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ISLAMIC FINANCIAL
INTERMEDIATION PROCESS
Topic 2:
Deposits and
Investments
ACC 3161
Accounting for Islamic Bank

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ISLAMIC DEPOSIT TAKING ISLAMIC DEPOSIT TAKING

Definition Deposits are sources of funds that all banks use to
finance their activities Deposits could be in terms of:
Though deposit mobilization between Islamic and
conventional banks is similar, the underlying concepts
and principles are different
According to IFSA 2013, “Islamic deposit means a sum
of money or any precious metal or precious stone, or
any article or thing as may be prescribed by the Mudharabah for investment activities (IFSA 2013
Minister, on the recommendation of the Bank, accepted,
paid or delivered, in accordance with Shariah”. Governing Islamic deposits differ from one type to another

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TYPES OF ISLAMIC DEPOSIT SAVINGS

AND
Savings and CURRENT
Current Accounts ACCOUNTS

Fixed-income
Deposits Accounts

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SAVINGS AND CURRENT
ACCOUNTS, CONTINUED..
Based on Al-Qard (loan) contract
● Some savings and current account
are based on loan (al-qard) contract
● The instrument can be: Purely loan
(qard)
● Deposit is treated as loan
principal – to be returned
back at the same amount -
no profit
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The account holders
deposit their money as
RECOGNITION OF ISLAMIC DEPOSIT
an interest-free loan to TRANSACTIONS & JOURNAL ENTRIES
the bank. The bank, as
the borrower, may use
the monies for their
own purpose.
The bank is liable for
the loss of the monies,
whether it is by
negligence or
otherwise. The profit if
any, belongs to the
banks entirely. The
bank may award the
gift (hibah) to the
depositors on the
banks discretionary.
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FIXED-INCOME DEPOSITS ACCOUNTS

Islamic deposit taking via Murabahah /Tawarruq concept
Murabahah/Tawarruq is a transaction between three parties or more to facilitate fixed rate of
return-based instruments.
Murabahah deposit will allow the depositors / investor to earn a fixed return from his ‘deposit’.

By virtue of the above transaction, the customer /depositor will be getting USD 110k within 2
years for his deposit / investment.

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STRUCTURE OF TERM DEPOSIT

BASED ON TAWARRUQ INVESTMENT ACCOUNTS

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INVESTMENT ACCOUNTS, INVESTMENT ACCOUNTS, CONTINUED..

CONTINUED..

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RECOGNITION OF MUDARABAH INVESTMENTS INVESTMENT ACCOUNTS-

TRANSACTIONS & JOURNAL ENTRIES MUDHARABAH
No. T.ransaction Dr. Cr.
1. Recognition of Cash Mudharabah
Mudharabah Inv. Inv. Acc.
2. Withdrawal of money Mudharabah Cash
Inv. Acc.
3. Profit Share of P/L Equity
Mudharib
4 Profit Share of Inv. P/L Mudharabah
Acc. Holder (IAH) Inv. Acc.
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MUDHARABAH INVESTMENT (FUNDS) MOBILIZATION OF DEPOSITS,

INVESTMENT & SHAREHOLDERS FUNDS

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SPECIFIC DISCLOSURES & PROFIT STEPS IN PROFIT DISTRIBUTION

ALLOCATION METHODS BETWEEN IFI AND INVESTMENT
Investment Weights ACCOUNTHOLDERS
In allocating profit, higher investment weights are assigned
to those investment deposits with longer maturity periods. ● Determine the monthly average daily
balance (MADB)
Profit Sharing Ratio ● Assigned weights to each category and
Contracted Profit Sharing ratio could be the same for all ● determine the weighted balance Allocate
class of deposits distributable profit to each category
Profit sharing arise from funds mobilized through use of ● Apportion profit according to each
investment deposits category
● Compute dividend rate based on MADB
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ILLUSTRATION OF PROFIT The composition of investment accounts include:

DISTRIBUTION

The profit for the year 2000 is $ 140,000,000 from both joint
and self-financed assets. The profit sharing ratio between
depositors and bank is 70:30 respectively.

Required:
Compute the return for each class of investment deposit.
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INCOME MEASUREMENT & SPECIFIC In jointly financed assets

DISCLOSURE DISCLOSURES & where investment deposits
Interest based financial institutions PROFIT funds are utilized for
determine interest expense to be paid to financing, the provision for
depositors. ALLOCATION doubtful debt should
IFIs however distribute dividends from METHODS proportionately be borne by
profits earned to depositors. the depositors
More disclosure is warranted from IFI in Should expenses such As for administrative
terms of income determination. as provisions and expenses and other overheads
Nature of recognition such as pooling or administrative expenses the mutual agreement is left
separate investment account methods are be incurred by with the parties concerned.
adopted in income recognition Investment depositors?
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SPECIFIC DISCLOSURES & PROFIT SEPARATE INVESTMENT ACCOUNT

ALLOCATION METHODS, CONTINUED.. & POOLING METHODS
● Should profit of Investment account holders be shared with current
& savings accounts?
-The IFI pays a discretionary amount (gift) to the CSA depositors from the
pool of funds. IFI should disclose whether the gift was made prior to
distribution to depositors.

● Sharing revenue from banking operations?

-Fees earned from services rendered by IFI if distributed to depositors
should be disclosed.

● Any of the approved two methods of distribution should be disclosed are the
Separate Investment Account Method and the Pooling Method

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