No.

96/2017

ISRA Research Paper

Accepting Deposits
in Islamic Banking Operations:
SharÊÑah Issues and General
Parameters

International Shari’ah Research Academy for Islamic Finance

ISRA @ INCEIF (718736-K)
Lorong Universiti A
59100 Kuala Lumpur

Tel : + 603 7651 4200

Fax : + 603 7651 4242
Email : info@isra.my
Website : http://www.isra.my
Research Team

Assoc. Prof. Dr. Mohamad Fairooz Abdul Khir

fairooz@uim.edu.my

Islamic University of Malaysia (UIM)

Dr. Riaz Ansary

Head of Fatwa and Translation
riaz@isra.my

International Shari’ah Research Academy for Islamic Finance (ISRA)

© 2017 International Shari’ah Research Academy for Islamic Finance (ISRA)

All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or trans-

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recording, or otherwise without prior permission of the publisher.

Disclaimer
The views and opinions expressed in this research paper are solely those of the author
and do not represent the official views of the International Shari’ah Research Academy
for Islamic Finance.

Designed by Printed by

Accepting Deposits in Islamic Banking Operations:
Sharīʿah Issues and General Parameters
Acceptance of deposits is one of the most significant
activities of an Islamic banking business, along with
acceptance of money for investment and provision
of financing facilities and other services to various
clients. This is clearly spelled out by Islamic Financial
Services Act (IFSA) 2013:
“Islamic banking business” means the business of—
(a) accepting Islamic deposits on current account,
deposit account, savings account or other similar
accounts, with or without the business of paying or
collecting cheques drawn by or paid in by customers;
or (b) accepting money under an investment
account…
Deposit products comprise the cheapest source of
funds for banks. Of these, current accounts and
saving accounts (CASA) are cheaper than fixed/term
deposits (FD). Funds from CASA are also cheaper
than the interbank money market as well as the
bank’s own funds such as its paid-up capital, reserves
and undivided profits. Thus, banks from time to time
run campaigns for their deposit products to attract
and mobilise deposits. Deposit products may have a
significant impact on the bank’s ability to generate
assets. The larger the deposits of an Islamic bank, the
more funds it will have to provide financing, which
means it should be able to make higher profits.
Islamic banks have to conduct their activities
in accordance with the Sharīʿah principles as
interpreted by their respective Sharīʿah committees.
Their rulings must take into account detailed
Sharīʿah evidence as well as the objectives of Sharīʿah
(maqāṣid al-Sharīʿah). The practice of deposit taking
in the Islamic banking industry is not free from
Sharīʿah issues that require further deliberation.
Different Sharīʿah principles constitute the
underlying contract for different types of deposit.
For instance, term deposits in Malaysia are
usually structured based on tawarruq (commodity
murābaḥah) while demand deposits are structured
using the qarḍ (loan) contract. The rights and
obligations of the contracting parties must be in
conformity with the underlying contracts of the
deposit products. From this angle, not many Sharīʿah
Executive
Summary
issues arise from the practice of deposit taking in
Islamic banking operations.
Certain questions arise, however, concerning the
sources of funds deposited in bank accounts. Money
is lawful in its essence, but the money in a person’s
possession may be considered unlawful if it was
acquired by unlawful means. However, money is
a fungible asset that does not admit specification
(taʿyīn). It would be impossible to determine if
money was earned unlawfully by simply looking at
it. Investigation would be required to achieve that
knowledge.
Many fatwas assert that Islamic banks are not
obliged to conduct investigations to determine the 1
source of funds in order to accept a deposit or open
a deposit account. Isolated cases have, however,
been identified where a bank happens to acquire
Sharīʿah Issues and General Parameters
Accepting Deposits in Islamic Banking Operations:
knowledge that a specific deposit is non-ḥalāl. This
usually occurs by the customer informing the bank
of the non-ḥalāl source of his money; for example,
the cheque he is depositing was issued by a betting
shop and represents gambling proceeds. In such
cases the Islamic bank is not allowed to accept the
funds for deposit.
Such a ruling would not arise in automated and
remote transactions; for example, a transfer via
an automated teller machine (ATM), a deposit via
a cash deposit machine (CDM), etc. Such cases are
not covered under this research, which is confined
to cases in which the bank can control whether to
accept or reject the deposit.
Islamic banks must balance two conflicting needs.
Since they are in competition with their conventional
counterparts, and since deposits are the main source
of funds for banks, Islamic banks cannot be too
stringent about accepting deposits from customers
of various backgrounds. On the other hand, they
have to ensure that accepting deposits does not
entail reputational risk that may negatively impact
their image as providers of Sharīʿah-compliant
banking services.
 This raises the issue of a deposit by a company whose
income is partly Sharīʿah compliant and partly
Sharīʿah non-compliant but whose core business
is Sharīʿah non-compliant. The income source of a
particular deposit from a casino conglomerate, for
example, may be predominantly or fully ḥalāl, but
accepting deposits from such a customer may pose
a risk to the bank’s reputation. It would not be easy
to regain a bank’s good reputation after it has been
severely tarnished for any reason.
In light of the above, there is a need for a set of
parameters to guide Islamic banks in matters
pertaining to accepting deposits, particularly from
institutional and corporate customers. This research
attempts to provide such parameters. Emphasis
is placed on a mechanism to determine whether
accepting deposits from such companies impacts
the bank’s reputation.
It is generally permissible for Islamic banks to accept
deposit placements and applications to open deposit
accounts by an individual or a company except in
two cases:
(i) When the bank has knowledge that the
money of a specific (muʿayyan) deposit was
acquired in an Islamically unlawful manner;
and
(ii) When accepting deposits from a particular
customer may negatively impact the bank’s
reputation.
This research also confirms BNM’s Sharīʿah
resolution on accepting deposits from unknown
sources; i.e., the bank is not required to conduct
screening on such deposits. However, for the sake of
maintaining a bank’s reputation, it is recommended
to conduct screening on doubtful deposits.

On this note, the research discovered that Islamic

banks’ depositors are of diverse backgrounds.
They are both individuals and companies, and the
individuals are of various religions and ideologies.
Depositors’ sources of income and main business
2
activities may be Sharīʿah compliant or Sharīʿah
non-compliant. It is crucial to examine the types
of depositors to ensure freedom from reputational
Keywords:
Research Paper No. 96/2017

risk should the bank accept deposits from certain

depositors whose backgrounds may give rise to
negative public perception. Being guided by the deposit acceptance, current account, savings
proposed parameters, Islamic banks would be able account, reputational risk, source of income
to effectively avert reputational loss.

INTRODUCTION
Various parties deposit their money with Islamic
banks. The sources from which they obtained
the money may be Sharīʿah compliant or non-
compliant, depending on their activities. This is true
whether the depositor is an institution, a company
or an individual; however, at the individual level it
is difficult to identify their activities. In many cases,
the depositing parties’ activities are a mix of ḥalāl
and non-ḥalāl. The issue to be contemplated in this
case is the extent to which the depositors’ sources
of income have to be taken into consideration
in accepting their deposits. For instance, is it
permissible for an Islamic bank to open a current
account for a company that manufactures pork
products?
“ Money
is physically lawful. It
is only ruled to be unlawful
for a particular person when
they acquire it by unlawful
means. What happens if they
then transfer that money
to another person by a
transaction that is in other
respects lawful?
” any Shariah non-compliant activities related to the
Muslim jurists agree that money in the form of gold,
paper or electronic information is physically lawful.
Money is only ruled to be unlawful for a particular
person when they acquire it by unlawful means.
What happens if they then transfer that money
to another person by a transaction that is in other
respects lawful? Does the money retain its unlawful
status for the recipient? Ḥanafī scholars formulated
a legal maxim regarding certain scenarios of this
problem:
ِ َْ‫"اَ ْلَر ُام َل يـَتـََعدَّى إِ َل ِذ َّمتـ‬
."‫ي‬
َ sources of income. Thus, there is a need to construct
“Unlawfulness does not transfer from one person’s
liability to another’s.”
Section 1
The maxim cannot be taken at face value, however,
for its applicability has conditions. These conditions
will be more fully discussed later, and its relevance
to the acceptance of Islamic deposit products will be
further clarified.
Certain jurisdictions like Malaysia explain the
general ruling on deposit taking without reference
to specific cases. For example, the SAC of BNM
(2010, p. 197) issued the following ruling:
The SAC, in its 58th meeting dated 27 April 2006,
has resolved that Islamic financial institutions are
allowed to accept application to open deposit account
or investment account from a customer without
conducting investigation to ascertain whether the
sources of the customer’s fund are permissible
(ḥalāl), forbidden (ḥarām) or a mixture of the two.
Notwithstanding this, the SAC has no objection for
Islamic financial institutions to establish an internal
screening process to ascertain whether the sources of 3
the fund received are Sharīʿah compliant.
At its 167th Meeting, on 30 March 2016, it apparently
Sharīʿah Issues and General Parameters
Accepting Deposits in Islamic Banking Operations:
expanded the realm of permissibility:
The SAC has decided that in principle, it is permissible
for an IFI to accept fund from Shariah non-compliant
sources. However, the IFI is required to establish an
internal policy in managing Shariah reputational
risk and to ensure that it will not be involved in
source of the fund.1
Depositors may come from various religious
backgrounds and have different motives for deposit
placement. For example, a depositor may want to
open a saving account under his name, but the
main objective is to use it as a repository of money
donated for the construction of a Hindu temple. In
this case, to what extent does the objective of deposit
placement have to be considered from the Sharīʿah
viewpoint if the customer discloses his intention?
Based on the above, it can be argued that the industry
is facing uncertainty with regard to acceptance of
deposits from parties of different backgrounds and
a set of Sharīʿah parameters to guide the industry
in matters pertaining to deposit taking. This is to
ensure that any income that the bank generates via
 utilisation of the deposit money is not associated with
prohibited elements that may require purification of
income and result in reputational loss.
Based on the abovementioned problem statement,
this research seeks to achieve the following
objectives: deposit product. This is important because they
(1) To briefly discuss the practices of deposit
taking in Islamic banking operations;
(2) To identify key Sharīʿah issues related to
deposit taking in Islamic banking operations;
(3) To propose Sharīʿah parameters on deposit
taking for Islamic banks.
The study is significant as it outlines parameters
for the regulator’s consideration in coming up with
a policy on deposit taking for Islamic banks. The
proposed parameters will help avoid the negative
impact of utilizing non-ḥalāl deposits in the
bank’s operations. In other words, since the bank
utilises the deposits in giving financing facilities to
customers, it may have to purify its income if it uses
a deposit accepted under an invalid contract with a
4 depositing party. The invalidation of such a contract
may be due to the accepted money being specifically
identifiable as coming from a non-ḥalāl activity.
Research Paper No. 96/2017
The rest of the paper is organised as follows:
section 2 discusses types of deposit products and
their importance to an Islamic bank as the main and
the cheapest source of funds. The discussion of the
various kinds of Sharīʿah-compliant deposit products
highlights the underlying Sharīʿah contract of each
regulate the contractual relationship between the
bank as the recipient of the deposit and the customer
as the depositing party. Section 3 deals with the key
Sharīʿah issues related to deposit taking by Islamic
banks. It also discusses the challenges they face,
particularly in a competitive environment where
Islamic banks operate side by side with conventional
banks. Conventional banks may accept deposits
from any party as long as they are within the legal
and regulatory framework. The depositor’s source
of income is not an issue for them; nor does it matter
whether the depositor is individual or corporate. The
Sharīʿah issues discussed in this section encompass
the different backgrounds of depositing parties as
well as various sources of the deposited money that
may significantly impact the legality of the deposit.
Section 4 presents the proposed parameters for
deposit taking, constructed on the basis of the key
Sharīʿah issues and preferred opinions about them
delineated in section 3.

A GENERAL OVERVIEW OF DEPOSIT ACCEPTANCE IN ISLAMIC BANKING
OPERATIONS
Bank Funds
Similar to their conventional counterparts, Islamic
banks are financial intermediaries that manage
other people’s money. Most of the literature on
Islamic banking operations assert that a bank’s
day-to-day operations can be categorised into two
distinct functions: operations related to sources of
funds and operations related to utilisation of funds.
Sources of Funds
A conventional bank conducts its business of
financial intermediation purely to earn profit.
It receives surplus money from people who are
not utilizing it and lends to those who need it
for productive purposes or for asset acquisition.
An Islamic bank also functions as a financial
intermediary that relies on its sources of funds to
generate as many assets as possible so that it can
give a better return to depositors, shareholders, etc.
In this regard, a bank’s main activity is to mobilise
funds through various channels and from different
sources. One of the most important sources of funds
for the bank consists of deposit products of various
kinds such as term deposit, demand deposit, fixed
deposit, etc. Traditionally, a bank sources funds
from its depositors at a certain cost, known as cost
of funds, that the bank has to incur.
Utilisation of Funds
On the asset side of the bank’s balance sheet, the
bank utilises the mobilised funds/deposit money
in different instruments that are ultimately aimed
at generating profits. Islamic banks offer various
Islamic financing products and services to the
customers for different purposes such as working
capital, personal use and acquisition of assets like
houses and motor vehicles. The bank will impose
a certain profit rate that covers its cost of funds
and other operating expenses as well as the bank’s
spread.
Section 2
Acceptance of Deposits According to
the Islamic Financial Services Act 2013
(IFSA)
Under the Islamic Financial Services Act 2013
(IFSA), an Islamic financial institution (IFI) may
accept money from its customers via two essential
products, deposit account and investment account,
each having its own distinctive nature and criteria.
Section 2 of IFSA 2013 states:
“Islamic deposit” means a sum of money accepted or
paid in accordance with Shariah— (a) on terms under
which it will be repaid in full, with or without any
gains, return or any other consideration in money or
money’s worth, either on demand or at a time or in
circumstances agreed by or on behalf of the person
making the payment and person accepting it; or 5
(b) under an arrangement, on terms whereby the
proceeds under the arrangement to be paid to the
person paying the sum of money shall not be less
Sharīʿah Issues and General Parameters
Accepting Deposits in Islamic Banking Operations:
than such sum of money, but excludes money paid
bona fide—…..
“investment account” means an account under which
money is paid and accepted for the purposes of
investment, including for the provision of finance, in
accordance with Shariah on terms that there is no
express or implied obligation to repay the money in
full and—
(a) either only the profits, or both the profits or losses,
thereon shall be shared between the person paying
the money and the person accepting the money; or
(b) with or without any return…
The underlying Sharīʿah concept on which a deposit
account is typically structured is qarḍ or murābaḥah
while an investment account is typically structured
using a wakālah, mushārakah or muḍārabah
contract. Such accounts have to be operationalised
in a manner consistent with the inherent nature
and Sharīʿah rulings of their underlying contracts.
Deposits are accepted through a variety of fund
transfer mechanisms including cash deposit
machines (CDM) and online money transfers. Such
mechanisms make it difficult to identify the sources
 of the funds and whether the transferor is a Sharīʿah-
compliant entity. Thus, accepting money under a
deposit account or investment account through
such channels is not an issue to be discussed in this
research.
A study conducted by a practitioner (Elias, 2014)
concluded that there are four typical scenarios
of funds transfer related to accepting money as
deposits or for investment purposes that require
further deliberation. They are as follows:
(1) Funds transfer from a conventional fixed
deposit account to a Sharīʿah-compliant
deposit account.
(2) Funds transfer from the operations or account
of a company with non-ḥalāl business
activities to a Sharīʿah-compliant account.
(3) A cheque deposit that obviously indicates its
Sharīʿah non-compliant source; for instance, a
crossed cheque that indicates an amount from
gambling proceeds.
(4) A depositor declares that the money he
6 intends to deposit for investment purpose is
derived from a non-ḥalāl source.
The Importance of Deposits to an
Research Paper No. 96/2017
Islamic Bank (IB)
Deposit mobilisation is one of the most important
business functions of a bank. In fact, granting a
loan in conventional banking automatically creates
a deposit. As deposits are significant to a bank, it
is argued that a bank’s loan or credit creation is
primarily intended to create deposits; thus, most of
the deposit growth in the banking system is created
by granting loans (Chowdhury, 2014).
Figure 1 : Fixed and Savings Deposits and Average Financing Rates of IBs and Commercial
Banks in Malaysia
Malaysian Islamic and Commercial Banks Fixed Deposits and Average Savings
Deposit and Financing Rates
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1 2 3 4 5 6 7 8 9 10
2014
1MFDR 3MFDR 6MFDR
Source: Data Statistics of Bank Negara Malaysia website.
When an IB has less deposit funding, it will rely more
on open market funding such as interbank funding,
making its liquidity position more vulnerable
to external shocks. This section delineates the
importance of deposits to an IB as (i) the cheapest
source of funds and (ii) the main factor of an IB’s
financial stability and profitability.
Deposits are the Cheapest Source of Funds
for IBs
There are two essential sources of funds for any
bank, including an IB: internal and external. The
first includes the bank’s equity, comprising the
shareholders’ funds, reserves and retained earnings.
The second comprises the customers' deposits, which
are mainly utilised in financing activities and the
creation of assets (Islamic Bankers Resource Centre,
n.d.). Deposit facilities are the main sources of funds
for Islamic banks (Amin, 2013). Banks are hugely
dependent on them for their investment operations
(Abdel Wadoud, 2012). They are the cheapest source
of funds for banks (Bašič et al., 2015) as compared
to other sources such as the interbank money
market. Islamic banks strive to mobilise sufficient
amounts of deposits from the different categories
of their customers under the current accounts and
savings accounts (CASA) and investment accounts.
Since CASA accounts are demand deposits, they are
subject to withdrawal at any time by the account
holders. In order for IBs to gain more depositors,
they offer some types of savings and investment
accounts with higher returns but with restrictions
on withdrawals. Even so, they allow depositors to
withdraw up to certain limits and before maturity
in case of emergencies recognised by the IB (Abdel
Wadoud, 2012).
FDR-Fixed Deposit Rate
11 12 1 2 3 4 5 6 7 8 9 10 11 12 SDR-Savings Deposit Rate
2015 AFR-Average Financing Rate
9MFDR 12MFDR SFR AFR
 Figure 2: Six-Month Fixed Deposit, Savings and Average Financing Rates of IBs and Conventional

Malaysian Islamic and Commercial Banks Savings, Average Finncing and 6-Month Fixed
Deposit, Savings and Average Financing Rates
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2014 2015

6MFDR SDR AFR

Source: Data Statistics of Bank Negara Malaysia website.

Figure 1 above clearly confirms that deposits are
a cheap source of funds for Malaysian Islamic and
commercial banks for the two-year period shown.
While the savings deposit rate is less than 1%, the
fixed deposits are clustered around 3%. Meanwhile,
the average financing rate is around 5% throughout
the whole period. Hence, both IBs and commercial
banks in Malaysia enjoy a spread of 4% between
the savings deposit rate and the average financing
rate. Likewise, the spread between the fixed deposit
rates and the average financing rate is about 2% for
In addition, Islamic banks also source funds from the
Islamic Interbank Money Market at Money Market
Interbank Overnight Rates, which are higher than
the deposit rate. From Figure 3 below, we can observe
that the six-month money market interbank rates
are a bit higher than the six-month fixed deposit rate.
The literature has documented that market structure
and bank size have independent effects on deposits. 7
Historically, mid-sized banks were found to be more
aggressive in seeking new deposits (Rosen, 2007).
Though market structure and bank size are also

Sharīʿah Issues and General Parameters

both types of bank. Figure 2 above singles out the
six-month fixed deposit rate for comparison against
the savings deposit rate and the average financing
rate. We can see the price of funds for the six-
month fixed deposit rate climbing somewhat, and
the spread narrowing, during the second year. The
savings deposit rate declined somewhat over the
same period.
Accepting Deposits in Islamic Banking Operations:
important factors for IBs, their Sharīʿah compliance
and the religiosity of their customers could further
enhance their share in the mobilisation of larger
amounts of deposits. All banks, including IBs, would
prefer to use depositors’ money rather than funds
from the interbank money market as the latter are
more expensive than the former.

Figure 3: Six-month Interbank Overnight Rate versus Six-month Fixed Deposit Rate

Malaysian Islamic and Commercial Banks Savings, Average Finncing and 6-Month Fixed
Deposit and Money Market Interbank Overnight Rates

6.00
5.00
4.00
3.00
2.00
1.00
0.00
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2014 2015

6MFDR SDR AFR 6MIOR

Source: Data Statistics of Bank Negara Malaysia website and DataStream.

 Both Islamic and conventional banks (CBs) must have
good capital adequacy, which is the minimum level
of capital needed to cover unexpected losses or any
sorts of adverse shocks. It is confirmed empirically
that capital adequacy has a significant strong positive
relationship with deposits and growth of loans for
both IBs and CBs (Abdul Karim, 2014). Another
recent study has confirmed the positive impact of
capital ratio and interest rate on the returns of the
investment deposits of IBs. It additionally found that
small IBs offered higher rates of return than large
ones (Hamza, 2016). Interestingly, bank deposits
are also found to be influenced by the political
connections of the banks, regardless of whether they
are state-owned or private. The better connected the
bank, the more easily it attracts deposits compared
to its non-connected counterparts (Nys, Tarazi and
Trinugroho, 2015).
Deposits Are a Major Factor in the Stability
and Profitability of IBs
The financing-to-deposit ratio (FDR) is used to
assess a bank’s liquidity by dividing the bank’s total
8 loans by its total deposits. The FDR is expressed as
a percentage. If the ratio is too high, it signifies that
the bank might not have enough liquidity to cover
any unforeseen fund requirements. If, however, the
Research Paper No. 96/2017
ratio is too low, the bank may not be generating as
many assets as it could. This indicates that properly
calibrated deposit mobilisation plays a vital role in
ensuring a bank’s liquidity, stability and profitability.
As confirmed above, small banks are more aggressive
in attracting increased deposits compared to larger
banks. They are also more willing to lend to small
businesses, at least in Indonesia (Shaban et al., 2014),
thereby diversifying their portfolios. According to
Shaban, Duygun and Fry (2016), an IB’s willingness
to finance small and medium enterprises using its
differentiated products will not only increase its
market share through price competition but will also
boost its profitability and stability. This is impossible
to achieve without having substantial deposits as a
cheap source of funds that are utilised to generate
profitable assets.
Confirmation of IB stability can be found in the
empirical findings on IB efficiency in the GCC
region after the subprime crisis. Belanès (2015)
found that most IBs experienced only a minor
decrease in efficiency that became manifest two
years after the onset of the crisis. Beck (2013)
undertook a more comprehensive study that also
found IBs to be efficient and stable. Although IBs
are less cost-effective, they were found to have
higher ratios of intermediation, asset quality and
better capitalisation compared to their conventional
counterparts. Thus, they did not discontinue their
intermediation even during the crisis. Rosman, Abd
Wahab and Zainol (2014) found that the efficiency
of IBs in the Middle East and Asia is mainly
determined by their capitalisation and profitability.
Ramlan and Adnan (2016) recently confirmed in the
case of Malaysia that IBs are more profitable than
their conventional counterparts. We argue that the
stability and profitability of IBs are mainly due to
the cheap source of funds of their deposits and their
willingness to offer financing to small business and
enterprises which attracts more deposits, especially
saving deposits.
Deposits Are a Stable Source of Funding for
Banks
Demand deposits, especially current accounts,
constitute a main source of stable funding for banks.
This is because the main purpose of current accounts
is to provide transactional services to clients. Many
of these transactions take place within one bank.
Outflows are generally compensated by inflows as
transactions from other banks come to the bank. Due
to their stable core balance, current accounts serve
as a stable source of funding for banks (Džmurováa
and Teplý, 2015, p. 280).
Definition of Term Deposits
Islamic term deposit refers to a deposit product that
pays a fixed profit rate until a given maturity date
(Maybank Islamic, 2016). In Malaysia, this type of
deposit is covered by Perbadanan Insurans Deposit
Malaysia (PIDM). The fixed term generally refers
to short-term maturities that range from a month
to a few years. Depositors of term deposits are not
allowed to withdraw their money till the end of the
term as stated in their respective contracts. Term
deposits comprise an essential financial product that
is also sold by other financial institutions including
conventional banks, credit unions and others. While
the Islamic term deposit can take the same definition
as the conventional one, it uses Sharīʿah-compliant
structures to achieve the promised return, and the
particular schemes are bank-specific as well.
Commodity Murābaḥah Term Deposit
The commodity murābaḥah term deposit, also
known as tawarruq, normally operates using the
murābaḥah contract in the following way: First, a
customer deposits their money in an Islamic bank
(IB) for a fixed term, usually three or six months, for
a profit rate comprised of LIBOR or KLIBOR plus
certain basis points (e.g., 3.43% + 2 bps = 3.45%). The
customer appoints the IB as an agent to purchase
a commodity by cash payment from Broker A.
The bank, still acting as the customer’s agent, sells
the same commodity to itself, with a mark-up, by
deferred payment. The IB then sells the commodity
spot to broker B and receives the cash. There are
thus three sales and purchases, which result in the
IB acquiring ready cash along with the liability to
pay the depositor a larger sum of money at the end
of the fixed term. Tawarruq was initially used for
liquidity management by some Islamic banks. It
was introduced as the underlying contract for time
deposit accounts after IFSA 2013 abolished the use
of muḍārabah and wakālah for that purpose (Ismail,
Nik Abdul Ghani and Mat Zain, 2015).
The Modus Operandi of Term Deposits
Figure 4: Commodity Murābaḥah Term
Deposit Modus Operandi
3 at any time (ISRA, 2012). Certain Islamic banks
6 further categorise savings deposit accounts based
Customer Islamic Bank
2 4
1 5
Broker A Broker B
(1)
1 Islamic bank purchases the commodity on
behalf of its customer from broker A;
(2)
2 Islamic bank makes spot payment on behalf of
its customer;
(3)
3 Customer sells the commodity at cost plus
profit via deferred payment;
(4)
4 Islamic bank sells the purchased commodity on
spot basis to Broker B;
(5)
5 Islamic bank receives cash from Broker B.
Source: Adapted from ISRA (2012)
Definition of Savings Deposit
In the conventional system, a savings deposit, which
is generally known as a savings account, is defined
as a deposit account held at a bank or other financial
institution that provides principal security and a
modest interest rate (Investopedia, n.d.).
Islamic saving deposits differ from conventional
saving deposits in the following ways (ISRA, 2012):
First, though Islamic saving deposits do not offer
interest, they do offer a discretionary gift (hibah)
that is neither conditional nor promised upfront.
Conventional deposits offer a predetermined fixed
interest rate that is subject to revision. Second,
conventional banks offer incentives to attract
more new depositors. Islamic banks, on the other
hand, do not offer incentives in the form of gifts
or promotional items, particularly when saving
deposits are structured based on qarḍ or wadīʿah.
Savings Deposit Operations
Because of the significance of savings deposits as
the cheapest type of funds for Islamic banks, all 9
Islamic banks offer them. They are similar to current
or demand deposits except that they do not offer
a checkbook and limits are placed on withdrawal
Sharīʿah Issues and General Parameters
Accepting Deposits in Islamic Banking Operations:
frequencies and amounts without incurring
extra costs. Savings deposits, in contrast to term
deposits, do not have any maturity; customers are
allowed to withdraw their deposits on demand
on customer demography such as age, gender and
educational level. For instance, according to Ramlee
(2000), BIMB offers the Ijarah savings account to
students between the ages of 13 and 18 whereas the
Pewani and Sakinah accounts are for women and
retirees respectively.
Current Deposit (Current Account)
Like their conventional counterparts, Islamic banks
also offer a current deposit product. It is structured
based on an Islamic principle such as wadīʿah yad
ḍamānah. In some jurisdictions, current accounts
are known as checking accounts since the depositor
is issued a checkbook to pay bills, salaries, etc.
(Amin, 2013, p. 3). The current account is also called
a demand deposit and is designed for those, such
as business owners, who need their money always
available for transaction purposes (Haron and Wan
Azmi, 2008).
 Islamic Interbank Deposits In the modus operandi of this muḍārabah interbank
deposit, No. 1 indicates the flow of funds from the
The Islamic interbank money market has been surplus bank to the investee bank and then to the
developed in order to address Islamic banks’ critical investment project. No. 2 represents the profit-
need to manage their liquidity. An Islamic bank sharing ratio between the investee bank as muḍārib
with surplus funds lends its surplus cash to banks and the surplus bank as rabb al-māl. Meanwhile, No.
in a deficit position by offering those deposits in 3 shows the 100% loss that has to be borne by the
the interbank deposit mechanism or by purchasing surplus bank.
short-term money market instruments. The
muḍārabah interbank investment scheme is the most
important contract used. The profit-sharing ratio is
negotiated, but it is expected to be not less than the
latest revised rate of the Government Investment
Certificate plus 0.5%, as per the guidelines issued by
Bank Negara in 1995 (Bacha and Mirakhor, 2013).

Figure 5: Modus Operandi of Muḍārabah

Interbank Deposit Investment

Surplus Bank
(Rabb al-mal)
10
2
1
Research Paper No. 96/2017

Investee Bank
(Mudarib)

2
1

Investment

Source: Adapted from ISRA (2016)


SHARĪʿAH ISSUES RELATED TO THE PRACTICE OF DEPOSIT ACCEPTANCE
IN ISLAMIC BANKING OPERATIONS
This section highlights several Sharīʿah issues
associated with deposit acceptance by Islamic
banks. As an entity that operates an Islamic banking
business, an Islamic bank has to comply with the
Sharīʿah principles in all aspects of its operation,
including deposit acceptance. Possible damage to
its reputation is one important consequence of an
Islamic bank’s failure to comply with Sharīʿah in
matters pertaining to deposit taking.
Definition of Unlawful Property
The main issue of this research involves dealing
with māl ḥarām (unlawful property) as it relates
to (i) accepting a customer’s application to open a
deposit account or (ii) accepting deposit placement
from existing customers. It is, therefore, imperative
to understand the scholars’ definition of māl ḥarām.
Al-Ghazālī (n.d., vol. 2, p. 92) defines it as property
that is unlawful due to (i) an essential attribute, or
(ii) a defect in the means of its acquisition. Liquor
and pork, for example, are unlawful in their essence
due to their physical attributes. However, property
that is physically lawful can still be unlawful for a
particular person if it is acquired by illegal means.
The Sharīʿah does not permit the possessor of
such property to benefit from it in any way. The
impermissible status of property is known by an
authentic revealed text that explicitly prohibits
a type of property or a means of acquisition or
mentions a punishment for the one who consumes
it.
Sharīʿah Treatment of the Categories
of Unlawful Property
The Sharīʿah treatment may differ for the two
categories of unlawful property mentioned above.
Property Unlawful in Its Essence
The prohibition here relates to the essence (aṣl) of
the property and its corpus (ʿayn). Property that is
prohibited due to its physical nature includes all
Section 3
types of impurities; for example, blood and carcasses
(Ibn Taymiyyah, 1995, vol. 28, p. 594). A secondary
reason for the prohibition is the harm associated
with it. It is prohibited for a Muslim to own such
property, benefit from it, or transact in it. As the
Prophet () said about alcohol:
.» ‫« إِ َّن الَّ ِذي َحَّرَم ُش ْربـََها َحَّرَم بـَيـَْع َها‬
“The One who prohibited drinking it has [also]
prohibited selling it” (Muslim, n.d., vol. 3, p. 1206,
ḥadīth no. 1579).
A variant narration has the added wording:
.» ‫وأَ ْك َل َثَنِ َها‬...
َ « 11
“…and consuming its price” (Ibn Ḥanbal, 2001, vol. 4,
p. 73, ḥadīth no. 2190).
Sharīʿah Issues and General Parameters
Accepting Deposits in Islamic Banking Operations:
After delivering this judgment, the Prophet ()
had the wine about which he made the statement
poured out.
Property Unlawful Due to External Factors
Property that was acquired by prohibited means
(al-māl al-harām li kasbihi) is subdivided into two
categories (Ibn Taymiyyah, 1995, vol. 29, p. 320). The
first is acquired without the consent of the Lawgiver
and without the consent of the original owner. Such
means of acquisition include theft, embezzlement
and seizure by force (ghaṣb). They involve no
contract and are considered pure injustice. The
possessor has no right to the acquired property, and
it is thus obligatory that it be returned to its rightful
owner.
The second type is acquired without the consent of
the Lawgiver but with the consent of the original
owner. It is possible for some forms of this to
occur without a contract; for example, bribery.
Alternatively, it could occur by a contract that is not
valid. According to the Ḥanafīs, such a contract may
be completely invalid (bāṭil) or voidable (fāsid).

Invalid (bāṭil) contracts are not recognised by the
Sharīʿah at all because the flaw in them relates to
an essential element or condition. Such contracts,
by consensus, have no legal effect. An example of a
flaw in an essential contractual element is when the
subject matter is unlawful. When that is the case, the
money paid by, or to, a Muslim to purchase it is not
recognised by Sharīʿah as lawful for the seller. Thus,
it does not become his property. A second cause of a
bāṭil contract is when one of the contracting parties
does not own what he is transferring to the other.
This is relevant to the category of property acquired
without the consent of the owner. It is also relevant
to a contract conducted with the price acquired
from a previous contract in which the object of sale
is prohibited by Sharīʿah. There are other causes
that render a contract bāṭil, but these two are the
most relevant to this research. The general rule for
an invalid contract is that each party should return
the counter-value they received to the other party.
The ruling becomes more complicated when the
contract is voidable (fāsid). The Ḥanafī scholar al-
Nasafī defined a fāsid contract as:
12
."‫ص ِف ِه‬ ِ ِ ‫م ْشروع بِأ‬..."
ْ ‫َصله ُدو َن َو‬
ْ ٌ ُ َ
“…legitimate in its fundamental element but not in
Research Paper No. 96/2017
its accessory attribute” (in al-Zaylaʿī, 1313H, vol. 4,
p. 44).
A particularly relevant example of a voidable
contract is one that includes an element of ribā
(usury/interest). The basic contract, which is a loan,
is recognised in Sharīʿah. It is the added condition—
that an extra amount be repaid along with the
principal—that is unlawful. The contract could be
rectified if this condition were removed.
Scholars differ as to whether a voidable contract
results in ownership transfer. The Ḥanafīs make a
distinction between the religious/ethical ruling and
the civil ruling. Al-Kāsānī (1986, vol. 2, p. 209) says:
."‫اس ُد ُم ْستَ ِح ُّق الْ َف ْس ِخ َح ًّقا لِلش َّْرِع‬
ِ ‫"والْبـيع الْ َف‬
ُ َْ َ
“A voidable sale deserves to be annulled as the right
of the Law[giver].”
Despite that, as far as the rights of the contracting
parties are concerned, the Ḥanafīs consider a voidable
contract to have its legal effects if possession (qabḍ)
has already occurred. Ibn Nujaym (n.d., vol. 7, p. 91)
asserts:
ُ ‫ض؛ ِلَنَّهُ يُِف‬
َ ‫يد الْ ِم ْل‬ ‫س ِبََرٍام‬ ِ
‫ك‬ ٍ ‫َْم‬ ‫الربَا لَْي‬ َّ ‫ل‬..."
ِّ ‫َن‬
ِ ‫اس َدة وإِ ْن َكا َن ع‬ ِ ِ ‫الْ َف‬ َ
ِ ‫ض َكسائِِر الْبِياع‬ ِ
‫اصيًا‬ َ َ ‫ات‬ ََ َ ِ ِ ‫بالْ َقْب‬
."‫ك‬
َ ‫َم َع َذل‬
“…because ribā is not absolutely unlawful, since
it leads to ownership transfer upon possession,
as with other voidable sale contracts, even if [the
contracting party] is sinful thereby.”
The statement that “ribā is not absolutely unlawful”
cannot be taken as an endorsement that it is
permissible in some sense. It is only that, being money,
it is not unlawful in its substance, and secondly, the
contract has legal effect after possession. However,
the sin associated with it is not a trivial matter. A
Muslim who habitually deals with it may come to
see nothing wrong with it. Ibn ʿĀbidīn (1992, vol.
2, p. 292) discussed the disagreement among Ḥanafī
scholars regarding a person who considers the
unlawful to be lawful. One view said that such a
person leaves Islam by denying the unlawfulness of
what has been definitively prohibited by a definitive
text. A second view adds a second condition,
which is that the rule applies only to property that
is unlawful in its essence. However, this second
condition is an addition that is not consistent with
the text of Sharḥ al-ʿAqīdah al-Nasafiyyah that Ibn
ʿĀbidīn quotes as an authoritative formulation of
the issue. In that book, the issue is phrased simply
in terms of istiḥlāl al-maʿṣiyah (considering a sinful
act to be permissible).
Ibn Taymiyyah (1995, vol. 29, p. 327) summarises
the views of the other juristic schools on voidable
contracts as follows:
‫الربَا َوالْ َمْي ِس ِر؛ َونَ ْح ِوِه َما‬
ِّ ‫اس ٍد َك‬ ِ َ‫فَأ ََّما الْم ْقبوض بِع ْق ٍد ف‬
‫َح ُد َها‬ ‫أ‬ : ِ ‫فـهل ي ِفَيدُ الْ ِمُْلكَ؟ علَى ثََلثَِة أَقـو ٍال لِْل ُف َقه‬
‫اء‬
ِ َ َ ِ َِْ َ َ ِ ُ ُِ ْ ََ
:‫ َوالثَّاني‬.َ‫ب أَبي َحني َفة‬ ‫ َوُه َو َم ْذه‬،‫ك‬ َ ‫يد الْم ْل‬ ُ ‫أَنَّهُ يُِف‬
ِ‫الشَّافَِعِ ُي وأَحمد فِي الْمعروف‬
ُ ْ َ ِ َ ْ َ ِّ ‫ب‬ُ ‫يدهُ َِِوُه َو َم ْذَِه‬ ُ ‫َل يُف‬
ِ
‫ َوإ ْن‬،‫ك‬ َ ‫ات أَفَ َاد الْم ْل‬َ َ‫ أَنَّهُ إ ْن ف‬:‫ث‬ ُ ‫ َوالثَّال‬.‫ِم ْن َم ْذ َهبه‬
‫ف َوَل ِس ْع ٍر‬ ٍ‫ص‬ ْ ‫أ َْم َك َن َرَّدهُ إلَى َمالِ ِك ِه َولَ ْم يـَتـَغَيـَّْر فِي َو‬
ٍ ِ‫ب مال‬ ِ ِ
َ ‫لَ ْم يُف ْد الْ ِم ْل‬
.‫ك‬ َ ِ ‫ َوُه َو الْ َم ْحك ُّي َع ْن َم ْذ َه‬،‫ك‬
The second [opinion] is that it does not cause
ownership transfer. This is the view of Shāfiʿī and
Aḥmad in the recognised position of his School.
The third is that it causes ownership transfer if the
opportunity to annul has passed. However, if it is
possible to return it to its owner without any change
having occurred in its attributes or price, it does not
cause ownership transfer. This is the reported view of
the Mālikī School.
The view of Shāfiʿī and Aḥmad derives automatically
from their rejection of any distinction between an
invalid contract and a voidable contract. According
to them, each party must return what they received
to the other party. The Mālikī view, as reported here,
is closer to the Ḥanafī opinion.
It may be noted that voidable (fāsid) contracts are
based on mutual consent. They are different in this
respect from theft and its equivalents. The authors
consider the Ḥanafī opinion to be compelling. Its
recognition of distinctions between voidable and
invalid contracts makes it the most practical view
for application in modern circumstances.
Sharīʿah Ruling on Dealing with a Person
Whose Property Is Unlawful
Jurists’ treatment of this issue can be most easily
understood by considering the factor of knowledge.
Property that is unlawful in its essence—for
example, pork or wine—can normally be identified
by its physical characteristics. In modern economies,
products are normally sold in packages that identify
them and list their ingredients. Therefore, it is
usually not difficult to determine if a particular
item is unlawful in its essence. There is scholarly
consensus that a Muslim is not allowed to conduct a
transaction involving such property.
The case is more difficult for property that is unlawful
due to the means of acquisition. The unlawfulness
here is related to the liability (dhimmah) of the
possessor, and this is an invisible attribute. On rare
occasions, a person may happen to witness another
person taking possession of someone’s property
without their consent. In that case, it is clearly
prohibited to conduct a transaction with the new
possessor of the property because of the definitive
knowledge that it does not belong to them. This is
particularly obvious for non-fungible property—
say a car—because it continues to be uniquely
identifiable. A person who knowingly enters into a
transaction involving illegally acquired property is
sinful because he knows the disposer has no right to
the subject matter. By dealing with him, he impedes
the return of this property to its original owner.
In theory, the same ruling could apply to money.
If one sees a thief stealing a wallet, it would be
unlawful to accept bills from it as payment for a
purchase. The nature of money, however, is that it is
fungible. This is why classical jurists articulate the
principle that:
ِ ِ‫ي بِالتـَّْعي‬
."‫ني‬ ُ َّ ‫"النـَّْق ُد الَ يـَتـََع‬
“Money is not specified by specification” (Wizārat
al-Awqāf wa al-Shuʾūn al-Islāmiyyah, 1427H, vol. 9,
p. 112; al-Kāsānī, 1986, vol. 5, p. 236).
That is why criminals go to the trouble of money
laundering. Once its source has been disguised by
an intermediate transaction, it becomes generic
money, and one ringgit is like any other.
This brings us back to the issue of knowledge:
what is the ruling about conducting a transaction
with a person when the status of their property is
unknown? Ibn Taymiyyah explains the basic rule in
this regard:
،‫وإِ ْن َكا َن َم ْج ُه ْوَل الْ َح ِال فَالْ َم ْج ُه ْو ُل َكالْ َم ْع ُد ْوِم‬
‫َص ُل فِْي َما بِيَ ِد الْ ُم ْسلِ ِم أَ ْن يَ ُك ْو َن ِم ْلكاً لَهُ إِ ْن‬ ْ ‫َو ْال‬
‫ك الْ َم ِال‬ ِ ِ
َ ‫ فَِإ َذا لَ ْم أ َْعلَ ْم َح‬،ُ‫َّاد َعى أَنَّهُ م ْل ُكه‬
َ ‫ال َذل‬
ِ ِ ِِ ِ
‫ ثُ َّم إِ ْن َكا َن‬،‫َص ِل‬ ِْ ‫الَِّذ ْي بِيَده بُنِيَت ْال َْمُر َعلَى ْال‬
‫س األ َْم ِر قَ ْد َغصبِهُ ُه َو َولَ ْم أ َْعلَ ْم‬ ِ ‫ك الد ِّْرَه ُم في نـَْف‬
ْ َ ‫َذل‬
ِ ِ ِ
َ ‫ت َجاهالً بِ َذل‬
.‫ َوالْ َم ْج ُه ْو ُل َكالْ َم ْع ُد ْوم‬،‫ك‬ ُ ‫أَنا ُكْن‬ 13
When the status is unknown, the unknown is treated
like the non-existent. The starting principle regarding
what is in the possession of a Muslim is that it belongs
Sharīʿah Issues and General Parameters
Accepting Deposits in Islamic Banking Operations:
to him if he claims it to be his property. If one has no
positive information about the status of that wealth
which is in his possession, the matter is to be based
upon the starting principle. If, in fact, he usurped that
dirham, but I do not know that, the unknown is like
the non-existent (1995, vol. 29, p. 324).
“regarding
The starting principle
what is in the
possession of a Muslim is that
it belongs to him if he claims
it to be his property. If one
has no positive information
about the status of that wealth
which is in his possession, the
matter is to be based upon the
starting principle.
”
Ibn Taymiyyah then proceeds to condemn the idea
that it is praiseworthy to avoid dealing with a person
whose property is of unknown status:
 ِ
ً‫ع ِ ْف الدِّيْ ِن بِ ْد َعة‬
َ ‫"وَم ْن تـََرَك ُم َِع َاملَِتَهُ َوْرعاً َكاٍ َن قَ ْد ابـْتَ َد‬
."‫َما أَنـَْزَل اهللُ بَا م ْن ُس ْلطَان‬
“Whoever avoids dealing with him out of
scrupulousness (waraʿ) has introduced a detestable
innovation in the religion for which Allah has not
revealed any authority” (1995, vol. 29, p. 324).
Al-Ghazālī (n.d.) differs with him on this point.
‫"إِ ْن َكا َن يـَتـََوَّرعُ فَ َل يَ ْد ُخ ُل َج ْوفَهُ إَِّل َما يَ ْد ِر ْي ِم ْن أَيْ َن‬
."‫ُه َو فـَُه َو َح َس ٌن‬
If someone practices scrupulousness, such that
nothing enters his stomach except what he knows
the source of, it is laudable” (vol. 2, p. 119).
However, al-Ghazālī agrees with Ibn Taymiyyah
that it is not allowed to ask someone questions
about the origin of their wealth when there is no
cause for suspicion. To do so would be a violation of
Allah’s statement:
ِ ِ ِ ‫ ياأَيـُّها الَّ ِذين آمنُوا‬
َ ‫اجتَنبُوا َكث ًريا م َن الظَّ ِّن إِ َّن بـَْع‬
14
‫ض‬ ْ َ َ
 ‫الظَّ ِّن إِ ْثٌ َوَل َتَ َّس ُسوا‬
Research Paper No. 96/2017
“Believers, avoid making too many assumptions—
some assumptions are sinful—and do not spy on one
another” (Qurʾān, 39:12).
To claim that lack of scruples is the dominant trait
of the current era is no justification for asking. That
is because one is applying a general observation
to a particular person without any basis. Evidence
for this can be found in the practice of Allah’s
Messenger (). It was lawful for him to receive gifts
but unlawful to receive charity. He would accept
invitations to meals without asking whether it was
being served as an act of charity. He did not ask
because invitations to dinner were not a customary
form of charity. There was thus no reason to suspect
otherwise for a particular invitation. On the other
hand, when the Prophet () first arrived in Madīnah
and people brought him gifts, he did ask whether
they intended charity thereby. Al-Ghazālī (n.d.)
explains that the reason for the difference in his
behaviour was the presence of contextual clues. The
emigrants had been forced to leave their property
back in Makkah; therefore, the residents of Madīnah
initially gave them donations to help them get back
on their feet.
This brings us to the case of dealing with a person
َ when there are indicators that his property was
earned unlawfully. In this case, one does not have
certainty, but there is a basis for doubt. Al-Ghazālī
(n.d.) identified the person’s appearance as one type
of clue. The examples he mentioned in this regard
were particular to his time and place; for instance,
being dressed like a mercenary and possessing
a long moustache. A modern example might be a
man decked out with gold jewellery who drives an
expensive SUV and is accompanied by muscular
men with the demeanour of bodyguards. These are
characteristics of drug dealers and gangsters. A
person’s actions could also provide warning signs;
for example, if one observes him committing a
prohibited act. This is particularly relevant when the
behavior observed is related to acquiring property.
That would indicate that he does not care whether
his earnings are Sharīʿah-compliant. Al-Ghazālī
considered non-financial acts of disobedience—
for example, cursing—to be weak evidence in this
regard. Scholars differ over such cases because there
is conflicting evidence, and neither indicator is
definitive. Possession is an indicator of ownership
while the conflicting clues inspire doubt about the
َ َ legitimacy of the possession. Al-Ghazālī considered
it impermissible to proceed without asking, based
on the statement of the Prophet ():
َ ُ‫ك إِ َل َما الَ يَِريب‬
."‫ك‬ َ ُ‫"د ْع َما يَِريب‬
َ
“Leave what causes you doubt for that which causes
you no doubt” (al-Tirmidhī, vol. 4, p. 249, ḥadīth no.
2518; Ibn Ḥanbal, 2001, vol. 3, p. 248-9, ḥadīth no.
1723).
However, al-Ghazālī acknowledged that the ḥadīth
could be interpreted as an instruction of best
practice rather than an inflexible obligation. Based
on that, this is an issue about which scholars differ.
He then mentioned a third category with regard to
knowledge about the counterparty. When one has
general knowledge of a person based on his regular
practice, it creates a reasonable likelihood (ẓann)
that his property is either lawful or unlawful. If a
person is known for integrity, it is not compulsory to
investigate whether his earnings are tainted. In fact,
it is not permissible. On the other hand, if a person
is known for an economic practice prohibited in
Sharīʿah, in al-Ghazālī’s view, one must investigate
the source of the particular wealth he is offering if
one is considering a transaction with him.
This brings us to a second angle of consideration:
the wealth itself. When it is known that all of a
person’s wealth is unlawful, it is prohibited to
conduct a transaction with him/her (Al-Māwardī,
1999, vol. 5, p. 311; Ibn ʿAbd al-Salām, 1991, vol. 1,
pp. 84-85). A more common situation, however, is
when a person’s wealth is a mixture of lawful and
unlawful. Ibn Taymiyyah (1995, vol. 29, p. 324) said:
ً‫َن ِ ْف َمالِِه َحَراما‬
َّ ‫الر ُج ُل َم ْع ُرْوفاً بِأ‬
َّ ‫ك‬ ِ
َ ‫"لَ ِك ْن إِ ْن َكا َن َذل‬
."ً‫تُِرَك َم ْعاََملَتُهُ َوْرعا‬
“If, however, it is known about a person that part
of his wealth is unlawful, dealing with him is to be
avoided on the basis of scrupulousness.” The mention
of scrupulousness here indicates best practice rather
than obligation.
The Shāfiʿi scholar al-Māwardī (1999, vol. 5, p. 311)
provided compelling evidence for this distinction.
He pointed out that in the Qurʾān (9:29) Allah
ordered the Muslims to collect jizyah tax from the
Jews although the Qurʾān (5:42, 4:161) describes
many of them as consuming illicitly earned wealth.
If their properties were prohibited for Muslims, we
should not have been allowed to collect taxes from
them at all. Also, the Prophet () personally dealt
with Jews whose property was a mix of lawful and
unlawful. It is narrated that he took an interest-free
loan of barley from a Jew named Abū al-Shaḥm (al-
Bukhārī, 1422, vol. 4, p. 41, ḥadīth no. 2916; cf. Ibn
Ḥanbal, 2001, vol. 4, p. 18, ḥadīth no. 2109). All this
indicates the permissibility of economic transactions
with possessors of mixed wealth.
Al-Māwardī also cited the understanding of a
prominent Companion on dealing with a person of
tainted wealth:
َّ ‫ود َر ِضي اللَّهُ َعْنهُ أ‬
‫َن َر ُج ًل‬ ٍ ‫رِوي عن عب ِد اللَّ ِه ب ِن مسع‬
َ ْ ُ ْ َ ْ ِ َّ ِ َْ ْ َ َ ُ
‫ َوإِنَّهُ َل يـََز ُال‬،‫الربَا‬
ِّ ‫ إن لي َج ًارا يَأ ُك ُل‬:‫ال‬ َ ‫َسأَلَهُ فـََق‬
‫ال‬ ِ
َ َ‫ ق‬."‫ك َوإثْ ُمهُ َعلَْيه‬ ِ َ َ‫"م ْهنـَُؤهُ ل‬ َ ‫ فـََق‬،‫يَ ْدعُونِي‬
:‫ال‬
َ
ِ ُ‫ "فَِإ ْن عرفـتَه بِعينِ ِه فَ َل ت‬:‫س ْفيا ُن‬
."ُ‫صْبه‬ َْ ُ ْ ََ َُ
A man asked ʿAbd Allah ibn Masʿūd, “I have a
neighbour who consumes ribā, and he keeps inviting
me.” ʿAbd Allah replied, “Its goodness will be for you,
and its sin is on him” (ʿAbd al-Razzāq, 1403H, vol. 8, p.
150, narration no. 14675, by an isnād comprising very
reliable narrators). One of the narrators, Sufyān al-
Thawrī, who was also an eminent jurist, commented,
“If you know it specifically [to be unlawful], do not
touch it.”
“ordered
In the Qurʾān (9:29) Allah
the Muslims to collect
jizyah tax from the Jews
although the Qurʾān (5:42,
4:161) describes many of them
as consuming illicitly earned
wealth. If their properties
were prohibited for Muslims,
we should not have been
allowed to collect taxes from
”
them at all.
Some Ḥanafī scholars have mentioned a principle
with regard to the unlawful status of property after
a transaction:
ِ َْ‫"اَ ْلَر ُام ال يـَتـََعدَّى إِ َل ِذ َّمتـ‬
."‫ي‬
َ
“Unlawfulness [of a property] is not transmittable
from one liability to another” (Ibn ʿĀbidīn (2003, vol.
3, p. 219). 15
However, the maxim must be interpreted in light
of other Sharīʿah principles. With regard to unjust
Sharīʿah Issues and General Parameters
Accepting Deposits in Islamic Banking Operations:
possession, Ibn ʿĀbidīn quotes Shihāb al-Dīn al-
Shilbī that it only applies when the recipient does
not know the property is unlawful for the one who
is transferring it. Lack of knowledge would also be
relevant to invalid contracts. When the counterparty
has knowledge, the maxim would only apply to
voidable (fāsid) contracts. One can interpret the
opinion of ʿAbd Allāh ibn Masʿūd as relevant to this
issue, as the case he was asked about involved a
person involved in ribā.
Ibn Qudāmah (1968, vol. 4, p. 201) and Ibn ʿAbd al-
Salām (1991, vol. 1, pp. 84-85) both made a general
observation that the existence of an unlawful portion
in a person’s wealth is a shubhah (cause for doubt).
This observation applies to cases where the unlawful
portion is not distinguishable from the lawful. As the
unlawful proportion increases, the shubhah becomes
stronger and transactions with such a person
become more and more detestable. When the vast
majority of it is unlawful, dealings with him become
unlawful. Al-Ghazālī (n.d.) considered anything
more than 50 percent to trigger the prohibition of
dealing with him. He considered it obligatory to ask
 the source of the particular wealth before accepting
it as a gift or as the subject matter of a transaction.
However, as Ibn Taymiyyah (1995) points out, this
is a matter about which jurists disagree. Al-Ghazālī
considered a judgment to be exceedingly difficult
even regarding a situation where a minority of the
wealth is unlawful, but most scholars considered it
lawful but disliked to deal with such a person.
Based on the foregoing discussion, the Sharīʿah
issues pertaining to deposit acceptance can be
examined from two perspectives: (i) categories of
customers, and (ii) types of business activities.
Categories of Depositors in Islamic
Banking Operations
Customers who apply for deposit accounts may
have various intentions for placing deposits with
the bank. From the banking perspective, they can be
subdivided into two categories:
(1) Individual depositors; they could be Muslims
or non-Muslims.
16
(2) Company or non-individual depositors: This
category includes companies, enterprises,
retailers, non-governmental organisations
Research Paper No. 96/2017
(NGO), houses of worship (temple, church),
associations, political parties, etc. The
objective of depositing the money with
the bank may be ultimately for religious or
political purposes or to facilitate specific
business activities.
Organisations could be Islamic or non-Islamic.
Companies could be Sharīʿah compliant or Sharīʿah
non-compliant. The identities of these entities give
rise to different objectives, and these may have
impacts on the Sharīʿah ruling pertaining to deposit
taking by an Islamic bank as well as the bank’s
reputation.
Deposits in the form of cheques and postal orders
may clearly reflect the actual source of the funds;
for example, if they were issued by a company that
generates income solely from non-ḥalāl activity.
Furthermore, the deposit money or its equivalent
may originate from impermissible activities that are
not based on mutual agreement such as robbery,
usurpation and theft. Alternatively, the activity may
be built upon mutual agreement between the parties
involved such as gambling, bribery and usurious
transactions. Some of the non-Muslim individuals
or organisations may explicitly state that they are
opening the account for their religious activities or
place of worship.
Figure 6: Categories of Depositors
Based on Religious Background
(1) Muslim
(2) Non-Muslim
Based on Intention and Motive
(1) Intended for religious activities such
as place of worship
(2) Intended for non-religious activities
Based on Source of Money
(1) Permissible
(2) Impermissible depending on (a) core
activities and (b) entity
Activities and Operations of Individuals
and Companies
In terms of activities and operations, the depositing
companies and individuals can be classified into
three categories, based on their activities: (i) Sharīʿah
compliant activities, (ii) Sharīʿah non-compliant
activities and (iii) mixed activities or activities of
doubtful Sharīʿah-compliance status. Note that the
fiqhī discussion in this sub-section pertains to the
case where the income of the depositing parties is
specified and is not a mixture of lawful and unlawful.
If there is a mixture of lawful and unlawful income,
the scholars allow the bank to accept the deposit as
explicated in the previous discussion.
Sharīʿah Non-compliant Activities
This category refers to customers who conduct
activities that contradict Sharīʿah principles
definitively established in the Qurʾān and Sunnah.
The Sharīʿah non-compliant activities can be further
classified into two main sections as follows:
(1) Activities based on a contract of ownership
transfer:
Ownership transfer is an important element
because the permissibility and impermissibility of
dealing with the owner of a property is dependent
on whether the means employed by the person to
acquire his property resulted in ownership transfer.
Al-Taftāzānī (n.d., vol. 1, p. 324) explained the
principle that a change in ownership [of an asset]
requires a change in the ruling on the asset:
ِ ِ ِ َ ‫"إن تـبد‬
ِ ْ ‫ُّل الْ َع‬
."‫ي قضاء‬ َ ‫ب تـَبَد‬
ُ ‫ُّل الْم ْلك يُوج‬ ََ َّ
The precondition for its applicability is that the
corpus (ʿayn) be physically lawful. Thus, the issue
of lawfulness or unlawfulness arises in terms of
the means by which it was acquired. Thus, change
in ownership of an object leads to a constructive
legal (ḥukman) change in its corpus. The Ḥanafī
scholar al-Zaylaʿī (1313H, vol. 3, p. 219) suggests
that the legal change is similar to a real (ḥaqīqah)
change, which implies that it has become another
thing that is subject to a different Sharīʿah ruling.
This category includes activities that are conducted
based on a contract or an arrangement that results
in ownership transfer to the contracting party. In
other words, they refer to impermissible activities
that are conducted by the parties out of their mutual
consent, which include the following:
(a) The activities of the customers/companies are
ribā-bearing such as those of conventional
financial institutions. These include
conventional commercial banks, merchant
banks and non-bank financial companies,
pawn shops, conventional loan providers, etc.
According to the Ḥanafī School, a ribā-bearing
contract is still considered as a contract
that results in a transfer of ownership. For
example, if 50g of gold is exchanged with
200g of silver on a deferred basis, the contract
is rendered voidable (fāsid). In contemporary
Islamic finance, the bank may offer Islamic
Fixed Deposit-i (IFD-i) as a rollover product
for conventional investment-linked funds on
the basis that (i) the conventional funds are
not unlawful by specification (muʿayyan) and
(ii) that accepting deposits from conventional
funds is permissible as long as the contract
applied by the bank for the deposit taking
is Sharīʿah compliant. For example, a
Sharīʿah-compliant contract for the above
Islamic Fixed Deposit-i (IFD-i) is commodity
murābaḥah (CM). The above is based on the
Ḥanafī scholars’ argument that a voidable
contract such as a ribā-based contract leads
to ownership transfer when the contracting
parties have taken possession of the subject
matter. However, such a transaction renders
the contracting parties sinful. Once the
ownership transfer is recognised by Sharīʿah,
the bank can deal with the owner of the asset
if he wishes to open an IFD-i account via
execution of a Sharīʿah-compliant contract.
Ibn Nujaym (2002, vol. 3, p. 469) says:
‫صـ َـوِر‬ ِ ِ ِّ ‫"وِف (الْـ ُقـن ــيـ ِـة) عـ ِن الْ ـب ــزد ِو‬
ُِ ‫ مـ ِْـن ُجْـلَــة‬:‫ي‬ َِ ْ َ َ ِ َِْ ْ َ
‫ك فيـَْها‬ ‫ل‬
َ ‫ي‬ ‫؛‬ ‫ة‬ ‫ي‬
َّ‫و‬ِ
ُ ُْ َِّ ‫الْبـَْي ِع الْ َفاسد ُجْلَةُ الْعُ ُق ْو‬
‫ب‬
‫الر‬ ‫د‬
."‫ض‬ ِ ‫بِالْ َقْب‬
“It is mentioned in al-Qunyah from al-
Bazdawī that among the forms of voidable
sale contracts are all ribā-bearing contracts;
[the subject matter] in these is owned by
possession.”
(b) The activities of customers/companies are
related to gambling and games of chance
such as casinos and lotteries. This also
includes giving virtual salaries to players in
an electronic football game, taking a fee for
correctly predicting sports results, buying 17
tickets to win prizes in a draw, bingo, etc. In
this regard, scholars are of different views
on whether an arrangement that contains
Sharīʿah Issues and General Parameters
Accepting Deposits in Islamic Banking Operations:
the element of maysir results in ownership
transfer.
(c) The activities of the customers/companies are
solely related to production and sale of goods
and services prohibited in Sharīʿah. These are
summarised in Figure 7.
Figure 7: Examples of customers’/companies’
activities that are totally prohibited by
Sharīʿah
• Processing, manufacturing,
marketing of liquor or any
intoxicant.
• Breeding, supplying, slaughtering of
non-ḥalāl meat such as pork.
• Supplying meats that are not
slaughtered according to Sharīʿah.
• Entrepreneur of immoral services
and entertainments such as
prostitution, pubs and discos.
 These activities all involve property that is
unlawful in its essence such as liquor, pork,
etc. Supplying non-ḥalāl meat from animals
that are not slaughtered according to Sharīʿah
involves the sale of carcasses (maytah), which
are not recognised by Sharīʿah as property
(māl mutaqawwim). Income from the sale of
a substance that Sharīʿah does not recognise
as property is not considered to be owned
by a Muslim seller (Abū al-Maʿālī, 2004, vol.
5, p. 402). Thus, placing it as deposit based
on a specific Sharīʿah-compliant deposit is
unacceptable under Sharīʿah.
(d) The activities of customers/companies
comprising the element of major uncertainty
(gharar) such as conventional insurance and
other activities related to it.
(2) Activities that do not transfer ownership.
These are of two types:
(a) Property acquired without the consent
of the original owner and without the
approval of Sharīʿah. The money that is
specifically and identifiably derived from
18 such acts is unlawful. Thus, a person who
knows that this is the status of the money
is not allowed to enter into a financial deal
Research Paper No. 96/2017
with its possessor unless it is mixed with
other lawful money of the possessor. Ibn
ʿĀbidīn (1992, vol. 2, p. 292) says:
‫الر ْش َوِة؛‬ ِ‫ص‬
ِّ ‫ب أ َْو‬ ْ َ‫ي الْغ‬
ُ ْ ‫َي إ ْن َلْ يَ ُك ْن َع‬ ْ ‫"أ‬
ِ ِ ِ
ُ‫الََرِام فَ َل َي ُّل لَه‬
ْ ‫س‬ ُ ‫لَنَّهُِ َلْ يَْل ْكهُ فـَُه َو نـَْف‬
."‫َوَل لغَ ِْيه‬
It must not be the corpus of usurped
property or a bribe. That is because he
does not own it so it is itself unlawful. It
is thus neither permissible for him nor
for others.
(b) The activities of the customers/
companies comprise bribery (rishwah).
(3) Mixed activities or activities of doubtful
Sharīʿah-compliance status
Examples include the following:
(a) Hotels, massage parlors, karaoke venues
and spas.
(b) Supermarkets that sell some Sharīʿah
non-compliant goods such as liquor,
tobacco products, etc.

SHARĪʿAH PARAMETERS FOR DEPOSIT ACCEPTANCE
The Sharīʿah parameters have been developed
based on several aspects delineated in the foregoing
discussions. It is undeniable that accepting deposits
from the various categories of depositors is originally
permissible on the grounds that the corpus of money
is lawful and that lack of knowledge about the means
of its acquisition makes permissibility the default
rule. However, when the bank has knowledge that
specific funds are unlawful, it cannot accept them.
Thus, the principle applies to unlawful money
when it is mixed with lawful money. The proposed
Sharīʿah parameters are primarily intended to guide
Islamic banks in matters pertaining to deposit
taking from potential depositing parties of diverse
backgrounds to avoid reputational loss that may
have a significant impact on the Islamic banks.
In addition, the parameters are also developed
by taking into account the significance of deposit
mobilisation to banks as financial intermediaries.
Cases of deposit placement that are not under a
bank’s control or are difficult for the bank to control,
such as online money transfers and money transfers
through ATMs, are not subject to these parameters.
“ The bank may conduct a screening
process on the sources of deposit
in two situations: (i) in case of
doubt and (ii) in case of possible
reputational loss.
” bank is not allowed to accept the customer’s
General Parameters for Accepting an
Individual, Organisation or Business
Entity
(1) The starting rule is that the bank may accept
any funds from an individual, organisation
or business entity without conducting an
investigation to ascertain whether the source
of the customer’s funds is permissible (ḥalāl),
forbidden (ḥarām) or a mixture of the two.
Section 4
(2) If, however, the bank discovers in the course of
its “know your customers” (KYC) procedures
that the funds are probably from a non-
ḥalāl source, it is recommended to conduct a
screening process to confirm or rule out the
probability.
(3) The bank is not required to scrutinise the
status of the money placed in an existing
deposit account that may from time to time
be derived from a non-ḥalāl source.
(4) It is originally permissible for the bank to
accept deposits from conventional funds
provided that the contract applied by the bank
for deposit taking is Sharīʿah compliant. Thus,
the bank may accept a fund transfer from a
conventional fixed deposit to an Islamic fixed
deposit. The bank may also accept a fund
19
transfer from a conventional account of a
company that operates non-ḥalāl activities to
an Islamic account.
Sharīʿah Issues and General Parameters
Accepting Deposits in Islamic Banking Operations:
(5) Notwithstanding the above, the bank shall
ensure that accepting a deposit from a
particular customer does not breach any law
of the relevant jurisdiction.
(6) In the event that the customer offers
information that the specific funds are sourced
from an illegal activity or arrangement by
which ownership is not transferred, the
application to open an account.
(7) The bank should be further guided by its
internal policy and/or rulings issued by its
Sharīʿah Committee (SC) pertaining to deposit
taking. In case of any uncertainty where
there is no specific SC ruling, the bank shall
consult its Sharīʿah Department and Sharīʿah
Committee for detailed advice.
(8) In addition to the above, the bank has to
ensure that such deposit taking will not result
in reputational loss to the bank.
 General Parameter for Conducting
Screening on the Source of Deposit
The bank may conduct a screening process on the
sources of deposit in two situations: (i) in case of
doubt and (ii) in case of possible reputational loss. If
the bank opts for a screening process in the above
situations, it shall abide completely by the following
internal parameters of deposit taking:
Customers Whose Sources of Income Are
Clearly Sharīʿah Compliant
The bank is allowed to receive applications of deposit
opening/deposit placement from customers whose
sources of income are clearly Sharīʿah compliant
irrespective of whether they are individuals,
companies or organisations.
Customers Whose Sources of Income Are
Clearly Sharīʿah Non-compliant
The above refers to customers whose incomes are
20 (i) solely derived from Sharīʿah non-compliant
activities such as sale of liquor, production of
non-ḥalāl food, etc., and (ii) those whose unlawful
income can be differentiated from income derived
Research Paper No. 96/2017
from Sharīʿah-compliant activities. The category
does not include cases of mixed incomes where the
Sharīʿah non-compliant portion is not identifiable or
separable. In this case, the bank should differentiate
between individual customers and organisational
customers as follows:
(1) Individual Customers
In the case of individual customers whose
sources of income are clearly and specifically
Sharīʿah non-compliant based on any form
of written evidence or verification by the
customer, the bank should identify the means
by which customers earned their income. The
means may be an activity, an arrangement
or a contract that transfers ownership, or an
activity that does not transfer ownership.
The bank has to comply with the following
parameter for each category:
(a) Activity/Arrangement/Contract that
transfers ownership:
If an activity/arrangement/contract
effects ownership transfer, the bank is
allowed to accept application for opening
of deposit account/deposit placement.
On this basis, the bank may accept
such application from the following
customers:
(i) Customers who are employees
of liquor factories, pig farms,
conventional banking, insurance
companies, or involved in
prostitution-related work or
entertainment or any Sharīʿah non-
compliant activities.
(ii) Depositors who intend to open a
deposit account on behalf of their
non-Islamic religious house of
worship such as a church, temple,
etc. where the account is in the
name of an individual customer.
Notwithstanding the above paragraphs,
the bank is not allowed to accept
applications for opening of deposit
accounts or deposit placements from the
following individuals:
(i) A customer who intends to
deposit a cheque that is clearly
derived from gambling activities
or that has a stamp of a casino or
gambling company. Nevertheless,
if the cheque issued by a gambling
company is derived from a lawful
activity such as the cheque that
represents payment for permissible
contractual work completed by the
beneficiary, the bank is allowed to
accept it as deposit or payment of
financing amount.
(ii) A customer who intends to deposit
money resulting specifically and
identifiably from gambling, bribery
and their equivalents.
(b) Activity that absolutely does not transfer
ownership:
If the activity entails possession without
ownership transfer such as theft, robbery,
usurpation, etc., the bank is not allowed
to receive any application for opening
a deposit account or deposit placement
from the respective individuals. The
prohibition applies to both cash and
cheques specifically derived from such
activities.
(2) Companies/institutions/organisations
The bank is not allowed to accept any
application to open deposit accounts
or deposit placements from companies,
associations, non-government organisations
(NGO), enterprises, retail shops, or political
parties whose sources of income are clearly
Sharīʿah non-compliant irrespective of
whether the company’s activities involve
contracts of ownership transfer. This is
intended to safeguard the bank’s reputation
as an Islamic banking institution that
operates Islamic banking business and to
avert negative perceptions among the public
that the bank supports or engages in Sharīʿah
non-compliant affairs, businesses, activities,
etc. The typical Sharīʿah non-compliant
activities include but are not limited to the
following:
(a) Operation of the company is solely
related to sale of liquor.
(b) Operation of the company is solely
related to pig farming.
(c) The customer is a non-Islamic religious
association.
Customers Whose Sources of Income Are a
Mixture of Sharīʿah Compliant and Non-
compliant or Are Doubtful
In this case, the bank should differentiate between
individual customers and organisational customers
as follows:
(1) Individual customers
The bank is allowed to accept application for
opening of deposit account/deposit placement
by customers without any need for further
inquiry, investigation or screening on their
sources of income.
(2) Companies/organisations
The bank is allowed to accept application for
opening of deposit account/deposit placement
by customers without any need for further
inquiry, investigation or screening on their
sources of income.
Notwithstanding the above paragraphs, the bank
has to ensure that accepting deposits from the above
customers does not result in reputational loss to the
bank. For this purpose, the bank has to consult its
Sharīʿah Committee if the main activities of the
non-individual customer are related but not limited
to the following:
(a) Financial services based on usury.
(b) Gambling and betting.
(c) Sales and productions of impermissible goods
in Islam.
(d) Conventional insurance.
(e) Entertainment activities that are illegal.
(f) Sales and productions of tobacco-based goods.
(g) Sharīʿah non-compliant brokerage, sale and
purchase.
(h) Non-Islamic religious activities.
(i) Other Sharīʿah non-compliant activities.
In addition to the above, the bank may consider
adopting the following mechanism to avoid
reputational risk: 21
(1) By looking at the customary practice of the
industry (ʿurf tijārī) in relation to accepting
Sharīʿah Issues and General Parameters
Accepting Deposits in Islamic Banking Operations:
deposits from specific non-ḥalāl sources,
particularly non-individual customers like
companies, institutions and organisations. If
the majority of Islamic banks accept deposits
from such customers without attracting
negative public perception, the bank can
also accept deposits from such a customer.
(2) By looking at the majority of the population;
for example, in Sabah and Sarawak, operating
non-ḥalāl stalls and restaurants is customary.
The number of non-Muslims who operate
non-ḥalāl stalls exceeds the number of
Muslims who operate ḥalāl stalls. In addition,
the Muslims in that area lack awareness of
ḥalāl products. Thus, in such places, accepting
deposits from the people is not deemed
as negative by the public. This is different
from Peninsular Malaysia, where the public
attitude toward non-ḥalāl items such as liquor
and pork is negative. This implies that they
would also be sensitive regarding non-ḥalāl
deposits. This would trigger reputational risk
to the bank, particularly a full-fledged Islamic
bank.
 Section 5

CONCLUSION

In conclusion, the basic rule is that the bank is not

required to investigate the sources of deposit in
the event of doubt. This implies that the bank may
accept (i) deposit placement from existing account
holders and (ii) applications by new customers
to open a deposit account or investment account.
Nevertheless, this research discovered that the bank
may opt for screening in two situations:
(i) when the bank intends to avert reputational
loss due to dealing with a non-ḥalāl company;
and
(ii) when the bank has reason to suspect that the
deposit may be traced to a non-ḥalāl source
by specification (taʿyīn), especially when
possession occurred without the consent of
the original owner.
22 If the bank opts for screening, it has to have an
internal screening methodology and/or internal
policies pertaining to accepting deposits endorsed
by its Sharīʿah Committee. It is obligatory for
Research Paper No. 96/2017

the bank to abide by its internal policy to ensure

continuous compliance with Sharīʿah.
 End Note

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23

Sharīʿah Issues and General Parameters

Accepting Deposits in Islamic Banking Operations:
 Appendix
1

Start

Customers apply for opening of

deposit account

Branch classifies the customers into two categories:

individual and non-individual

Individual Non-individual
Sharīʿah
24 Sharīʿah compliant
Not clearly Non- Not clearly
Sharīʿah Sharīʿah
compliant compliant Non-
compliant
Research Paper No. 96/2017

Determines the category of

Evaluates the criteria
ownership contract

Contract of Fulfils Does not

ownership Uncertainty criteria fulfil criteria

Possession
without
Refers to owner’s Refers to
the Sharīʿah consent the Sharīʿah
Department Department

Approved Rejected Approved Rejected

Finish

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 Accepting Deposits in Islamic Banking Operations:
27

Sharīʿah Issues and General Parameters

Notes
Notes
Research Paper No. 96/2017

28
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