Institutions in Islamic Finance
Islamic Banks receive funds from their clients as deposits in the following classes of accounts: - Current and savings accounts; and
- Investment accounts.
The nature of usage for the first type (i.e., liquidity purposes) deprives the clients from any returns on their account balances. In case clients judge that there is excess cash, they have the option to transfer some or all of it to an investment account.
In the event that the client sets certain guidelines as to what he wishes to invest his excess cash in, whether it be geography, sector, corporate, transactions, etc. then the bank would channel it to a restricted investment account that satisfies the criteria set by the client. If the client has no investment preference, then the client authorize the bank to invest his funds in the best possible way as the bank sees fit without restrictions.
Investment accounts in an Islamic Bank are a form of a (Mudaraba) or trust account whereby both parties are partners. In this case, the client is the capital provider or Rab Al-Maal, and the bank is the Mudarib. The generated profits are distributed as per the agreed profit distribution ratio with the client. Since the client provides 100% capital, then clients are subject to full losses on their capital, and none to the bank’s account. If the client assigns the bank as an agent or Wakeel only, then the bank receives agency fees and all profits and losses are to the client’s account. |
|
 |
|