Mihe presentation.pp

Markfield Institute of Higher Education

Presented By

Bashir Uj Jaman

Alternative Model For

Profit Distribution on Deposit

You can reach Bashir at [email protected]

How does depositor get benefit from Conventional Banks ?

---By fixed Interest


Presented by

Bashir Uj Jaman

Alternative Model for Profit Distribution on Deposit


Presented by

Bashir Uj Jaman

What is wrong with predetermined Interest?

How does it effect Economy?



Presented by

Bashir Uj Jaman


Riba BankOf Kuffar

Deposit taking onX% interest

Investment with (X+Y)% interest

Fixed rate of x% interest to depositors forces to charge fixed rate of (x+y)% interest to customer, hence if no chance of investment with expected interest,

Money will not be invested. Sometimes customers are forced to pay more than ROI

Impact of predetermined interest

What is the solution for Islamic banks?

Instead of predetermined interest, islamic bank sets pre determined

profit ratio. eg; 80%:20%.

So actual profit will be determined after getting outcome from investment


Presented by

Bashir Uj Jaman


Practice of design of deposit account around the world based on

Qard a Hasana/ Wadia- Iran, Client can’t demand profit.Current account

Mudaraba – Savings account

Murabaha (Bai al ina & Tawarruk) – Malaysia, fixed deposit account.term deposit

Wakala- by treasury department to raise fund for special purpose. Bank receives agency fee. Long term deposit account.


Presented by

Bashir Uj Jaman



Presented by

Bashir Uj Jaman


Comparison - conventional vs Islamic Approach

Conventional/Riba Bank Islamic Bank

Predetermined first to last fixed approach

No loss sharing

Last to first variable approach

Profit/Loss sharing

Restricted, Unethical higher interest rate investment

Profit is fixed

Flexible, Ethical, realistic investment

Profit increases if ROI increase


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Bashir Uj Jaman

Logic behind profit distribution


Conventional-Time is money. The higher the duration the higher the percentage.

Islamic-Not only duration but the higher the risk, the higher the profit


Presented by

Bashir Uj Jaman

Sharia requirement for declaring profit distribution method.

Do you know the percentage of your profit in your account with Islamic Bank?



Presented by

Bashir Uj Jaman

Currently, bank keeps it profit first and then distribute remaining profit to mudaraba depositors based on weightage system. So It is called two tier Profit Distribution.

Alternative system is a Income sharing ratio (ISR) based system treating different mudaraba depostors individually.It is a single tier profit distribution which distributes profit to bank and depositors at a time.

Example will make it clear



Presented by

Bashir Uj Jaman

Alternative model for profit distribution on deposit

Table A: Profit Distribution Based on Current Weightage system.

DepositorsName

TypeOfMudarabaDeposit

DepositAmount(Tk.)

Weightage

InvestmetAmount(Tk.)

Income fromBank’sInvestment

Collective Income DistributionRatio betweenBank: Client

1 2 3 4 5 6 7

A Curret 100 .5

B Savings

100 .6 20% (on

300* 25:75

C Term Deposit

100 .7 Investment)

Total 300 1.8


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Bashir Uj Jaman


Table Al: Determination of amount of Investment Income and collective distribution thereof

Tier 1: Income Investment

Share of Investment Income as per Col. 7

Total Bank Client

8= Col. 5 x Col. 6

9= Col. 8 X 25%;

10= Col. 8 X 75%

Tk.300 x 2O% = Tk.60

Tk.15 Tk.45


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Bashir Uj Jaman


Table A2: Distribution of Clients’ portion of Income of Tk.45 (Column 10) to individual type of depositors according to Weightage at column 4 above

Tier 2: Depositors Name Weightage Profit Distribution

A .5 Tk.45x.5-* 1.80 =Tk.12.50

B .6 Tk.45x.6-* 1.80 =Tk.15.00

C .7 Tk.45x.7~1.80 =Tk.17.50

Total 1.8 Tk.45.00

Problem with Existing System


Presented by

Bashir Uj Jaman


In the first step of the Weightage formula (in the name of Collective PSR or Profit Sharing Ratio, Col. 7), the Bank sets aside its own share from the Investment Income.

Factors that affect/distort the distribution pattern, changing due amount of profit to individual types of depositors under Weightage System are:

i) Change of Weightage of any one (or more) type of the Mudaraba depositmix (Current, Savings & Terms Deposit etc.).

ii) Change in the Proportion of individual deposit type, among the total Deposit mix.

iii) Inclusion of any new deposit product.

ISR (Income Sharing Ratio) based Module for distribution of profit to Mudaraba Depositors

: Depositor/ Client

Type ofMudaraba

Deposit

DepositAmount

(Tk.)

Income SharingRatio (ISR)

InvestmentAmount

(Tk.)

Income from Bank’sInvestment

Bank’s Share

Client’sShare

Total

1 2 3 4 5 6 7 8

A Current 100 37.50% 62.50% 100.00

B Savings 100 25.00% 75.00% 100.00 20%

% 300* (on

C Term 100 100.00 Investment)

12.50% 87.50%

Deposit %

Total 300


Presented by

Bashir Uj Jaman

ISR based Single tier profit distribution would be as under:

Table X: Client wise Profit Distribution

Income Sharing Ratio (ISR) Profit Retained

Rate of Profit (on deposit) Retained by the Bank

Client’s Profit Rate

by Bank (Tk.)

Profit to client (Tk.)

Client/Depositor

9=Col. 8 X Col. 4 10= Col. 8 X Col. 5

11=Col. 3 X Col. 9

12= Col. 3 X Col. 10

13= Col. 1

7.50% 12.50% 7.50 12.50 A

5.00% 15.00% 5.00 15.00 B

2.50% 17.50% 2.50 17.50 C

Total 15.00 45.00


Presented by

Bashir Uj Jaman


Comment:

Inputs or given data/ information are same both for Table A & Table X. The former distributes profit on Weightage basis and the later on ISR basis. Both the systems’ ultimate profit distribution amount is identical. So apparently no significance of using a new Module is felt upto this level

Comparison:

To see the significance of the methods let us think to change a single data under both the methods. Say, we just want to pay C a bit higher profit than he earns this year. Other data would remain unchanged. Under Weightage system we shall change a data in Table A (that is Weightage against C at Col. 4 would now be .9 instead of .7). Similarly under ISR based system C’s ISR shall be 5 : 95 instead of 12.50 : 87.50 for Bank & C respectively (Col. 4 & 5 of Table X). Effect of change is now summarized in the Comparison Table:

Comparison Table: Result of Weightage based Vs. ISR based Profit Distribution Modules

Result of Weightage & ISR(From Table A-A2 & X-X1)

Result under Revised Weightage

Result under Revised ISR

Client/ Depositor

Weightage

ISR Client’s Profit under both

Weightage Client’sProfit

ISR Client’sProfit

Bank Client System (Tk.)

(Tk.) Bank Client (Tk.)

1 2 3 4 5 6 7 8 9 10

A .5 37.50% 62.50% 12.50 .5 11.25 37.50% 62.50% 12.50

B .6 25.00% 75.00% 15.00 .6 13.50 25.00% 75.00% 15.00

C .7 12.50% 87.50% 17.50 .9 20.25 05.00% 95.00% 19.00

Total of Clients’ Profit

1.8 - - 45.00 2.0 45.00 - - 46.50

Profit Retained by Bank

- 15.00 - 15.00 13.50

Total Distributable*Investment Income

60.00 60.00 60.00


Presented by

Bashir Uj Jaman


Analysis:

Analysis of this Comparison Table clearly reveals that subsequent decision to pay ‘C’ a bit higher profit than he was earning earlier under Weightage system causes A & B to lose although Weightage of A & B is not altered.

In weightage syestem, additional profit of Tk.2.75 (Tk.20.25-Tk.17.50) paid to ‘C’ is actually deducted from A & B at the rate of Tk. 1.25 and Tk.1.50 respectively. Bank’s portion of profit remains the same as Tk.15.

But under ISR System additional Tk.1.50 paid to C is sacrificed by the Bank. Neither profit of A nor that of B is cut down. Rather additional Tk.1.50 paid to ‘C’ cuts the Bank’s portion of Profit by the corresponding amount.

So it becomes obvious that under Weightage base any subsequent agreement with any depositor affect profit of the existing depositors; whereas under ISR base, consequence of the subsequent agreement is taken care of at the Bank’s cost without causing any loss to the existing depositors.


Presented by

Bashir Uj Jaman


When an Islamic Bank goes for a new deposit product

say for example, Haj Deposit or different Mudaraba bonds, the Bank assigns higher Weightage to attract new clients.

Surprisingly some of such products are offered Weightage much higher than 1; such as 1.2, 1.35 etc,

Causing the existing or pioneer deposit holders lose their due rate i.e. they are deceived irrationally.


Presented by

Bashir Uj Jaman


It should have been the Bank (not other depositors) who to sacrifice for the higher profit offered by the Bank.

It is ethically wrong to cut the rates of the existing clients down (Weightage remaining the same) without any consent (consultation even) from those whose interest is hampered.

A software designed according to this Module would enable to arrive at the actual rate of attained profit each month for different Mudaraba deposits and the same may be displayed electronically on the 1st day of the following month


Presented by

Bashir Uj Jaman


Conclusion:

Islamic banking is based on ethical standard.

In some cases ignorance may be ignored;

But whenever wrong or discrepancy is detected, that should be stopped or rectified immediately.

In Islam none is advised, even to make charity from others’ purse. Any reward to anybody should be from one’s own pocket or at least the original donor should be informed.

Islamic banking is an emerging market. it is yet being evolved. So any better thing from anybody may be adopted without hesitation for the greater interest of the ideology.


Presented by

Bashir Uj Jaman


References:

An alternative module to distribute profit on deposits under Islamic banking by Afzalul Haq

The Writer is the First Vice President and Head of Islamic Banking of Bank Asia Ltd. He can be reached at email [email protected].

Article Available at :

http://csbib.org/publications/an-alternative-module-to-distribute-profit-on-deposits-under-islamic-banking-afzalul-haq#more-48

http://www.islamicbankingway.com/2010/11/21-investment-fixed-deposit-account.html

Central sharia Board of Islamic Bank Bangladeshhttp://csbib.org/

Islamic Finance in a Nutshell by Brian Kettellhttp://books.google.co.uk/books?id=CgjsYcxNLuUC&pg=PA130&dq=types+of+deposit+account+in+islamic+banks+non+specialist&hl=en&ei=pIj8TI23Jsv1sgbO06GUBA&sa=X&oi=book_result&ct=result&resnum=1&ved=0CC4Q6AEwAA#v=onepage&q&f=false

mailto:[email protected]



http://www.islamicbankingway.com/2010/11/21-investment-fixed-deposit-account.html

http://csbib.org/

http://books.google.co.uk/books?id=CgjsYcxNLuUC&pg=PA130&dq=types+of+deposit+account+in+islamic+banks+non+specialist&hl=en&ei=pIj8TI23Jsv1sgbO06GUBA&sa=X&oi=book_result&ct=result&resnum=1&ved=0CC4Q6AEwAA#v=onepage&q&f=false


















Presented by

Bashir Uj Jaman

May Almighty help us to get benefit

from this presentation.

Zazak Allahu khairan for listening

Any Question ?


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