Current Accounts with Islamic Banks

Islamic banks provide current accounts for customers to safeguard their cash and to pay for their day to day life expenses. This cash is a trust and cannot be used by the bank unless the account contract allows for that. If the money is used, it should be in a Shari’ah compliant manner. In this case it is a loan to the bank and the principle is guaranteed. The scholars have ruled that the bank is liable to pay the depositors’ money even in case of loss and complete insolvency. The customer is not expected to make any profit out of his deposit except unless the bank issues it as a gift. These gifts should not be pre-announced, or pre-fixed, or become a permanent fixture of the account. These rewards should be varied and given at irregular intervals in order to attract deposits and to provide a just distribution for using the depositors’ money.

The Islamic banks compete with traditional banks for mobilization of deposits. Since they are competing with interest based accounts they may have to provide some incentives to attract the deposits. They may use their income from the fee-based services such as remittances, trade guarantees, letters of credits, etc. to use for rewarding their depositors through gifts. If a current account is offered which also has profit element similar to checking accounts with interest, they will have to be based on Mudarabah where the customer shares the profits as well as losses.

When a customer makes a deposit into a profit bearing investment account, it is governed by Mudarabah or Musharakah principles. Fixed term deposits usually do not allow withdrawals until the end of the term. There are also accounts that have no withdrawal penalty but their profit share is usually less than the fixed deposits. The Islamic bank is obligated to invest the depositors’ investment in Shari’ah compliant ventures. In Mudarabah, the bank can charge the venture any expenditures and net proceeds should be distributed according to the contract. The investors must be aware of the distribution ratios of the contract to avoid any ambiguity. If the investment account is based on Musharakah principle, the bank also provides capital for the project. In that case, the bank will share the profits in proportion to the investment as well as for the management of the funds.
The banks may offer a general investment fund where bank can select any project it deems profitable or it can provide a list of industries or projects from which the investor can choose based on his risk preference. In both cases, Shari’ah compliance is a condition.