Profit distribution in an Islamic bank: wrapping up

In-Depth Analysis

An important aspect which needs to be understood on this point is that at the time of the deployment of term deposit funds to a particular lending financing transaction, the Islamic bank does not literally tie up the maturity of a deposit with the expiry of a certain lending transaction. The weight system is applied on a notional basis at a date by the Islamic bank with a view to steering the longer tenor deposits. Another point that needs to be explained in respect of the deposit weight is the practice of profit-smoothing. Here, the amounts of the profit equalization reserve and the investment risk reserve, which are ploughed back into the common pool, are allowed to enjoy highest deposit weight decided by the Islamic bank's management and approved by the bank's Shariah board. 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 is also accorded the highest weight owing to it being a permanent investment. On the premature redemption of a term deposit at the customer's request, the Islamic bank shall pay the principal amount of the deposit to the customer forthwith but he or she will have to wait for the completion of the profit period in order for the Islamic bank to ascertain the customer's eligibility for the profit related to the broken period. An Islamic bank does not deduct Zakat from the customers' term deposits or savings accounts. However, an Islamic bank is required to pay the Zakat on the shareholders' annual net profit which is comprised of their share from the common pool profit (as the Mudarib) as well as the non-funded income.