DEPOSITS

Learning objectives
What are underlying principles in
deposit management of IFIs?
What is daily product system in
banking business?
What are principles regulating
deposits servicing in IFIs?
What is financial impact of deposits
and how it is accounted for?
Khalid Hussain, Assistant Professor, Bahria
1
University Islamabad
 DEPOSITS

Banking is a business of
intermediation between savers
(depositors) and users (investors) of
funds, and Islamic banking has no
exception. However the nature of
relationship between Islamic bank
and its customers is entirely
different from conventional banking.
Khalid Hussain, Assistant Professor, Bahria
University Islamabad
2
 DEPOSITS

IFIs are also offering the facility of

current, savings and fixed deposits,
however no risk free return is offered
rather deposits are accepted either
interest free loans (current deposits)
or under Musharaka and Mudaraba
modes of financing.

Khalid Hussain, Assistant Professor, Bahria

University Islamabad 3
 DEPOSITS

Current deposits are accepted as loans from

depositors which can be withdrawn on
demand by depositors.
Some of the Islamic banks are accepting
these deposits as Ammanah.
If Ammanah deposits are lost without
negligence of bank, making the loss of
depositors good is not responsibility of the
bank, hence, Ammanah deposits are not
recommended to safeguard the interest of
both bank and Khalid
customers.
Hussain, Assistant Professor, Bahria
University Islamabad 4
 Generally, no return is given on
current accounts on the grounds that
such deposits take the
form of loans given to Islamic banks
and the loans cannot carry any
return.

Copy right (c) 2011-Muhammad

2/25/2012 5
Hanif Fellow CMA
 DEPOSITS

Saving deposits are accepted under profit

and loss sharing schemes hence Sharia
rulings of Musharaka and Mudaraba apply
as the case may be.
Generally banks are accepting deposits
under Mudaraba then mix the funds of
bank and create a joint pool for investment.
Out of this pool after meeting the statutory
reserve requirements investment portfolio
is created and managed by IFIs.
Khalid Hussain, Assistant Professor, Bahria
University Islamabad 6
 DEPOSITS

Third category of deposits is time deposits

under profit and loss sharing system. Under
the scheme deposits are accepted for a fixed
period which provides opportunity to IFI to
invest in more profitable long term projects
hence depositors of this scheme are getting
higher profit in comparison of second
scheme discussed above. Longer the period,
higher the rate of return is earned. This is
happening through weight age system
discussed in section of daily product.
Khalid Hussain, Assistant Professor, Bahria
University Islamabad 7
 DEPOSITS

IFIs working in Pakistan have shown

tremendous growth in deposit
collection on the basis of profit and loss
during last eight years 01/04-31/11 as
depicted in Figure (FOLLOWING).
Increasing number of deposits on profit
sharing basis provides evidence of
successful application of sharing modes
and trust of masses in IFIs working in
Pakistan Khalid Hussain, Assistant Professor, Bahria
University Islamabad 8
 DEPOSITS
600

500

400

300

521

200 390

283

100 202
147
84
50
30
0 8
Dec.03 Dec.04 Dec.05 Dec.06 Dec.07 Dec.08 Dec. 09 Dec.10 Dec. 11

Khalid Hussain, Assistant Professor, Bahria

University Islamabad 9
 DEPOSITS

Daily product system

In banking business facility of deposits and
withdrawals is provided to depositors as per their
needs and preferences except under time deposits. It
created problem in calculation of share in profit and
loss of each depositors because profits on
investments are generated and disclosed periodically
(monthly, quarterly, semi annually and annually).
IFIs responded the issue by creation of daily product
formula to share the outcome with all depositors
except current account holders. Daily product is
calculated by multiplying the amount of a deposit
with number of days remained in bank,
Khalid Hussain, Assistant Professor , Bahria 10
University Islamabad
 DEPOSITS
Weightage
Another invention of IFIs is the allotment of weight-age to
deposits as per tenure. Generally weight of 1 is awarded
to a deposit remained in bank for one year and less than 1
is awarded to deposits remained in bank for a period less
than one year. what should be weight-age of a deposit of
six months, three months and a month depends upon
number of factors including nature of investment projects
executed by bank, risk free rate offered by conventional
banks, because IFIs are competing with conventional
banks in costs and profits to customers in order to
maintain their competitiveness and saving the customers
to pay additional cost or forego return as a cost of being
Muslims and transecting business with IFIs.
11
 DEPOSITS

Illustration. bank Islami ltd; received the

following deposits during first quarter of its
operation in Suburbs Islamabad. (Schedule on
Next Page)

If profit of bank for the quarter without charging

for operating expenses is Rs; 200,000 and
operating expenses are Rs; 140,000 what is
share in profit of bank and each depositor
assuming share of mudarib is 80%? What is
percentage return per annum on amounts
deposited? Khalid Hussain, Assistant Professor, Bahria
University Islamabad 12
 DEPOSITS
Name deposits in PKR deposit date withdrawal date # of days
Khan 100,000 01/01/09 01/03/09 59
Malik 500,000 15/01/09 14/02/09 30
Warraich 200,000 20/01/09 not yet 70
Chaudhry 400,000 01/02/09 01/03/09 28

Khalid Hussain, Assistant Professor, Bahria

University Islamabad 13
 DEPOSITS

Following work sheet shows the profit

distribution. Bank is receiving Rs;
160,000 [80% of 200,000] as share of
mudarib and spends Rs; 140,000
operating expenses consequently
profit earned is Rs; 20,000 for the
quarter. Balance amounting to Rs;
40,000 is distributed among the
depositors on daily product basis.
Khalid Hussain, Assistant Professor, Bahria
University Islamabad 14
 DEPOSITS
Name Amount Days Daily product % Share Profit %
Return p.a.
Khan 100,000 59 5,900,000 12.80% 5,119
31.67%
Malik 500,000 30 15,000,000 32.54% 13,015
31.67% Warraich 200,000 70 14,000,000
30.37% 12,148 31.67% Chaudhry 400,000 28
11,200,000 24.30% 9,718 31.67%
Bank - - - 0.00%
160,000 0.00%
Total 1,200,000 187 46,100,000 100.00%
200,000 0.00%

Khalid Hussain, Assistant Professor, Bahria

University Islamabad 15
 DEPOSITS

Illustration.2. In continuation of illustration 1.

Suppose following weights are assigned to the
deposits on the basis of tenure.
Tenure Weight
3 Months 1.00
2 Months 0.80
1 Month 0.60

Required:
Calculate the profit and percentage return per
annum on each deposit.
Khalid Hussain, Assistant Professor, Bahria
University Islamabad 16
 DEPOSITS
Name Amount Days Daily product Weight W.Product % Share Profit
% Return p.a.
Khan 100,000 59 5,900,000 0.80 4,720,000 13.70%
5,482 33.91%
Malik 500,000 30 15,000,000 0.60 9,000,000 26.13%
10,453 25.44%
Warraich 200,000 70 14,000,000 1.00 14,000,000 40.65%
16,260 42.39%
Chaudhry 400,000 28 11,200,000 0.60 6,720,000 19.51%
7,805 25.44%
Bank - - - - - 0.00%
160,000 0.00%
Total 1,200,000 187 46,100,000 3.00 34,440,000 100.00%
200,000 0.00%

Khalid Hussain, Assistant Professor, Bahria

University Islamabad 17