Acceptance of deposits is one of the most significant activities of an Islamic banking business, along with acceptance of money for investment and provision of financing facilities and other services to various clients. This is clearly spelled out by Islamic Financial Services Act (IFSA) 2013:
“Islamic banking business” means the business of— (a) accepting Islamic deposits on current account, deposit account, savings account or other similar accounts, with or without the business of paying or collecting cheques drawn by or paid in by customers; or (b) accepting money under an investment account…
Deposit products comprise the cheapest source of funds for banks. Of these, current accounts and saving accounts (CASA) are cheaper than fixed/term deposits (FD). Funds from CASA are also cheaper than the interbank money market as well as the bank’s own funds such as its paid-up capital, reserves and undivided profits. Thus, banks from time to time run campaigns for their deposit products to attract and mobilise deposits. Deposit products may have a significant impact on the bank’s ability to generate assets. The larger the deposits of an Islamic bank, the more funds it will have to provide financing, which means it should be able to make higher profits.
Islamic banks have to conduct their activities in accordance with the Shariah principles as interpreted by their respective Shariah committees. Their rulings must take into account detailed Shariah evidence as well as the objectives of Shariah (maqasid al-Shariah). The practice of deposit taking in the Islamic banking industry is not free from Shariah issues that require further deliberation.
Different Shariah principles constitute the underlying contract for different types of deposit. For instance, term deposits in Malaysia are usually structured based on tawarruq (commodity murābaḥah) while demand deposits are structured using the qard (loan) contract. The rights and obligations of the contracting parties must be in conformity with the underlying contracts of the deposit products. From this angle, not many Shariah issues arise from the practice of deposit taking in Islamic banking operations.
Certain questions arise, however, concerning the sources of funds deposited in bank accounts. Money is lawful in its essence, but the money in a person’s possession may be considered unlawful if it was acquired by unlawful means. However, money is a fungible asset that does not admit specification (taʿyin). It would be impossible to determine if money was earned unlawfully by simply looking at it. Investigation would be required to achieve that knowledge.
Many fatwas assert that Islamic banks are not obliged to conduct investigations to determine the source of funds in order to accept a deposit or open a deposit account. Isolated cases have, however, been identified where a bank happens to acquire knowledge that a specific deposit is non-halal. This usually occurs by the customer informing the bank of the non-halal source of his money; for example, the cheque he is depositing was issued by a betting shop and represents gambling proceeds. In such cases the Islamic bank is not allowed to accept the funds for deposit.
Such a ruling would not arise in automated and remote transactions; for example, a transfer via an automated teller machine (ATM), a deposit via a cash deposit machine (CDM), etc. Such cases are not covered under this research, which is confined to cases in which the bank can control whether to accept or reject the deposit.
Islamic banks must balance two conflicting needs. Since they are in competition with their conventional counterparts, and since deposits are the main source of funds for banks, Islamic banks cannot be too stringent about accepting deposits from customers of various backgrounds. On the other hand, they have to ensure that accepting deposits does not entail reputational risk that may negatively impact their image as providers of Shariah-compliant banking services.
This raises the issue of a deposit by a company whose income is partly Shariah compliant and partly Shariah non-compliant but whose core business is Shariah non-compliant. The income source of a particular deposit from a casino conglomerate, for example, may be predominantly or fully halal, but accepting deposits from such a customer may pose a risk to the bank’s reputation. It would not be easy to regain a bank’s good reputation after it has been severely tarnished for any reason.
In light of the above, there is a need for a set of parameters to guide Islamic banks in matters pertaining to accepting deposits, particularly from institutional and corporate customers. This research attempts to provide such parameters. Emphasis is placed on a mechanism to determine whether accepting deposits from such companies impacts the bank’s reputation.
On this note, the research discovered that Islamic banks’ depositors are of diverse backgrounds. They are both individuals and companies, and the individuals are of various religions and ideologies. Depositors’ sources of income and main business activities may be Shariah compliant or Shariah non-compliant. It is crucial to examine the types of depositors to ensure freedom from reputational risk should the bank accept deposits from certain depositors whose backgrounds may give rise to negative public perception. Being guided by the proposed parameters, Islamic banks would be able to effectively avert reputational loss.
It is generally permissible for Islamic banks to accept deposit placements and applications to open deposit accounts by an individual or a company except in two cases:
(i) When the bank has knowledge that the money of a specific (muʿayyan) deposit was acquired in an Islamically unlawful manner; and
(ii) When accepting deposits from a particular customer may negatively impact the bank’s reputation.
This research also confirms BNM’s Shariah resolution on accepting deposits from unknown sources; i.e., the bank is not required to conduct screening on such deposits. However, for the sake of maintaining a bank’s reputation, it is recommended to conduct screening on doubtful deposits.
deposit acceptance, current account, savings account, reputational risk, source of income
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