Handling mid-period deposits and premature encashment in Islamic banking

In-Depth Analysis

A question arises: what about the weight given to the shareholders' equity which remains endowed in the common pool on a perpetual basis? Any remaining amount of the paid-up share capital, pursuant to the spending on completing the brick and mortar part of its head office and branches and the entire setup and the human resources costs, which is invested in the common pool, is also accorded the highest weight owing to it being a permanent investment. How Islamic banks handle mid-period deposits and premature withdrawal is a critical operational challenge. If a deposit was made in the middle of a profit period and the original amount was redeemed to the customer, the bank needs to determine appropriate allocation. With regards to the introduction of a new deposit to the common pool in the midst of a profit period, it shall be allocated the profit amount based on the relevant deposit weight from the deposit-making date until the completion of the profit period. For example, if it is a six-month deposit and the bank's profit period is based on a quarterly basis and that the deposit was made 20 days prior to the completion of the current quarter, the customer will receive the pro-rata amount of profit for the period the deposit amount remained invested in the common pool based on the six-month weight. If a deposit reached maturity in the middle of a certain profit period, the bank will only redeem the principal amount of the deposit to the customer on maturity and the relevant profit amount shall be credited to the customer's account only after the bank has closed the profit period and determined the profit amount eligible to the customer based on the appropriate weight.