Investment Deposits

Investment deposits are Islamic bank’s counterparts to term deposits or time deposits in the conventional system. They are also called :

• Profit and loss sharing PLS accounts
• Investment accounts
• Participatory accounts.

Investment deposits in islamic banks are based on the application of Mudarabah and wakala contract. Mudaraba is a partnership in profit whereby one party provides capital (rab-al-maal) and the other party provides work / expertise (mudarib). In this contract, the depositors act as rab-al-maal and the bank as mudarib. Therefore, a portion of the deposits would be invested in various shari’a compliant projects, and the profit is shared in ratios as agreed upon between the two parties. In case a loss is incurred, then the the depositors (rab-al-mala) would bear all the losses.

Legally, the term Wakala can be defined as the delegation of one person (the principal) for another (the agent) to take his place in a known and permissible dealing. In this regard, the agent (wakil) deals in the other party’s properties and preserves them in return for a specific fee known as Wakala fee.

The following characteristics of Mudaraba are of significance for the sources of bank funds:

• The division of profits between the two parties must necessarily be on a proportional basis and cannot be a lump sum or a guaranteed return.
• The investor is not liable for losses beyond the capital he has contributed.
• The Mudarib does not share in the losses except for the loss of his own time and effort.
• The Mudaraba can be general purpose or for a specific purpose.