LECTURE 4:

ISLAMIC BANKING
OPERATIONS –
DEPOSIT SIDE
DEPOSIT PRODUCTS
Deposits Products Shariah concepts (contracts) used
Transactional Current Account Wadiah Dhamanah
deposits Mudarabah

Saving account Wadiah Dhamanah

Mudarabah

Investment General investment account Mudarabah/Tawarruq

Deposits Special investment account Mudarabah/Tawarruq
Specific investment account Mudarabah/Tawarruq
Money market Negotiable Islamic Debt Certificate Bai’ Bithaman Ajil ( deferred payment sale)
deposits (NIDC)

Islamic Negotiable Instruments of Mudharabah ( profit sharing)

Deposit (INID)
Mudarabah Interbank Deposit Mudharabah ( profit sharing)
(MID)
 FINANCING PRODUCTS
Home-financing BBA, Tawarruq, Musahrakah Muntaqanisa
(diminishing partnership), istisna

Auto-financing Al-Ijarah Thumma Al-bay/ Murabahah

Personal financing Tawarruq, Murabahah, Wakalah

Working capital Financing Murabahah/ BBA/Tawarruq

Trade financing Wakalah Letter of Credit
Murabahah Letter of Credit
Kafalah letter of Guarantee
Islamic accepted bills

Credit card BBA/Tawarruq

BALANCE SHEET OF ISLAMIC
BANKS
Asset Liability

Cash Wadiah Dhamanah Current Account

BBA Home Financing Wadiah Dhamanah Savings Account

AITAB Car Financing Restricted Mudarabah Account

Bay al-Inah Personal Financing Unrestricted Mudarabah Account

Enterprise Financing

Government Islamic Securities Commodity Murabahah

Negotiable Islamic Certificate of Deposits

Sukuk

Fixed Assets Shareholders’ Capital

Asset Liability

Asset-based financing Transaction Deposit

Murabahah/BBA
AITAB
Ijarah
Istisna
Salam
Tawaruq
Bay inah

Partnership/Contract Financing Investment Deposit

Musharakah Restricted PSIA
Mudarabah Unrestricted PSIA

Fee-based financing Commodity Murabaha

Wakalah

Investment Tier 1 Capital Common Stocks

Sukuks

Fixed Assets Tier 2

Capital Preference Shares
Reserves
INCOME STATEMENT OF ISLAMIC
BANKS
Islamic Banking Profit and Loss

Revenues
Cost of Funds

Gross Profit

Overheads
Provisions for NPF
Profit Equalization Reserve
Profit Before Tax and Zakat

Tax and Zakat

Net Profit
THE PROFIT COMPUTATION OF
ISLAMIC BANKS
Rate of return of financing (rF): this is the profit rate the
bank uses to compute the selling price of Murabaha,
BBA, AITAB, etc.

Size of financing (F): This variable is usually determined

by economic conditions such as booming economy, lower
cost of funds, marketing and aggressive of product
promotion will help to increase demand for financing.
Deposit rate of return (rD): this is the profit rate on
investment deposits/profit sharing investment account
(PSIA). This rate varies based on the financing
performance. If rF is low, then rD will be also low and
vice versa.

Size of deposit (D): deposits come from households,

business enterprises, corporations and government
agencies. This is included by many factors including the
return on deposits and the economic conditions.
An Islamic bank can improve its performance by reducing
any three of the following expenditures:

Overhead expenditure;
Provision for non-performing financing;
Provisions for profit-equalization reserve.
Total financing (F) RM 5000 million
ILLUSTRATION
Rate of financing (rF) 10%
Total deposit (D) RM 5000 million
Deposit rate (rD) 5%
Gross profit = (5000*0.1) - (5000*0.05)=500-250=250 million
Islamic Banking Profit and Loss (million)

Revenues 500

Cost of Funds 250

Gross Profit 250

Overheads 70
Provisions for NPF 30
Profit Equalization Reserve 5
Profit Before Tax and Zakat 145

Tax and Zakat (30%) 43.5

Net Profit 101.5

 EXERCISE:
Hidayah Bank’s balance sheet is given below:
Financing Amount Rate per Deposit Amount Rate per
(million) year (%) (million) year (%)
Cash 5000 0 Wadiah dhamanah 45000 1
BBA 60000 7 Mudarabah unrestricted 20000 4
Investment
AITAB 25000 6 Mudarabah restricted 15000 3
investment
Sukuk 15000 4 Commodity Murabahah 35000 3
Salam 10000 5

a) Find Hidayah bank’s cost of deposits.

b) Find Hidayah bank’s revenue.
c) Find Hidayah bank’s gross revenue.
d) If overhead expenses is 1000 million and provisions for non-performing financing 200
million, profit equalization reserve is 200 million, find the profit before tax and zakat.
e) If the tax and zakat rate is 30%, what will be Hidayah bank’s net profit?
Thank you.
 TOPIC 2:
DEPOSIT OPERATIONS
 WADIAH YAD DHAMANAH (GUARANTEED
CUSTODY) DEPOSIT

Literal meaning
-Leave, that is, the thing left with a person (not the owner) for the
purpose of safe-keeping
Legal definition
-The authorization of a person to keep the property of another in his
safe custody by explicit or implicit terms
Legal basis
-“and if one of you deposits a thing on trust with another, let the trustee
(faithfully) discharge his trust, and let him fear his Lord” [Al-
Baqarah:283]
Salient features of its application as a deposit instrument:

The bank guarantees deposited monies

Depositor can withdraw monies at any time
The bank can use the deposited monies to generate
profit
Depositor is not entitled to profits generated by the bank
HIBAH DISTRIBUTION
Calculation of the profit:

Profit = P x R x T/365*

Where:
P = Deposit Amount
R = Profit Rate (%) given upon the placement
T = Tenure (number of days, from placement date to maturity date)
*Denominator = To follow the market’s day-count convention
ILLUSTRATION
Deposit Amount RM100,000.00
Profit Rate 3.00%
Tenure 3 months
No. of Days 91
Placement date 01/04/2015
Maturity date 30/06/2015
Profit RM747.95
MUDARABAH DEPOSITS

Salient features of Mudarabah deposits:

Contractually the deposited amount is not guaranteed by the

bank (no capital protection);
Theoretically, in the event of losses, the entirety of any diminution
in value would be borne by the depositor;
Rate of return is not pre-fixed (ex-ante) but only indicative rates
(typically based on historical rates of return) are given;
Actual rate of return is only calculated and distributed at the end
of investment period (ex-post), which may or may not differ from
indicative rates;
Using the concept of mudarabah, both demand deposits and time deposits can be structured:

– Savings Account (demand deposit)

Return to depositor given on the basis of balance held in account calculated at intervals

– Mudarabah investment account (time deposit)

Requires commitment of deposit for specified time periods (for e.g., 3, 6, 9, 12 months)

In the event of early withdrawal, principal usually made available (returned) to depositor but no
return will be given on the deposit.

Rates tend to track that of conventional fixed deposit accounts and are generally higher than
savings account rates.
Two types are common
-General Investment Account (mudarabah mutlaqah)
General mandate given to the bank, standard profit
sharing ratio

-Specific Investment Account (mudarabah

muqayyadah) - Customer specifies constraints on use of
capital, negotiated profit sharing ratio.
ILLUSTRATION OF PROFIT
DISTRIBUTION
RM 20,000 was placed in a 6-month mudarabah investment account,
from 22 Jan 2015 to 22 Jul 2015. The bank determined (quoted) the
following profit rates for the following monthly intervals.

Monthly interval Rate

16 Jan – 15 Feb 2014 3.50%
16 Feb – 15 Mar 2014 3.35%
16 Mar – 15 Apr 2014 3.30%
16 Apr – 15 May 2014 3.20%
16 May – 15 Jun 2014 3.37%
16 Jun – 15 Jul 2014 3.25%
16 Jul – 15 Aug 2014 3.45%
 No. of
Monthly interval Rate Calculation Profit
days

25
22 Jan – 15 Feb 25 3.50% x 3.50% x RM20,000 RM47.95
365
28
16 Feb – 15 Mar 28 3.35% x 3.35% x RM20,000 RM51.40
365
31
16 Mar – 15 Apr 31 3.30% x 3.30% x RM20,000 RM56.05
365
30
16 Apr – 15 May 30 3.20% x 3.20% x RM20,000 RM52.60
365
31
16 May – 15 Jun 31 3.37% x 3.37% x RM20,000 RM57.24
365
30
16 Jun – 15 Jul 30 3.25% x 3.25% x RM20,000 RM53.42
365
7
16 Jul – 22 Jul 7 3.45% x 3.45% x RM20,000 RM13.23
365

Total RM331.89
MONEY MARKET DEPOSITS

The Islamic negotiable instruments are structured:

The concept of BBA for Negotiable Islamic debt

certificate (NIDC) and

The Mudarabah concept for Islamic negotiable

instruments of deposits (INID).
NEGOTIABLE ISLAMIC DEBT
CERTIFICATE (NIDC)
 BBA refers to the sale of goods on a deferred payment basis;

 The Islamic bank sells the identified asset to a customer and

subsequently buys the asset from the customer at an agreed
price (the sale price), which includes the customer’s mark-up
(profit);

 Or it refers to a sum of money deposited with the banking

institutions and repayable to the depositor on a specified future
date at the nominal value of the NIDC.
MODUS OPERANDI:
 THE COMPUTATION OF NIDC
Formula Example
Bank sells an asset to its customer SP (Selling price) 1,000,000
Profit margin r 7.5%
Tenor (months) t 6
Or, days to maturity 182.5
Bank buys back the asset from the 𝑟∗𝑡 1,037,500
𝑆𝑃 ∗ (1 + )
customer 365

Customer’s profit Profit (𝜋) 37,500

 COMPUTATION OF PROCEEDS AND
TRADING OF NIDC

An NIDC is traded on price basis, whereby its principal value is quoted in terms of “price per
RM100 nominal value” specified to four (4) decimal places.

The proceeds to be paid by the buyer is equal to the principal value

𝑃𝑟𝑖𝑐𝑒
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 = 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 ∗
100

Example: an NIDC with a nominal value of RM1,000,000 is purchased at a price of 98.2222. the
proceeds will be:

98.2222
𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 = 1,000,000 ∗
100

= 𝑅𝑀 982,222
MATURITY IS LESS THAN
1 YEAR
EXAMPLE:

Example: the price of an NIDC with six months to

maturity and trading at the yield of 3.15%.

100
𝑃𝑟𝑖𝑐𝑒= =98.4494
182.5 ∗0.0315
1+
365
MATURITY IS MORE
THAN 1 YEAR
 EXAMPLE:
Example: an NIDC with the following features was sold for value 25 September 2014;

Issue date: 15/05/2014

Maturity date: 15/05/2016

Yield: 3.05%

Settlement dare: 25/09/2014

Coupon dates: 15 May and 15 November each year

RV=100

r = 3.05%

n=4

DSC= 133 days

DCC=182.5 days

100
𝑃𝑟𝑖𝑐𝑒 = 133 = 94.5128
0.0305 4−1+182.5
(1 + 2 )
MUDARABAH – ISLAMIC NEGOTIABLE INSTRUMENTS
OF DEPOSITS (INID)

Mudarabah refers to an agreement between two (2) parties:

– The depositors – which provides 100% capital for the

financing;
– The Islamic bank – who manages the project or financing;
– Profits earned from the project or financing are distributed
based on the pre-determined profit-sharing ratio (PSR);
– Any accrued losses are bear by the depositors.
THE COMPUTATION OF INID
Formula Example
Profit sharing ratio in favour PSR 70:30
of customer
Deposit placement D 1,000,000
Declared dividend rate r 10%
Tenor (months) t 6
Or, days to maturity 182.5
Proceeds 𝑟∗𝑡∗𝑘 1,035,000
𝐷 ∗ (1 + )
365
Customer’s profit Profit (𝜋) 35,000
COMMODITY MURABAHAH DEPOSIT-I
STEPS:
1)Depositor purchase commodity from broker A and pays the cash at
USD 1 million;
2)Broker A delivers the commodity to depositor;
3)Now the depositor sells the commodity to an Islamic bank the price
higher than the purchase price which is USD1.1 million at deferred
basis.
4)Debt certificated issue to depositor.
5)In order to get liquidity/cash, the bank sells the commodity to broker B
at market price which is USD1 million.
6)The broker B pays to the bank.
IF THE TRANSACTIONS BETWEEN THE
FINANCIAL INSTITUTIONS:
1)The deposit placing bank appoints the deposit-taking bank as its agent to buy commodity
from supplier A.
2)the deposit-taking bank pays cash to supplier A;
3)The supplier A supplies the CPO (commodity);
4)Now the deposit placing bank holds beneficial ownership while the deposit-taking bank
holds legal ownership of the commodity. The deposit-placing bank sells the CPO to the
deposit-taking bank.
5)The deposit-taking bank will pay to the deposit-placing bank on deferred basis.
6)The deposit-taking bank in order to obtain liquidity/cash, it sells CPO to supplier B.
7)The supplier B pays cash to the deposit-taking bank.
STRUCTURED DEPOSIT PRODUCT
GOLD INVESTMENT ACCOUNT
(GIA)
Thank you.