Learning from Malaysia's competitive Islamic CASAFA
The changing landscape of Malaysian Islamic banking system beginning 2013 has offered an improved competitive advantage through the proliferation of new product lines that can help to build up public positive perception on the industry. This trend, however, might jack up a new paradox among laymen on the new concepts of Islamic deposit products in Malaysia.
This fallacy occurs when laymen claim that Islamic deposit products (i.e. current, saving and fixed accounts) are similar to their conventional peers. They base their arguments based on TWO (2) grounds.
- The terminologies used are assumed to be identical, implying the modus operandi and underlying transaction for both Islamic and conventional deposit products are equal; and
- The two products serve the same purposes namely to meet one’s payment transaction (i.e. current account), precautionary (i.e. savings account) and investment motive (i.e. fixed account).
One of the contributing factors that can lead to this fallacy is lack of knowledge on Islamic deposit products and somehow rely on their past experiences and others’ assertion to claim their views right at the expense of positive words of mouth. Without an effective measure, this fallacy is extendable to others and worse comes to worst the latter take it for granted.
In majority, however, Malaysians have been so eager to learn about Islamic banking deposit products and hence to patronise them that causes an increased Islamic deposit products’ market share. This assertion is proven in tandem with an increase of Islamic deposit products' share from 27% in 2015 to 31% in 2018p, implying a small but growing support by consumers at large on Islamic deposit products.
One should learn that CASA stands for current and savings accounts whilst CASAFA is current, savings and fixed accounts. Islamic CASA and Islamic CASAFA are employed when Islamic banking deposit products are brought into play.
Against this backdrop, this article intends to answer ONE (1) question as follows:
- Are Islamic deposit products free from riba?
Two popular Shariah contracts have been equated to the governance of Islamic CASAFA at least in Malaysia, namely, qard and tawarruq. The preceding is based on a lending transaction but without any addition in return, whilst the latter is a trading-based transaction. Both are halal and open for patronisation for everyone.
Qard is a loan contract and typically governs Islamic CASA. The transaction parties' role is, somehow, reversed, that is the customer becomes a lender whilst the bank becomes a borrower. Since the transaction is qard, the borrower is only allowed to return the same amount borrowed to the lender without any extra.
For instance, X places a sum of RM10, 000 under qard savings account at Bank Muslim Malaysia Berhad (BMMB). After all, this sum of money is known as a loan. The bank is responsible to secure the return of the principal when demanded by the depositor.
The bank may give hibah or financial reward to the depositor. The reward, however, depends solely on the bank’s decision and cannot be promised.
Typically, the depositor can earn a good hibah when the bank is generated a large profit. As an assertion here, the giving of hibah is not promised and not guaranteed. In the event of loss, however, the bank needs not to give any reward to the depositor. Though at loss, the depositor’s money is still in custody, not decreased and for that, the principal can remain the same when it surrenders to the depositor.
This is fair dealing out of these departures:
- The depositor may experience hibah which is proffered by the bank for their money in safe custody whilst not having to carry any investment risk;
- The rate of hibah entirely depends on the bank's inclination and regularly competitive hibah is awarded for successful investment to entice more depositors; and
- Besides, the bank is not required to pay anything to the depositor should no profit obtained from its investment. Henceforward, the bank is not in a disadvantaged circumstance.
Since no promise and guarantee in the giving of hibah, therefore the problem of riba is, of course, no occurrence. However, laymen are misunderstood and they claim that the hibah is equivalent to interest income in conventional CASA out of the “addition” implication.
Unlike Islamic CASA, "addition" for conventional CASA is a fixed interest rate ranging from 0.1% to 1.5% p.a. or higher. The bank is perceived as borrowing funds from the depositor to engage in ventures or grant credits. The depositor is "assumed" to impose a fixed interest on the bank. The bank obliges to pay an extra sum based on the interest rate regardless of profit or loss. If the bank gets more, it only declares the small fixed interest to the depositor and it still pays the fixed interest rate when faces a loss.
There is an element of inequity. TWO (2) justifications are given as follows:
- The depositor earns a small interest income compared with the bank’s high profit; and
- The bank still pays the interest despite it is at a loss position.
Conventional CASA is thus subject to riba al-qard, which occurs when a bank pays extra to a depositor exceeding the principal amount deposited by the latter. Riba al-qard is termed as any predetermined benefit that is earned by the depositor and such a benefit is paid by the bank. In short, it is, somehow, a promise.
- Islamic CASA is also governed by tawarruq contract. Unlike a qard contract, tawarruq contract is a trade-based transaction.
- Simply in the majority, tawarruq contract has been employed by all Islamic banks in Malaysian when offering Islamic fixed account.
In the case of Islamic fixed account, the depositor sells a commodity to the bank, implying the depositor sells a commodity at a premium (principal plus profit). Hence, trading creates a financial obligation. The profit rate is pre-determined upfront and to be paid on maturity.
When the depositor sells the goods to the bank, the pre-determined profit will be determined, mirrored like in the case of Islamic tawarruq personal financing but reverses. Just in the case of Islamic fixed account, the depositor is "regarded" as imposing a pre-determined profit rate when the bank buys the goods.
For instance, XBZ Bank (not real name) introduced in 2008, offered Islamic fixed deposit-i in which if the depositor places a deposit for 1 month, then the amount saved is RM5,000 and if it keeps for 2 months and above, the amount saved is RM1,000. The profit rate is ranging from a low of 2.90% for 1 month to a high of 3.35% for 60 months.
Islamic banks invest deposits received in businesses, sectors, companies which are secure and free from any illicit ventures that are forbidden in Islam.
Unlike Islamic fixed deposit, its conventional peer imposes an upfront interest rate (fixed interest) where the underlying trade transaction does not exist. The basis of operation of this deposit is similar to its conventional CASA, exposing the bank is borrowing the money from the depositor and hence a promise to give a fixed interest income prevails. This is riba al-qard, unjustified excess above the principal of the loan (deposited money by the depositor) imposed by the lender (depositor) on the borrower (bank) in the contract.
Hence, Islamic fixed account is trade-based whilst its conventional peer is lending and borrowing money. The former is Shariah-compliant whilst the latter is not out of riba al-qard as explained earlier.
Going forward, Islamic deposit products are not tied up with a paradigm of lending and borrowing principle but instead based on qard and tawarruq, where the giving of hibah is not guaranteed for the former and the reward of profit for the latter is justified through a trade transaction. By all means, Islamic CASAFA is not only free from riba but also clean from unlawful activities associated with the utilisation of deposit funds and for that it is a better option for Malaysians.
*The author is an Associate Professor at the Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance (PG310163). He can be contacted at firstname.lastname@example.org