What is Islamic about Current Accounts? Deposit products of Islamic banks.

Current Accounts:

These deposit products are based on the principle of loan contracts whereby the depositors will receive payments on demand while the banker can utilize this money for the purposes of lending and investing activities in riba free modes of banking.

Like conventional banking, Islamic banks are also involved in money creation process and maintaining payment system in the economy. There exist simultaneity issue in money creation process; in one way, each unit deposited in the current account in Islamic bank, the banker under normal circumstances extend 60% of it in lending activity whereas the remaining in investing activities so each unit deposited brings almost twice money in the system, the Islamic banker convince both his depositor and its investor/borrower that they both own the same money at the same time.

Now look at the other way of the relationship, when someone ask one unit of money from Islamic banker, the banker need not do anything else, it simply bring money out of blue albeit managing some cash almost 5% of loan amount from interbank Islamic money markets.

Generally the current account works on the principle of loans without interest payments (qard hasan) however, these loans are utilized by Islamic bankers in Islamic modes of finance, and nonetheless, Islamic bankers generally do not lend money on this principle.

For all practical purposes current accounts are considered as money. Excepting its function as unit of account which is done by reserve currency/ legal tenders, the current accounts act as object of exchange in trading activities such as buying goods with currents accounts, they also are means of payment both productive and non-productive and for gift purposes such as payment of civil servants. In case of bank run as it happens in the conventional banks anywhere in the world, the Islamic banker will also be unable to make its current accounts liquid. What is Islamic about Islamic bank current accounts? It is their use of money in halal mode of finance or investing activities and the use of profits of Islamic banks for Muslim cause.

Islamic Finance Instruments: Modarabah

About Modarabah Contracts:

This is a kind of partnership where one partner gives money to another for investing in a commercial enterprise. The investment comes from the first partner who is called “Rab-ul-Maal” while the management and work is an exclusive responsibility of the other, who is called “Mudarib” and the profits generated are shared in a predetermined ratio.

Excerpts taken from Meezan Banks Guide to Islamic Banking by Imran Usmani

Salient features of Modaraba:

    The owners of capital and the management of capital are completely segregated. The manager of capital may not include or invest their capital in the modaraba. The owner may not specify how to operate the business, however; they can keep an eye on the manager (the Mudarib).

In case of loss to modarabah, the owner of capital suffer losses whereas the modarib may not receive any remuneration for conducting business. In case of profit, the owners and the managers of capital enjoy the benefit in pre-agreed proportions.

In most of the cases, the owners of capital enjoys limited liability of the business conducted by the modarib.

Tax Benefits of Modaraba:

In pakistan modaraba is exempt from income tax if 90% of income is distributed to the modaraba certificate holders

Below is the list of Modarabah Management Companies and listed Modarabah Instruments:


List of Modaraba Management Companies in Pakistan

1. A.R. Management Services (Pvt) Ltd.

2. A.R.T. Modaraba Management (Pvt) Ltd.

3. Allied Engineering Management Company (Pvt) Ltd

4. Al-Noor Modaraba Management (Pvt) Ltd.

5. Al-Zamin Modaraba Management (Pvt) Ltd.

6. B.R.R. Guardian Investment (Pvt) Ltd.

7. BankIslamic Investment (Pvt.) Limited

8. Constellation Management Company (Pvt) Ltd.

9. Crescent Modaraba Company Ltd.

10. E.A. Management (Pvt) Ltd.

11. Fidelity Capital Management (Pvt) Ltd.

12. Global Econo Trade (Pvt) Ltd.

13. Habib Bank Financial Services (Pvt) Ltd.

14. Habib Modaraba Management (Pvt) Ltd.

15. I.B.L. Modaraba Management (Pvt) Ltd.

16. National Bank Modaraba Management Company Ltd.

17. Paramount Investments Limited

18. Premier Financial Services (Pvt) Ltd.

19. Prudential Capital Management Ltd.

20. Punjab Modaraba Services (Pvt) Ltd.

21. Royal Management Services (Pvt) Ltd.

22. Standard Chartered Services of Pakistan (Pvt) Ltd.

23. KASB Modaraba Management (Pvt) Limited

24. UDL Modaraba Management (Pvt) Ltd.

25. Islamic Investment Bank Ltd.

Listed Modarbas

1. Imrooz Modaraba

2. Tri-Star Modaraba 

3. Allied Rental Modaraba

4. Al-Noor Modaraba

5. Al-Zamin Leasing Modaraba

6. Unicap Modaraba

7. Trust Modaraba

8. B.R.R. Guardian Modaraba

9. Crescent Standard Modaraba

10. Modaraba Al-Mali

11. Modaraba Al-Tameer

12. Modaraba Al-Makatib

13. Modaraba Al-Istetmar

14. Constellation Modaraba

15. Elite Capital Modaraba

16. B.F. Modaraba

17. Fidelity Leasing Modaraba

18. Treet Manufacturing Modaraba

19. Habib Bank Modaraba

20. Habib Modaraba

21. IBL Modaraba

22. National Bank Modaraba

23. Paramount Modaraba

24. Equity Modaraba

25. Prudential Modaraba

26. Punjab Modaraba

27. Pak Modaraba

28. Standard Chartered Modaraba

29. KASB Modaraba

30. UDL Modaraba

31. Islamic Modaraba

Islamic Liquid Investments: Sukuk, an alternative Islamic Tradable Debt Instruments

The capitalist banking system cannot operate without a liquid tradable debt market. The fundamental function of a banking system is to guarantee a payments and settlement system and provide liquidity to the market economy. Accepting deposits and extending loans is primary function of a banking system. A banker leverages its capital or net assets and makes profit from the difference in interest paid to depositors and the interest received from lending money. However, this process left the banker with illiquid loan portfolio in its balance sheet. To circumvent this issue, the banker maintains adequate investment grade highly liquid sovereign or corporate bonds that are tradable in secondary financial markets such as interbank money markets.

For Islamic banker, the maintenance of liquidity using conventional bonds is un-Islamic as the selling of bonds constitutes riba/interest in islam. In its simplest form, selling of debt by discounting is prohibited in Islam. In Islam, a debt should be exchanged without any beneficial considerations. Hence, selling or exchanging debt is counterproductive to Islamic banker as it will not yield return to them.

Nonetheless, the Islamic banker has devised instruments that do not defy the rules of Shariah and truly provide the functionality that investment portfolio of a traditional bank requires such as the provision of liquid assets, tradability of investments, and investment grade instruments etc. These instruments are so called sukuk.

Sukuk Certificates represent proportionate beneficial ownership in underlying physical or real assets. In essence they are asset backed securities. As they are asset backed their market value changes due to changes in the underlying asset and therefore they can be traded in secondary markets. Considering a pragmatic approach, these bonds behave like ordinary sovereign bonds. And they actually act similarly in repurchase agreements as any other repo instruments.

Consider for example Pakistan International Airlines Sukuk certificates. How do they act like highly liquid investment grade Islamic financial instrument for the purposes of liquidity management? The PIA has no net equity, in fact, it has negative equity. So, how do its underlying net assets have positive value? It seems that sukuk certificates are merely a renaming of government securities to make them feel Islamic and nothing else.