Guide to journey of a customer's Mudarabah deposit in an Islamic bank

In-Depth Analysis

The deposits received by an Islamic bank in the investment savings and investment deposit accounts constitute the Mudarabah capital and are entitled to receive an agreed portion of the profit made by the Islamic bank on an ongoing basis. These funds are put into a common pool that the bank draws on for its day-to-day deployment with customers needing funds. The common pool is usually comprised of the following sources: 1) Shareholders' equity — for a new Islamic bank starting its operation, this will be the residual amount of the paid-up capital by the shareholders. For an up and running bank, this amount may include any increase in the original equity, any increase in the capital, retained earnings, unpaid dividend, reserves, minority interest, and Tier 1 Sukuk issued by the bank. 2) Customers' deposits — these are term deposits with varying maturities starting from one or three months until one year or even longer. In addition, there are savings account deposits in the common pool. It has been a general phenomenon that customers' deposits in a common pool constitute about 90-95% of the amount and the rest is shareholders' equity. One important aspect is the agreement for the distribution of profit between the depositors and the shareholders acting as the Mudarib at the time of the placement of a deposit by a customer. This ratio could be anything from 50:50 or 80:40 or even 80:20 in favor of the Islamic bank provided that it is accepted by both parties at the start of the deposit period and is mentioned in the Mudarabah contract. Once agreed, this ratio cannot be changed by the Islamic bank unilaterally. The Shariah permits that the Rab Al Maal may restrict the Mudarib from investing the Mudarabah capital in a particular business chosen by the Rab Al Maal. However, the Islamic banks do not accept the condition of restricted Mudarabah since it is nearly impossible for the bank to segregate the deposits from various customers for investing in different segments of their choice.