BASIC SHARIAH RULES AND

PRINCIPLES FOR VARIOUS TYPES

OF DEPOSITES PRODUCTS
Abdul Samad
Shariah Advisor
The Bank of Khyber
WHAT IS BANK?

The name bank derives from the Italian word
banco "desk/bench.
In practice, the word Bank means an
institution which borrows money from people
and lends money to people for interest or
profit and provided other financial services.

BANKS ENGAGE IN THE
FOLLOWINNNG ACTIVITIES.

Accepting money
Processing of payments by way of telegraphic
transfer, internet banking, or other means;
Issuing bank drafts and bank cheques
Lending money
Providing documentary and standby letter of credit,
guarantees, performance bonds, securities
underwriting commitments and other forms of off
balance sheet exposures
Safekeeping of documents and other items in safe
deposit boxes

WHAT IS ISLAMIC BANKING?
Islamic banking has been defined as
banking in consonance with the ethos and
value system of Islam and governed, in
addition to the conventional good
governance and rick management rules
by the principle laid down by Islamic
Shariah.
OBJECTIVES OF ISLAMIC BANKING
Shariah compliant banking, to enable Muslims
to do their banking transaction a Halal way.
Achieving the goals and objectives of an
Islamic economy.
DEPOSITS
A deposit is an account at a banking institution
that allows money to be deposited and
withdrawn by the account holder. These
transactions are recorded on the bank's books.
All deposit appears as liability on Balance
Sheet of the Bank.

THE COMPANIES (INVITATION AND
ACCEPTANCE OF DEPOSITS) RULES 1987
Deposit means any deposit of money with,
and including any amount borrowed by a
company, but shall not include a loan raised
by issue of debentures or a loan obtained
from a banking company or financial
institution.
DEFINITION OF DEPOSIT IN ISLAMIC
BANKING AAOIFI STANDARADS
As per AAOIFI standards, the depositor is termed as
Investment Account Holder and the investment
account holder authorizes the Islamic Bank to invest
the account holder funds on the basis of
Musharakah/Mudarabah contract.
Under this contract the Islamic Bank has right to use
Investment Account Holders funds only
To combine the investment account holders funds with
1. its own funds
2. others funds
DIFFERENCE IN DEPOSITS &
INVESTMENT ACCOUNTS
Investment Account Deposits Account
In Islamic Banking the
deposits are only the
current accounts and
security deposits.
All kinds of account holder
are called depositors
PLS account holders are
actually investment account
holder.
PLS account holders are
also depositors
Investment account holders
are in participatory modes.
3. It is loan to the bank.
DIFFERENCE IN DEPOSITS &
INVESTMENT ACCOUNTS
Investment Account Deposits Account
These are not guaranteed. These are guaranteed.
Their nature is investment It is liability of the bank
Return paid to the account
holders is their portion in
profit of the bank.
Interest paid to the
depositors is treated as
bank expenses.
CATEGORIES OF DEPOSIT IN ISLMIC
BANKING
The Shariah option for deposit mobilization can
be worked out by respecting two principles:

The aim of the exchange at hand must be
recognizes in Shariah.
The modalities to achieve the said must be
Shariah Compliant.

CATEGORIES OF DEPOSIT IN ISLMIC
BANKING
Investment Account Depositors
Fixed Investment Accounts Current Account
Profit & Loss Sharing
Saving Accounts
Security Deposit
FIEXD INVESTMENT ACCOUNT
The account holders who intend to keep their
money for a fixed period of time normally open
such nature of account.
The life of account is fixed at the time of
opening of account. Within this period the
account holder are not entitled to withdraw
money from the account.
The owner of the fund seek a retune on their
funds.
FIEXD INVESTMENT ACCOUNT
Usually the bank assigns a high weightage to
these account holders, based on its amount
and tenure so as to create a balance in profit
return.
The account holder can withdraw money with
special permission of the bank. In case of
earlier withdraw full amount of profit are not
paid, and instead profit is paid at a lower
rate.
SAVING ACCOUNT
Those account holder having small amounts
of saving and need to withdraw for their
accounts any time like Saving Account.

Banks provide this facility to encourage the
saving among the general public.
CURRENT ACCOUNT
A current account is an account with a bank or a
financial institution. It enables account holders to make
or receive an unlimited number of payments as
frequently as they wish.
In this case the depositors concern:
Safekeeping of funds
Maximum flexibility in their withdrawals
Without seeking any return
GENERAL MOODES OF ISLAMIC
BANKING USED TO RAISE DEPOSITS
Investment Accounts
Islamic banks generally use Musharakah and
Mudarabah based product for obtaining investment
account.
These deposits are based on the Shariah principles
of profit and loss sharing, and the banks use them,
along with its own funds in businesses which are
Shariah compliant.
Wakala model can also be used for Investment
Account.
WHAT IS MUSHARAKAH?
The literal meaning of Musharakah is sharing.
The root of the word "Musharakah" in Arabic is
Shirkah, which means being a partner.
Under Islamic jurisprudence, Musharakah
means where two or more than two persons
agree to contribute funds for conducting some
business in which all partners share the profit
according to a specific ratio while the loss is
shared according to the ratio of the
contribution.
Management of Musharakah

Each partner has right to take part in Musharakah
management.
The partner may appoint a managing partner by
mutual consent.
One are more of the partners may decide not to work
for the Musharakah and work as a sleeping partner
If one or more partners choose to become no-working
or steeping partners. The ratio of their profit cannot
exceed from the ratio of their capital investment.
Capital of Musharakah
All partners must contribute their capital in
terms of money or species at an agreed
valuation.
Share capital in a Musharakah can be
contributed either in cash or in the form of
commodities. In the letter case the market
value of the commodities shall determine the
share of the partner in the capital.
Distribution of Profit
The ratio of profit distribution must be agreed at the
time of execution of the contract.
The ratio must be determined as a proportion on the
actual profit earned by the enterprise.
1. Not as percentage of partners investment.
2. Not in lump sum amount

A sleeping partner cannot share the profit
more than the percentage of his capital.
Rule for loss

In the case of loss all the Muslim jurists are
unanimous on the point that each partner
shall suffer the loss exactly according to the
ratio of investment
WHAT IS MUDARABAH?
This is a kind of partnership where one
partner gives money to another for investing
in a commercial enterprise.
The investment comes from the first partner
who is called Rab-ul-Maal(Investor)
The management and work is an exclusive
responsibility of the other, who is called
Mudarib (Working Partner).
Types of Mudarabah
Al Mudarabah Al Muqayyadah (Restricted
Mudarabah)
Rab-ul-Maal may specify a particular business or
a particular place for the Mudarib.
In which case he shall invest the money in that
particular business or place.
Al Mudarabah Al Mutlaqah (Unrestricted
Mudarabah)
Rab-ul-Maal gives full freedom to Mudarib to
undertake whatever business he deem fit.
Capital of Mudarabah
The capital in Mudarabah may be either cash
or in kind.
If the capital is in kind, its valuation is
necessary, without which Mudarabah
becomes void.
Profit & Loss Distribution
It is necessary for the validity of Mudarabah
that the parties agree, right at the beginning,
on a definite proportion of the actual profit to
which each one of them is entitled.
They can share the profit at any ratio they
agree upon.
Losses always by Rab-ul-Maal(Investor)