Banking Services

The most important services offered by Islamic banks:

• Current Accounts Performed in the normal banking traditions; the only difference is that Islamic banks obtain the explicit consent of the depositors to use their funds in its other investment oriented activities. These accounts are guaranteed by the Bank.
• Saving Accounts This banking service is offered free of charge. No interest or profit is paid, but in return, some banks may give special privileges which may be given to depositors e.g. financing of small projects and sale of consumer durables or productive goods by instalment and gifts etc. This is regarded as incentive to regular savers to encourage deposits.
• Investment deposits This type of account is peculiar to Islamic banks. It is the counterpart of fixed or term deposits in traditional banking. However, there are some basic differences:

1. Theoretically it is not a ‘deposit’ but money advanced or offered by the ‘depositor’ for the bank to invest on his behalf — on the basis of Mudaraba — the depositor being the financier (Rabul Mai) and the bank in this case being the manager (Mudarib) — or agent.
2. It is given with the explicit approval of the depositor that it will be subject to profit and loss. (Risk-sharing being the basic characteristic of Islamic financing).
3. The investment account holder is entitled — in the case of profit — to all the profit actually realised by the investment account (minus the banks percentage share of the profit in consideration for its managerial effort). Therefore, Islamic banks cannot determine in advance what level of return it may give to investment account holders (depositors).

• Correspondent banking services Islamic banks also offer their services in the sphere of international trade finance through correspondent banking.

To do this, they establish correspondent relationship with banks to facilitate services to be done on their behalf. In case of direct money transfers, no special relationship is needed beyond availing the correspondent bank with ready balances in the current account to meet such obligations. The correspondent bank can legitimately claim its commission on these services. There is no Shari’a prohibition against this.

Islamic banks, however, may ask a correspondent bank to add their confirmation to letters of credit opened on behalf of foreign suppliers to importers. (Suppliers ask for this as an added security for their payments). Either Islamic banks keep huge surpluses in their account with the correspondent bank to cover its obligations to the third party; (i.e. the suppliers), while it seeks to replenish its account with the correspondent bank. This in fact would be ‘lending’ by the correspondent bank for which Islamic banks would not accept to pay any interest. How then did Islamic banks solve this problem?

Foreign banks accepted dealing with Islamic banks on the basis of mutual agreements advised and accepted by simple exchange of letters to avail Islamic banks with confirmation facilities up to an agreed ceiling without charging interest should the accounts go red. In consideration, Islamic banks undertake to abide by the following:-

• To keep a reasonable amount of cash in their current account with the confirming banks.
• Endeavour to cover any debit as soon as possible. (It is part of the understanding that the Islamic bank does not ask for any reward on any balance due to it, should the other bank utilise these funds profitably. Therefore, there is no condition set by the other party if the Islamic bank account goes in the red for some time.)

As partial security, the correspondent bank would, on adding his confirmation, debit the Islamic banks with a certain ‘cash margin’ which it will transfer immediately to its own account. (They are authorised to do this automatically). Thus Islamic banks need in fact, only to keep sufficient balances in their correspondent banks account to cover the cash margins of the letters of credit and not the whole value of these letters.

1. All types of money transfers Domestic as well as international bank transfers are offered.
2. Collection Collection of bills (but not their discounting).
3. Letters of credit and guarantees All forms of letters of credit and letters of guarantee. Islamic banks charge fees for these services. This is permissible in Islam.
4. Safes Safe custody services are also available in some Islamic banks.

Source: Islamic Banking, Abdur Rahim Hamdi. Republished with permission.