Fundamental Islamic Banking – Sources of Funds & Shariah Concepts

A comprehensive set of question-and-answer flashcards covering the key concepts, contracts, account types, conditions and Shariah issues related to savings, current, term and investment deposits in Islamic banking.

What are the two main external sources of funds for an Islamic bank besides its own capital and equity?

Risk-free transactional deposits (current/savings) and investment deposits that carry the risk of capital loss.

Name the three basic types of customer accounts offered by Islamic banks.

Current account, Savings account, Investment (or Profit-and-Loss Sharing) account.

Which three Shariah contracts are most commonly used to structure SAVINGS deposits?

Qard (benevolent loan), Wadi’ah Yad Dhamanah (guaranteed safekeeping), and Mudharabah (profit-sharing).

What is a Qard savings deposit?

A benevolent loan in which the bank guarantees full repayment of the deposited amount but offers no return to the customer.

Under a Wadi’ah Yad Dhamanah savings deposit, what obligation does the bank assume?

The bank guarantees the return of the full deposit on demand and may voluntarily give a hibah (gift) but is not obliged to pay profit.

How does a Mudharabah savings deposit allocate profit and loss?

Profits are shared between bank and depositor according to a pre-agreed ratio, while the depositor (rabb al-māl) bears losses except those caused by the bank’s negligence.

What key feature distinguishes a SAVINGS deposit from a CURRENT deposit in Islamic banking?

The current deposit normally offers cheque-book and multi-purpose card facilities; otherwise both allow withdrawal on demand.

List the three Shariah structures commonly used for CURRENT deposits.

Qard, Wadi’ah Yad Dhamanah, and Mudharabah current deposit.

Define a TERM deposit in Islamic banking.

A deposit held for a fixed period where funds are invested in Shariah-compliant pools; withdrawal is only at maturity or with prior notice.

Which contracts frequently underpin Islamic TERM deposits?

Commodity Murabahah, Wakalah unrestricted investment, and Mudharabah general investment.

What sets an INVESTMENT deposit apart from savings and current deposits?

It is usually based on Mudharabah or Wakalah bi-Istithmar, offers potentially higher returns, and does NOT guarantee principal or profit.

In a qard-based deposit, how are the roles of depositor and bank defined?

Depositor = lender; Bank = borrower that must return the principal in full upon demand.

State two salient features of a qard-based deposit.

1) Bank can use the funds at its own risk without depositor’s authorization; 2) No dividends or profit are due to the depositor.

What is the literal meaning of the Arabic term ‘Wadi’ah’?

To leave, lodge or deposit; signifies entrusting property for safekeeping.

Name the four pillars (arkān) of a Wadi’ah contract according to majority jurists.

Depositor (al-Muwaddi’), Custodian (al-Wadi’), Deposited property (al-Wadi’ah), and Offer & Acceptance (Sighah).

Give one Qur’anic verse that underpins the legality of Wadi’ah.

“Indeed, Allah commands you to render trusts to whom they are due…” (Surah Al-Nisā’ 4:58).

What are the two modern sub-types of Wadi’ah applied by Islamic banks?

Wadi’ah Yad al-Amanah (trustee safekeeping) and Wadi’ah Yad al-Dhamanah (guaranteed safekeeping).

Under Wadi’ah Yad Amanah, is the bank allowed to use the deposited assets?

No. Assets must be kept separate, unused, and no fee is charged for custody.

Under Wadi’ah Yad Dhamanah, who owns any profit generated from using the funds?

The bank owns the profit but may give discretionary hibah to the depositor.

Why do some scholars criticise the consistent payment of hibah on Wadi’ah Yad Dhamanah deposits?

Because Wadi’ah Yad Dhamanah is legally akin to a loan (qard); any guaranteed or customary benefit resembles riba.

Describe the basic mechanism of a Wadi’ah Yad Dhamanah deposit.

Customer deposits funds → bank is allowed to use/invest them → bank guarantees full repayment → may give hibah from profits earned.

What is the primary Shariah issue if a bank guarantees a minimum return on a Mudharabah or Wakalah investment deposit?

It violates the profit-and-loss sharing nature of the contract and constitutes a prohibited guarantee of capital or profit.

Which body in Malaysia equated the rulings of Wadi’ah Yad Dhamanah with Qard?

The Shariah Advisory Council (SAC) of Bank Negara Malaysia (decision 30 April 1998).

List two differences between Islamic and conventional banks regarding investment deposits.

1) Islamic bank acts as agent/investor; conventional bank is debtor paying fixed interest. 2) Islamic depositor may share profit or loss; conventional depositor is protected from loss and receives interest.

What is the literal meaning of ‘Wakalah’?

Protection or authorization; refers to delegating power/agency to another party.

Identify the four pillars of a Wakalah contract.

Principal (Muwakkil), Agent (Wakil), Subject-matter/action, and Offer & Acceptance (Sighah).

State one condition for the principal (muwakkil) in a Wakalah contract.

Must be legally competent (sound mind, capacity to own and transact with property).

Differentiate between Particular (Specific) Wakalah and General Wakalah.

Particular Wakalah is limited to a specified task/transaction; General Wakalah grants broad authority over unspecified transactions within customary limits.

What is an Unrestricted Wakalah investment deposit?

Depositor appoints the bank as agent with full discretion to invest funds; bank may keep excess profit over expected rate and charges a fee, while depositor bears investment risk.

What characterises a Restricted Wakalah investment deposit?

Depositor limits the bank’s use of funds to specified schemes or sectors; investment risk still borne by depositor.

Give two events that terminate a Wakalah contract.

Completion of the assigned task, resignation of the agent, dismissal by principal, death or insanity of either party, or destruction of subject-matter.

Why can minors generally NOT appoint an agent in Wakalah according to the majority of jurists?

Because they lack full legal capacity (ahliyyah) to delegate authority.

According to Islamic law, what happens to a Wakalah agency upon the principal’s death?

The agency is discharged unless the rights of third parties would be adversely affected.

In a Wadi’ah Yad Amanah arrangement, who bears loss from theft, fire, or natural disaster if the custodian was not negligent?

The depositor/owner bears the loss; the custodian is not liable.

What is the core difference between Wadi’ah Yad Amanah and Wadi’ah Yad Dhamanah regarding liability?

Yad Amanah: no guarantee; custodian liable only for negligence. Yad Dhamanah: full guarantee of return regardless of cause.

Explain why returning the exact same cash in a traditional Wadi’ah is problematic once the funds have been used.

Because money is fungible; once spent, identical notes cannot be returned, and promising equivalent cash plus profit resembles a loan with interest.

Name three incentives an Islamic bank may provide on a Wadi’ah savings account besides hibah.

Free passbook, bankcard/ATM facilities, payment of zakat on savings, standing instructions, electronic banking access, salary crediting, sweeping facility.

What Shariah principle justifies a bank’s ability to use deposited funds under Wadi’ah Yad Dhamanah?

The accompanying guarantee transforms the deposit into a liability akin to a qard, allowing the bank to utilise the funds.

Under Mudharabah, who is called ‘rabb al-māl’ and who is ‘mudarib’?

Rabb al-māl = capital provider (depositor); Mudarib = entrepreneur/manager (bank).

State one reason term deposits in Islamic banks are often short-term.

They require liquidity to honour fixed maturities and are usually matched with short-term Shariah-compliant investment instruments (e.g., Commodity Murabahah).

In a current account based on Qard Hassan, what profit does the depositor receive?

None; it is an interest-free loan to the bank, repayable on demand.

Why is an overdraft generally not allowed on an Islamic current account structured as Qard?

Because the account represents a loan from the customer to the bank; allowing the customer to overdraw would reverse the roles and could create a riba-based loan from bank to customer.

What is the Islamic finance rationale for allowing discretionary gifts (hibah) but prohibiting contractual profit promises on deposits?

Hibah is voluntary and uncertain, thus not a stipulated benefit; contractual profit promises would constitute guaranteed return and risk riba.

Which contract allows a bank to earn a management fee while acting purely as agent for investment?

Wakalah bi-Istithmar (agency for investment).