loan)

1. Cannot be used by Bank for its 1. Bank is using the deposit in its
business or benefit. daily financing and investments.
2. Bank is not liable to refund in case 2. Bank should return these
of any damage or loss incurred by deposits on the first call of
circumstances beyond its control. customer.
3. Since the customer is not willing to 3. Bank should return these
get any profit from the Bank, deposits without any increase
therefore, he doesn’t want to take or decrease.
any risk of deficit in principal.
 SPI DEPOSIT PRODUCTS

Wadiah Savings Account

Wadiah Current Account
Mudharabah General Investment Account
Mudharabah Current Account
Mudharabah Special Investment Account
Unit Link Mudharabah
 CONCEPT OF WADIAH CONTRACT

Al Wadiah is a contract (Aqd) between the owner of

the asset and the custodian to safeguard the asset
on behalf of the customer.

Types of Wadiah:
Wadiah Yad Amanah - Trustee Custody
Wadiah Yad Dhamanah - Guaranteed Custody
THE CHANGING STATUS OF WADIAH

CUSTOMER GIVES CONSENT TO THE BANK

TO USE THE GOODS

Wadiah Yad Wadiah Yad

Amanah Dhamanah
RATIONALE ON CHANGING OF STATUS TO WADIAH YAD DHAMANAH

The custodian is the trustee and guarantor of the

asset/goods
The asset/goods can be used for business
purposes
The asset/goods can be mixed with other
asset/goods.
The Bank has to honour the claim on the
asset/goods made by the customer in anytime
WADIAH SAVINGS ACCOUNT

A Wadiah Savings Account is a contract between

the customer and the bank to deposit funds
under ‘guaranteed custody’. The customer
allows the bank to use the fund in accordance to
the Syariah.

Payment of Hibah is at the discretion of the

Bank.
WADIAH CURRENT ACCOUNT
A Wadiah Current Account is a contract between
the customer and the bank to deposit funds under
guaranteed custody. Minimum deposit is RM 500.
Benefits of Wadiah Current Account are as
follows:-

◆Hibah is paid to eligible customers - currently

only government Wadiah Current Account subject
to minimum balance of AED25,000-00
◆Interbranch deposit/withdrawal services at more
than 200 branches.
2 – Saving Accounts Deposit
Saving Accounts:
• These Saving Accounts deposit are distinguished by having little
amounts of money and great number of the depositors. Therefore,
Islamic banks seek to attract the surplus of the savings of the
individuals and small customers through this form of saving
currents.

• These accounts are of great importance to the Islamic bank. That is

because they can be invested in long and middle term usages.
Saving accounts are distinguished with entrusting the bank in
investing them while the bank makes a minimum rate from the
Conti….
• These deposits are distinguished with that investment can be
done in them on the basis of the absolute Mudarabah (which is
an Islamic term that means that a person gives an amount of
money to another person in order to trade with it and the second
takes a share in the profit, like one-fourth, or half, or a third and
the like) by the Islamic bank.
 3 – Investment Accounts Deposit
• They are the deposits that their owners put in the bank so that their money
can make profits and be increased. These deposits are of two kinds:
Firstly, Restricted Accounts:
• The customer will put a sum of money in the bank through opening an
investing account under his name and entrust the bank to invest this sum
of money in any project that the banks may see suitable from the legal and
Shariah-based principles whether it is the local or foreign area. This
account will be for different terms. The owner of this deposit cannot
withdraw it wholly or even a part of it before the end of the appointed term
for it. Investment through this deposit takes the ruling of the Sharee‘ah-
based Mudarabah.
Secondly, Unrestricted Accounts
• Secondly, Unrestricted Accounts. In this form of accounts, the
customer chooses one of the projects that he wants to invest his money
that he deposited in. He has the right to decide the term. In this form of
investment, the customer deserves to take his share of the profits of the
project he chose only.

• This form is called Mudarabah Muqayyadah (an agreement whereby

the owner of the account or fund limits the management of its fund).
Continu…..
• Investing accounts, in general, are the category that is equal to the
termed accounts in the banks other than the Islamic ones. Islamic
banks that aim to encourage these forms of deposits hold different
conditions concerning these deposits.

• That is because investing deposits, in the Islamic banks, are the most
important financing factor that feeds the investment operations of the
Islamic banks. Order of investing deposit states the sum of money,
lasting time of the deposit, entrusting (or non-entrusting) the bank in
investing it in different forms of investment that the Islamic bank
practices
 CONCEPT OF MUDARABAH CONTRACT

• The Bank accepts deposits for investment under the

Islamic principle of Mudarabah which is a contract
between two parties i.e. the owner of capital & the
entrepreneur.
• The profit derived from the business will be shared
based on the agreed profit sharing ratio between the
customer and the Bank.
CHARACTERISTICS OF MUDHARABAH

Profit will be shared based on the agreed profit sharing

ratio between the depositor and the entrepreneur.(e.g
75:25)
Depositor will not be allowed to involve in business
transaction
75% 25%
profit

depositor Business transaction entrepreneur

loss
100% 0%
 INVESTMENT ACCOUNT DEPOSIT
MUDARABAH DEPOSIT

Mudarabah Current Account

Mudarabah General Investment Account
Mudarabah Special Investment Account
Unit Link Mudharabah
MUDHARABAH CURRENT ACCOUNT
Mudharabah Current Account is based on the
contract of profit sharing between the customer
and bank. The profits earned from investment will
be shared between the customer and the bank based
on pre-determined profit-sharing ratio (PSR).
Initial deposit amount is RM 2,000.

Benefits:-
◆ Dividend paid monthly based on daily balance
which exceeds RM2,000 based on PSR
◆ Cheque books for withdrawals and payments
MUDARABAH CURRENT ACCOUNT
◆ Free Takaful personal accident protection
insurance up to RM100,000
◆ 25 % discount on commission for travelers
cheques purchased at bank
◆ Electronic banking services such as ATM,
Phonebanking & RHB OnLine
◆ Automatic transfer of funds from Wadiah Savings
Account/Wadiah Current Account to Mudharabah
Current Account
◆ Gift (Nokia Handphone up to 31 December)
MUDHARABAH GENERAL INVESTMENT ACCOUNT (MGIA)

The Bank accepts deposits for investment under

the Islamic principle of Mudharabah which is a
contract between two parties i.e. the owner of
capital & the entrepreneur.

The owner of the fund places money for a

stipulated period of time for the purpose of
participating in the sharing of profits made from
the Bank’s investment of their funds.
MUDHARABAH GENERAL
INVESTMENT ACCOUNT (MGIA)
Features of MGIA
◆ Tenure ranges from 1,3,6,9,12,15, 24, 36, 48
and 60 months
◆ Minimum amount for 1 month investment is
RM 5,000
◆ Minimum amount for 3 months and above
investment is RM 500
◆ Profit sharing
70% customer : 30% bank (1 month)
75% customer : 25% bank (3 mths & above)
◆ Dividends are accrued on daily basis
MUDHARABAH GENERAL INVESTMENT ACCOUNT (MGIA)

Withdrawal before maturity

◆ Less than 1 mth - no dividend

◆ 1 mth to 3 mth - 1 mth prevailing MGIA rate

calculated on number of days completed

◆ 3 mth and above - 75% of total dividend accrued

DIVIDEND COMPUTATION FOR MGIA

Adopts a daily computation of dividend

method rather than based on the average rate
upon maturity of each tenor.
 RATE (%)

0
2
4
6
8
10
12

Ju
l9
8
Au
g9
8
Se
p9
8
O
ct
98
N
ov
98
D
ec
98
Ja
MGIA 1m n9
9
Fe
b9
9
M
MGIA VS FIXED DEPOSIT

ac
99
FD 1mth

Ap
r9
9
M
ay
99
Ju
n9
9
 RATE (%)

0
2
4
6
8
10
12

Ju
l98
Au
g9
8
Se
p9
8
O
ct
98
N
ov
98
D
ec
98
Ja
MGIA 3m
n9
9
Fe
b9
9
M
MGIA VS FIXED DEPOSIT

ac
99
FD 3mths

Ap
r9
9
M
ay
99
Ju
n9
9
 RATE (%)

0
2
4
6
8
10
12

Ju
l98
Au
g9
8
Se
p9
8
O
ct
98
N
ov
98
D
ec
98
Ja
MGIA 6m
n9
9
Fe
b9
9
M
MGIA VS FIXED DEPOSIT

ac
99
FD 6 mths

Ap
r9
9
M
ay
99
Ju
n9
9
 UNIT LINK MUDHARABAH

Unit-Link Mudharabah is the first Islamic investment

plan that combines the benefits of Mudharabah General
Investment Account (MGIA) with Mudharabah Fund,
which is an Islamic Unit Trust Fund. Under this product,
customer can place funds in MGIA and at the same time
purchase Mudharabah Unit Trust for the same amount.

Eligibility
◆Individual of 18 years old and above.
◆Maximum two joint account holders, one of whom
must be at least 18 years of age.
OTHER SERVICES AVAILABLE UNDER SPI

◆ ATM Services
◆ Autocredit Services
◆ Phonebanking Services
◆ Online
◆ CAMS
 ISLAMIC MONEY MARKET PRODUCTS
Full range of Islamic Money Market products
including :-

◆ Mudharabah Special Investment Account (MSIA)

◆ Islamic Accepted Bills (IAB)
◆ Islamic Debt Securities (short/long term)
◆ Islamic Negotiable Instrument (INI)
◆ Government Investment Certificate (GIC)
◆ Bond Mudharabah Cagamas
 MUDHARABAH SPECIAL INVESTMENT
ACCOUNT
Unlike the Mudharabah GIA, the ratio of profit
sharing for Mudharabah SIA is negotiable
between the customer and the bank.
Minimum amount is RM 500,000
◆Tenure 28 to 92 days (month to month)
◆Yield = 4.00% (after profit sharing)
◆PSR is negotiable based on “R” i.e 12 months
gross profit rate
◆No profit is paid if withdrawals are made before
maturity
MUDHARABAH SPECIAL INVESTMENT ACCOUNT

◆We accept investment rollovers

◆Rollovers can be arranged upon maturity based
on a new profit sharing ratio negotiated between
customer and bank.
ISLAMIC ACCEPTED BILLS(IAB)

Similar to BA’s formulated on Islamic principles

◆Bills of exchange created based on deferred lump

sum payment or Murabahah principle
◆Customers can invest in IAB at prevailing market
rate or via Forward order *(REPO)
◆Minimum amount is RM 30,000
◆Tenure of 21 days to 200 days
◆Maximum tenure is not more than 200 days
◆Yield of 2.50% to 3.00%
ISLAMIC DEBT SECURITIES (IDS)

Short Term IDS

Issued by corporate under the principles of Murabahah
or Suk' Al-Ijarah.

◆Short term notes @ Murabahah known as MUNIF

◆Short term notes @ Suk' Al-Ijarah known as SARUF
◆Minimum tenure of 1 month up to maximum of 1 year
◆Minimum amount is 500,000
◆Yield of 3.10% to 3.80% (indicative)
◆Depend on availability of ‘papers’ in the secondary
market
Long term IDS

Known as Islamic Corporate Bonds.

Issued via tender or offered by an Arranger

◆Issued under the principles of Bai Bithaman Ajil

(cost plus profit margin) or Mudharabah (profit
sharing) or Al Ijarah (leasing)
◆Tenure > 3 years
◆Minimum amount RM 1 mil
◆Yield of 5.25% to 6.50% (indicative)
◆Earn income semi annually or issued at a discount
◆The bonds are rated by Rating Agency of Malaysia
(RAM) and Malaysia Rating Corporation (MARC)
 INDICATIVE RATES OF RETURN

Instruments Tenure Liquidity Rates (16/10/99) Risk

----------------------------------------------------------------------------------

◆Mudharabah 1,3,6,9 Average 1 m 3.30% Bank

General and 12 m 4.05% Risk
Investment 12 months After profit
Account sharing

◆Mudharabah 28-92days Very 2.80% average Bank

Special Good Monthly revision Risk
Investment After profit
Account sharing
BUDGET FOR DEPOSIT 30/6/2000

TYPES 30/6/99 GROWTH 30/6/2000 MIXED

('000) ('000) % ('000) %

WADIAH SAVINGS 92,000 58,000 63.0% 150,000 8.1%

ACCOUNT

WADIAH CURRENT 278,700 41,300 14.8% 320,000* 17.3%

ACCOUNT

MUDHARABAH 12,600 87,400 693.7% 100,000 5.4%

CURRENT ACCOUNT

MUDHARABAH GIA 794,000 406,000 51.1% 1,200,000 64.9%

MUDHARABAH SIA 12,000 68,000 566.7% 80,000 4.3%

TOTAL 1,189,300 660,700 55.6% 1,850,000 100%

* of which RM 250 mil. is from Government A/C.

PRODUCTS & TARGET MARKET

PRODUCT TYPES TARGET MARKET

PRIMARY SECONDARY

MUDHARABAH EXECUTIVES, PAYROLL ADULTS,

CURRENT ACCOUNT A/Cs, PROFESSIONALS GOVERNMENT
HIGH NET- WORTH SERVANTS &
INDIVIDUALS, NON-PROFIT EMPLOYEES
ORGANIZATIONS
e.g. Mosques, Schools,
Associations

WADIAH CURRENT STATE/FEDERAL BUSINESS &

ACCOUNT GOVERNMENT COMPANIES
STATUTORY BODIES
.e.g. LPN, EPF, Tabung Haji
PRODUCTS & TARGET MARKET
PRODUCT TYPES TARGET MARKET

PRIMARY SECONDARY

WADIAH SAVINGS ADULTS, WORKERS & NON- EMPLOYEES,

ACCOUNT EXECUTIVES

WADIAH STUDENT STUDENTS BELOW 18

SAVINGS ACCOUNT YEARS AGE

MUDHARABAH GIA GOVERNMENT/STATUTORY, EMPLOYEES,

BODIES, UNIT TRUST AND PROFESSIONALS
CORPORATIONS & COMPANIES

UNIT LINK INDIVIDUAL SAVERS AND

MUDHARABAH INVESTORS
PRODUCTS & TARGET MARKET

PRODUCT TYPES TARGET MARKET

PRIMARY SECONDARY

MUDARABAH SIA HIGH NETWORTH

INDIVIDUALS,
CORPORATIONS,
GOVERNMENT
STATUTORY BODIES

MONEY MARKET GOVERNMENT/STATUTORY

INSTRUMENTS BODIES, CORPORATIONS,
(REPO, IAB, ISLAMIC COOPERATIVES AND UNIT
PAPERS) TRUST
CONCLUSION

53
 ً‫ُش ْك ًرا َجزْيْا‬
"The word ‘impossible' is not in leaders'
dictionaries. No matter how big the
challenges, strong faith, determination and
resolve will overcome them."

H.H Shaikh Mohammed bin Rashid Al Maktoum

Maktoum World Economic Forum 2004 (16 May 2004)