Structure of Banks’ Deposits

Banks in Pakistan started accepting deposits from their customers on profit-and-loss sharing basis but no change was in traduced in the then prevailing structure of deposits and it continues as it existed under the interest-based system. This is not to suggest that a change must be introduced just for the sake of change. But the structure of bank’s deposit is important for the just and efficient functioning of an Islamic profit-sharing system.

According to existing practice, all categories of deposits held by a bank are treated as one common pool of funds. But the income derived by banks from the use of these deposits is apportioned by banks under two heads of income: (a) non-interest income; and (b) interest income. Interest income is entirely retained for the shareholders while non-interest income is distributed among the PLS depositors of various categories according to the weightages prescribed by State Bank of Pakistan. The consequence of this arrangement is that long-term PLS deposits (say five-year term deposits) and short-term PLS deposits (say PLS savings deposits) are invested in similar assets. Long-term PLS deposits do not earn anything more than the short-term PLS deposits but get a preferential treatment through the system of weightages. Obviously, this is not fair.

Banks in Pakistan are accepting interest-based foreign currency deposits and branches of Pakistani banks established abroad are operating under the interest-based system and this is likely to continue for a long time to come. For these reasons, there is need to introduce some changes in the deposit structure of the banks. There is need to develop water-tight arrangements between the interest-based and the Islamic PLS operations of a bank in a manner which will also improve the profitability of the PLS deposits.

The existing large number of categories of deposits should be reduced and each category of PLS deposits be managed as a separate pool of funds for investment. A new category of PLS foreign currency deposits should immediately be introduced because this option is not available to the foreign currency depositors. The present position is that if someone wants to maintain a foreign currency deposit he also has to deal on the basis of interest.

Another idea is to establish such banks as will not pay any profit or return to their depositors. They will attract deposits on the basis of the quality of service which they will provide to their depositors. People will keep accounts for the convenience of transactions only. People having surplus funds will then not keep their deposits with the banks as they do now for consideration of a small return. For their surplus funds people will discover new avenues of investment which, in turn, will provide a boost to real investment and growth in economy. Surplus funds kept with banks are not usually invested in the most efficient manner.

Source: Elimination of Riba, Khurshid Ahmad, Khalid Rahman and Zahed A. Valie. Republished with permission.