Deposit account in Islamic bank is one of the flourishing products in the industry. Islamic Finance is constantly developing a wide range of financial products and services that can compete with the offerings of conventional banks. In this article, we will briefly talk about deposits in Islamic Finance and the way they work.
Deposit in Conventional Bank
In order to understand deposit in Islamic banking, first of all, let’s have a look into how conventional deposits work.
You are effectively giving your money to the bank in the form of a loan when you deposit money into a checking or savings account. This is why bank deposits are shown on a bank’s balance sheet under liabilities. Your money will be used by the bank after you deposit it. As your money will be under bank’s management, the bank may do whatever it wants with it as long as it follows the guidelines and norms set forward by banking regulators.
Deposit in Islamic Bank
In Islamic Finance, there are three main types of deposits, they are:
1- Current deposit account
A current deposit account is a form of demand deposit. It allows the customer to withdraw their deposit at any time. In the US, this type of account is commonly referred to as a checking account or demand deposit. Additionally, current deposit account offers capital guarantee to the depositors. Individuals and companies can use this type of account to safekeeping their cash. The two most common current deposit structure in Islamic banking are qard and wadiah yad damanah.
2- Saving deposit account
Savings accounts are available at all Islamic banks, although the way they work differs from one to another. A saving account deposit, like a current account deposit, has no maturity date and customers can withdraw the money at any time. Besides, it also has a feature of a return on deposit. To structure the saving deposit account, Islamic banks use qard, wadiah yad dhamanah, or mudarabah principles.
3- Term deposit account
A term deposit is an arrangement in which customer deposits are retained for a certain period of time until maturity. Islamic banks have experimented with various structures of Islamic term deposit schemes in order to meet the demands and expectations of various customers. Islamic banks commonly structure this type of account based on mudarabah and commodity murabahah principles.
In this account, the deposited funds are subsequently put into Shariah-compliant business ventures through a variety of investment pools. Depositor can only withdraw the money from this account only at the completion of the contract’s term or by giving advance notice of a certain number of days. Term deposits are typically short-term deposits with maturities ranging from one month to a few years.
To read more about Islamic Finance related topics, please click here and visit our academy.
Also, feel free to sign up for our free stock screening services at musaffa.com.