This site is solely dedicated to publish my writing, mostly on the topic of Islamic finance. Some of the articles were written as partial fulfillment for completing the Chartered Islamic Finance Professional (CIFP) certifications and for the Ph.D in Islamic Finance that I am currently undertake. Interested parties, including reporter/press or students, may reproduce or quote materials published provided that the credit has to be given to my blog (arzim.blogspot.com). Comments must be accompanied by names or pseudonyms. Anonymous postings and those containing profanities and obscenities will be rejected.

Saturday, February 27, 2010

The application of Wadiah and Qardh principles in Islamic deposit accounts and the Shariah implications for the use of each of the respective principles

Wadiah is defined as “setting up an agency contract for the purpose of protecting one’s wealth” by Maliki school of law. Other school of thoughts basically agrees to the main element of definitions, which is, the delegation to another party of the function of protecting one’s wealth. Wadiah is basically a benevolent act by the keeper and the nature of wadiah is amanah (a trust). The basic concept of wadiah yad al-amanah (safe custody based on trust) is that the trustee will only be responsible for damages to the assets or property entrusted in case of negligence and the trustee cannot mix the assets or property with his or other people’s properties. 
From viewpoint of Islamic banking, the saving account facility is offered to account holders who seek safe custody of their funds and wish to save money whilst current account facility entitles the depositor to receive his funds on demand. There is not much different between current deposits and saving deposits. Both deposits shall not be entitled for a return and no restriction on deposit or withdrawal are imposed. As far as the practice, for example, Bank Islam Malaysia Berhad (BIMB,) will ask permission from clients for the use of money deposited for business purposes or investments. In this situation, the original position of the bank as the keeper of client’s money under concept of wadiah yad al-amanah has changed status to wadiah yad al-damanah (guaranteed safe-custody).

The wadiah yad al-damanah is a combination of wadiah with daman (guarantee contract) principle. Under this rule, the bank can use the funds or deposits as it wishes and be liable to refund back when demanded by clients. Any profit generated will be solely for the bank. However, the bank may grant hibah (gifts) to the clients if the bank wants to share it but it is not an obligation.

The general accepted principle among early jurists is that when the object of wadiah is money, the contract of wadiah would automatically be transformed into a contract of loan (qard). However, as far as the practice in Islamic banks is concerned, before the agreement for money depository is signed between client and the bank, the bank will informed whether the depository will either confined within principle of wadiah yad al-damanah or qard. If qard principle is followed, the client would be the lender and the bank would be the borrower (a creditor and debtor relationship). Still, there’ll be no return on the money deposited by client. The argument is that since the bank is in fact ‘borrowing’ money from depositor, it is only obliged to return the amount loaned, on the basis of Islamic law that “any loan which begets any advantage is riba (usury)”. As in this case dayn (debt) is created by the bank. Dayn is basically a contractual obligation of a person to pay a certain amount of money or its equivalent, and this liability resides until it is completely discharged.

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