Islamic Current Accounts

Bank deposits, also called bank accounts, are among the most important sources of funds in banks in general, including Islamic banks, for the lower cost of obtaining them compared to other sources, in addition to the fact that banks are the only institutions legally empowered to accept bank deposits. This is why banks attach great importance to these deposits and compete with each other to get as much of them as possible.

Bank deposits are one of the main investment and trading instruments in Islamic banks, but they are the backbone of them. The Islamic bank accepts deposits of all kinds, making social service the primary consideration, unlike the traditional banks that focus in taking advantage of that money and trade it through RIBA-based loans, while the Islamic bank employs it in various fields of investment through shari’a compliant means .

All Islamic banks operate current accounts on behalf of their clients, both individuals and businesses. An Islamic current account provides the account holder with a guarantee on the principal amount deposited. The account holders are not entitled to receive any profits, but do not bear any losses either.

This type of account is designed specifically to meet the needs of customers who want to deposit or withdraw funds by cheques, through cash tellers at bank branches or through the ATM machines.

This most basic form of bank product does not necessarily require any particular changes to be made from a conventional current account to make it a Shari’a-compliant one. In many countries, it is not expected that conventional current account deposits will earn interest, and in the same time it is not allowed for account holders to have overdrafts.

There are two dominant views within the Islamic banking community regarding current accounts :

1. The Islamic current account is structured using as wadia (trust وديعة) accounts. In this case the trust account is defined as :

cash deposits received by the bank where the bank is authorized to use the deposits, at its own risk and responsibility with respect to profit or loss, and which are not subject to any conditions for withdrawals or deposits

These deposits are handed over to the islamic bank by depositors, as a trust, and the islamic bank does not have the authority to use them without first obtaining the specific permission of the owner of the funds.

2. The Islamic current account are structured as Qard Hasan (interest-free loans القرض الحسن). According to this view, money deposited in these accounts is a benevolent loan from the depositor to the islamic bank. The islamic bank is free to use these funds at its own risk without any return to the depositors and without needing any authorization.

The Current accounts main characteristics :

• Current accounts govern what is commonly known as demand deposits. These accounts can be opened by individuals or companies, in domestic or foreign currency.
• The bank guarantees the full return of these deposits on demand and the depositor is not paid any share of the bank’s profits, interest or return in any other form.
• Depositors authorize the bank to use funds at the bank’s own risk. Hence, if there is any profit resulting from the employment of these funds, it accrues to the bank, and if there is any loss, it is also borne by the bank.
• There are no conditions with regard to deposits and withdrawals.
• Usually account holders have a right to draw cheque on their accounts.

Banks do run the risk of account holders overspending with unapproved overdrafts, in these circumstances per-defined “management” fees are usually applied and in certain circumstances “penalty” fees can also be charged to discourage the account holder from creating an overdraft situation.

While management or administration fees are usually retained by the bank to cover their costs, penalty fees are to be paid into a charitable account so that the bank, does not profit from the borrower to avoid falling in Riba.

Though islamic banks can’t profit from current account,  islamic banks build relationships with the customers that they potentially can develop into use of other services for which fees can be charged. In addition account holder’s deposits help strengthening islamic banks balance sheet.