An alternative module to distribute profit on deposits under Islamic banking
Sunday, 16 May 2010
Afzalul Haq
Recent economic meltdown created a global inference that, by dint of a number of inherent virtues, Islamic Banking has been least affected by this economic tsunami. Vatican has also echoed the similar tone. Again there is no doubt that the pace of growth of Islamic Banking & finance all over the world (both in Muslim as well as non-Muslim countries) has been tremendous for recent years. Bangladesh is not also lagging behind in Islamic banking in terms of major volume indicators. Under the circumstances the principal criterion that makes Islamic banking operation distinct from that of traditional banking must be clear to the common people of the country. There are some basic differences between conventional/ interest?based banking and Shariah based/ Islamic banking.
The conventional banking provides the depositors with a return at a predetermined rate known as interest on the amount of deposit irrespective of the earnings from use of the concerned deposit/fund. Thus conventional bank offers its depositors a fixed return (rate /percentage) calculated on the basis of the amount of the deposit (say 10% on deposit). Such a return is called interest.
The Islamic banking provides the depositors with a share of income/revenue the bank earns by deploying those funds. Islamic banking, among other stipulations, prohibits payment and/or receipt of interest. It offers its depositors an agreed share/ proportion of income it earns through deployment of their fund (say 40% of earned income fetched from the concerned fund unlike a conventional rate, such as 10% on deposit). In other words under Islamic banking profit to depositors is essentially a consequence of Return On Investment (ROI). In terms of cause and effect such profit is the effect i.e. result or consequence. It is neither the cause nor is it independent variable. The share of income/ revenue (fetched by the bank) thus paid to the depositors according to the pre?agreed ratio is called Profit. Rate of such emerged profit belonging to the depositors necessarily become positively correlated with bank's funded income i.e. depositors profit must rise when the bank's fund deployment earns more & vice versa.
However, in case of historical presentation of the profit as stated above there may be a lot of ways or dimension as and when required. Post event presentation is an art for analysis, interpretation or comparison etc. as the case may be. We may, therefore, express the profit later on, as a resulted rate on deposit; but only when the amount of share of earning has already been worked out. In other words rate of profit on deposit must be a post facto expression of the amount of profit distributed to the depositors, as their respective shares according to the agreed ratio. It is an expression of a resultant figure or output; not any input.
Islamic banks, among other types, accept profit bearing deposits under the principle of Mudaraba in which the bank plays the role of fund manager (Mudarib) and the depositors as fund?provider (Rab?al?Mal). Under this principle, profit earned from investment and financing is shared between the Mudaraba depositors and the bank based on pre?agreed profit?sharing ratio. Losses, if any, will be borne by the depositors provided the loss does not result from the negligence of the bank in managing the depositors' fund. Pursuant to this unique relationship which results in a direct financial interest of the depositors over bank's income, it's imperative on the part of any Islamic bank to have a framework for allocation and distribution of profit to the depositors. This framework is no more a mere regulatory issue. It is a vital Shariah issue also. As such the fundamentals of the framework used shall not be kept under lock & key of some key personnel of Islamic banks. We must know the boundary of privateness and confidentiality in the banking and Islamic banking in particular. Again market discipline (or public disclosure), the third pillar of Basel?11 also calls for disclosure of such important issues and as such Islamic banks are under double (regulatory as well as Shariah /ethical) compulsion to make their profit distribution framework public instead of arresting the same in the strongroom.
The existing framework (also suggested in Bangladesh Bank's Guidelines For Islamic Banking) provides uniform/fixed management fee for the bank against all groups of Mudaraba depositors collectively whereas each group of depositors has different sharing ratio in the name of Weightage.
We may explain the same with some simplified hypothetical statistics for any particular year illustrating the fundamental aspect of modus operandi thereof as under:
Table A: Given Data/ Information
Assuming the full amount of total Mudaraba Deposit is duly invested by the Bank
Table Al: Determination of amount of Investment Income and collective distribution thereof
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
Obviously Profit distribution process upto the level discussed above raises no major objection. That is, if the declared Weightage becomes perpetual (or it is for a single case of distribution), then everybody may find the distribution fair and rational. We must, as such, congratulate Islamic Bank Bangladesh Limited for using this framework in its primary days when people (clients) found how their profit rate emerged, without any predetermined fixed interest rates, unlike an other interest based/ conventional banks prevailing during those days.
But so called Weightage (In fact it is a double?tier distribution process) system is fair only when it is applied for a single case distribution. Otherwise due share of profit belonging to different types of depositors, distributed through this double?tier Weightage formula, is affected by a number of factors; even if Weightage remains the same. The fact behind this truth is that 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 deposit
mix (SND, 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.
Practically most of the above factors may become inevitable for a banker nowadays. Here lies the problem. Distortion under this system takes place when one or more of the three situations need be accommodated with an existing/ declared Weightage.
Before going into details of the above, let us have a look at an alternative Profit Distribution module intended to attain confidence of the stakeholders to believe the same as a transparent, rational, justified and above all better Shariah?compliant module.
ISR (Income Sharing Ratio) based Module for distribution of profit to Mudaraba Depositors:
The aforestated problems are overcomed in the ISR based module by way of entering into separate Income Sharing Ratio (ISR) with different types of (even individual) depositors (instead of Weightage applied on a residual portion of Income after Tier 1 deduction of Bank's share therefrom). Referring to our first table (Table A), we may now set chent?wise ISR and rearrange that table for ISR based Module:
Table X: Given Data/ Information alongwith ISR instead of Weightage
*Assuming the full amount of total Mudaraba Deposit is duly invested by the Bank
ISR based Single?tier profit distribution would be as under:
Table Xi: Client wise Profit Distribution
Comment: Inputs or given data/ information are same both for Table A & Table X. The former distributes profit on Weightage basis and the latter 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.
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
* In practice both Weightage & 1SR based Modules arrive at Distributable Investment Income subtracting for Profit Equalization/ Loss Offsetting Reserve and regulatory Loan/ Investment Provisioning. As those practice are more or less similar in both the cases, for simplicity, we have ignored the same and assume 'Investment Income = Distributable Investment Income'.
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. The 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.
Similarly under Weightage system an additional fresh contract of the Bank with a new client may also affect the existing ones although there is no change in their prevailing Weightage. For example, we may keep all earlier data in Table ?A remain the same, but only if a new client named D maintains a long tenure Term Deposit account or a new product of Haj Deposit with an Weightage of 1.0 for Tk.100 or more in addition to earlier deposit of Tk.300, then profit of A, B & C shall be downturned to pay higher to D. Moreover, simply a change in the proportion of deposit mix would affect the rate. For example, if deposit of Tk.100 each of A, B & C is restructured as Tk.200, Tk.60 & Tk.40 (Total Tk.300 remains unchanged) respectively, resultant profit rate on deposit of all the clients i.e. A, B & C shall be different from earlier. We, however, refrain from all these calculation leaving the idea with the people concerned for their brainstorming.
Experience makes us believe that 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. Rationally 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. Such an important matter rather remains beyond the knowledge of the stakeholders. It seems funny that the Weightage offered to me has got less significance to me than the Weightage offered to many other people in determining my profit. Say for example, one is offered a Weightage of .8; does it signify anything until he knows the Weightage offered to others? If most of others are offered greater than .8 he (former) will be paid more and vice versa. So should not one to be rather careful to others' Weightage than that of his own? Moreover, the amount of other depositors (proportion in the deposit?mix) has got a great impact on my earning. Does any depositor have any such system to regularly watch others' data all over the country? Certainly not. So there must be an alternative. ISR based (i.e. with Variable Management Fee) module may be a solution.
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 (anyone can have practical experience visiting Islamic Windows at Uttara, Shantinagar and Dilkusha's Principal Office Branch of Bank Asia). This process facilitates the depositors and other stakeholders to see month?wise trend of their expected profit instead of hypothetical fixed provisional rate and waiting 12 to 15 months for actual rate of profit. System can workout actual rate of such profit on weekly or even daily basis, if required.
Islamic banking is based on, inter alia, 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 phenomenon; it is yet being evolved. So any better thing from anybody may be adopted without hesitation for the greater interest of the ideology.
Adoption of this ISR based Module would save most of the Islamic banking operators from paying their Mudaraba depositors 'interest' (I mean it) 'at actual rate of profit' finalized for the previous year (usually referred to as provisional profit rate). This sin is done most unIslarnically, particularly in case of term deposits attaining maturity before Annual closing. This is done on the plea of non?finalization of the A/cs which may need many months more after maturity of such instruments). Postmortem adjustment, if any, raising a lot of question, cannot be a better solution than adoption of the ISR base.
There are even rumors against an Islamic bank in Bangladesh which dares to quote the rate of profit (?) in the term deposit instrument. If so, does the nomenclature of profit save them from interest paying (How brave they are to enjoy the fire!). Such misdeed, if any, must be stopped at once for the sake of transparency and the beauty of Islamic banking and Islam as a whole. Wrong operators must not be allowed to engender scandal against a noble cause/ ideology. To prevent distortion, the greatest challenge of tody's Islamic banking, only unquestioned dedication would not be sufficient. Dedication must accompany knowledge, at least in the people in the leadership position. ( The Writer is the First Vice President and Head of Islamic Banking of Bank Asia Ltd. He can be reached at email afzal@bankasia.com.bd Opinions expressed in the article are of the writer and not necessarily of the organization he is serving for)
Recent economic meltdown created a global inference that, by dint of a number of inherent virtues, Islamic Banking has been least affected by this economic tsunami. Vatican has also echoed the similar tone. Again there is no doubt that the pace of growth of Islamic Banking & finance all over the world (both in Muslim as well as non-Muslim countries) has been tremendous for recent years. Bangladesh is not also lagging behind in Islamic banking in terms of major volume indicators. Under the circumstances the principal criterion that makes Islamic banking operation distinct from that of traditional banking must be clear to the common people of the country. There are some basic differences between conventional/ interest?based banking and Shariah based/ Islamic banking.
The conventional banking provides the depositors with a return at a predetermined rate known as interest on the amount of deposit irrespective of the earnings from use of the concerned deposit/fund. Thus conventional bank offers its depositors a fixed return (rate /percentage) calculated on the basis of the amount of the deposit (say 10% on deposit). Such a return is called interest.
The Islamic banking provides the depositors with a share of income/revenue the bank earns by deploying those funds. Islamic banking, among other stipulations, prohibits payment and/or receipt of interest. It offers its depositors an agreed share/ proportion of income it earns through deployment of their fund (say 40% of earned income fetched from the concerned fund unlike a conventional rate, such as 10% on deposit). In other words under Islamic banking profit to depositors is essentially a consequence of Return On Investment (ROI). In terms of cause and effect such profit is the effect i.e. result or consequence. It is neither the cause nor is it independent variable. The share of income/ revenue (fetched by the bank) thus paid to the depositors according to the pre?agreed ratio is called Profit. Rate of such emerged profit belonging to the depositors necessarily become positively correlated with bank's funded income i.e. depositors profit must rise when the bank's fund deployment earns more & vice versa.
However, in case of historical presentation of the profit as stated above there may be a lot of ways or dimension as and when required. Post event presentation is an art for analysis, interpretation or comparison etc. as the case may be. We may, therefore, express the profit later on, as a resulted rate on deposit; but only when the amount of share of earning has already been worked out. In other words rate of profit on deposit must be a post facto expression of the amount of profit distributed to the depositors, as their respective shares according to the agreed ratio. It is an expression of a resultant figure or output; not any input.
Islamic banks, among other types, accept profit bearing deposits under the principle of Mudaraba in which the bank plays the role of fund manager (Mudarib) and the depositors as fund?provider (Rab?al?Mal). Under this principle, profit earned from investment and financing is shared between the Mudaraba depositors and the bank based on pre?agreed profit?sharing ratio. Losses, if any, will be borne by the depositors provided the loss does not result from the negligence of the bank in managing the depositors' fund. Pursuant to this unique relationship which results in a direct financial interest of the depositors over bank's income, it's imperative on the part of any Islamic bank to have a framework for allocation and distribution of profit to the depositors. This framework is no more a mere regulatory issue. It is a vital Shariah issue also. As such the fundamentals of the framework used shall not be kept under lock & key of some key personnel of Islamic banks. We must know the boundary of privateness and confidentiality in the banking and Islamic banking in particular. Again market discipline (or public disclosure), the third pillar of Basel?11 also calls for disclosure of such important issues and as such Islamic banks are under double (regulatory as well as Shariah /ethical) compulsion to make their profit distribution framework public instead of arresting the same in the strongroom.
The existing framework (also suggested in Bangladesh Bank's Guidelines For Islamic Banking) provides uniform/fixed management fee for the bank against all groups of Mudaraba depositors collectively whereas each group of depositors has different sharing ratio in the name of Weightage.
We may explain the same with some simplified hypothetical statistics for any particular year illustrating the fundamental aspect of modus operandi thereof as under:
Table A: Given Data/ Information
| DepositorsName | TypeofMudarabaDeposit | DepositAmount(Tk.) | Weightage | InvestmentAmount(Tk.) | Income fromBank'sInvestment | Collective IncomeDistributionRatio between |
| Bank: Client | ||||||
| 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| A | SND | 100 | .5 | |||
| B | Savings | 100 | .6 | 20% (on | ||
| 300* | 25:75 | |||||
| C | Term Deposit | 100 | .7 | Investment) | ||
| Total | 300 | 1.8 |
Assuming the full amount of total Mudaraba Deposit is duly invested by the Bank
Table Al: Determination of amount of Investment Income and collective distribution thereof
| Tier 1: | Income Investment | Share of InvestmentIncome as per Col. 7 | |
| Bank | Client | ||
| 8= Col. 5 x Col. 6 | 9= Col. 8 XT5-;I;- | 10= Col. 8 X 75% | |
| Tk.300x2O% = Tk.60 | Tk.15 | Tk.45 | |
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 |
Obviously Profit distribution process upto the level discussed above raises no major objection. That is, if the declared Weightage becomes perpetual (or it is for a single case of distribution), then everybody may find the distribution fair and rational. We must, as such, congratulate Islamic Bank Bangladesh Limited for using this framework in its primary days when people (clients) found how their profit rate emerged, without any predetermined fixed interest rates, unlike an other interest based/ conventional banks prevailing during those days.
But so called Weightage (In fact it is a double?tier distribution process) system is fair only when it is applied for a single case distribution. Otherwise due share of profit belonging to different types of depositors, distributed through this double?tier Weightage formula, is affected by a number of factors; even if Weightage remains the same. The fact behind this truth is that 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 deposit
mix (SND, 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.
Practically most of the above factors may become inevitable for a banker nowadays. Here lies the problem. Distortion under this system takes place when one or more of the three situations need be accommodated with an existing/ declared Weightage.
Before going into details of the above, let us have a look at an alternative Profit Distribution module intended to attain confidence of the stakeholders to believe the same as a transparent, rational, justified and above all better Shariah?compliant module.
ISR (Income Sharing Ratio) based Module for distribution of profit to Mudaraba Depositors:
The aforestated problems are overcomed in the ISR based module by way of entering into separate Income Sharing Ratio (ISR) with different types of (even individual) depositors (instead of Weightage applied on a residual portion of Income after Tier 1 deduction of Bank's share therefrom). Referring to our first table (Table A), we may now set chent?wise ISR and rearrange that table for ISR based Module:
Table X: Given Data/ Information alongwith ISR instead of Weightage
| Depositor/ Client | Type ofMudarabaDeposit | DepositAmount(Tk.) | Income Sharing Ratio(ISR) | InvestmentAmount (Tk.) | Income fromBank'sInvestment | ||
| Bank'sShare | Client'sShare | Total | |||||
| 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
| A | SND | 100 | 100.00 | ||||
| 37.50% | 62.50% | ||||||
| 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 | ||||||
*Assuming the full amount of total Mudaraba Deposit is duly invested by the Bank
ISR based Single?tier profit distribution would be as under:
Table Xi: Client wise Profit Distribution
| Income Sharing Ratio (ISR) | Profit Retained | |||
| Rate of Profit (on deposit) Retainedby the Bank | Client's ProfitRate | 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 | ||
Comment: Inputs or given data/ information are same both for Table A & Table X. The former distributes profit on Weightage basis and the latter 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.
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 RevisedWeightage | Result under Revised ISR | |||||||
| Client/ Depositor | Weightage | ISR | Client's Profitunder 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 | ||||||
* In practice both Weightage & 1SR based Modules arrive at Distributable Investment Income subtracting for Profit Equalization/ Loss Offsetting Reserve and regulatory Loan/ Investment Provisioning. As those practice are more or less similar in both the cases, for simplicity, we have ignored the same and assume 'Investment Income = Distributable Investment Income'.
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. The 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.
Similarly under Weightage system an additional fresh contract of the Bank with a new client may also affect the existing ones although there is no change in their prevailing Weightage. For example, we may keep all earlier data in Table ?A remain the same, but only if a new client named D maintains a long tenure Term Deposit account or a new product of Haj Deposit with an Weightage of 1.0 for Tk.100 or more in addition to earlier deposit of Tk.300, then profit of A, B & C shall be downturned to pay higher to D. Moreover, simply a change in the proportion of deposit mix would affect the rate. For example, if deposit of Tk.100 each of A, B & C is restructured as Tk.200, Tk.60 & Tk.40 (Total Tk.300 remains unchanged) respectively, resultant profit rate on deposit of all the clients i.e. A, B & C shall be different from earlier. We, however, refrain from all these calculation leaving the idea with the people concerned for their brainstorming.
Experience makes us believe that 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. Rationally 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. Such an important matter rather remains beyond the knowledge of the stakeholders. It seems funny that the Weightage offered to me has got less significance to me than the Weightage offered to many other people in determining my profit. Say for example, one is offered a Weightage of .8; does it signify anything until he knows the Weightage offered to others? If most of others are offered greater than .8 he (former) will be paid more and vice versa. So should not one to be rather careful to others' Weightage than that of his own? Moreover, the amount of other depositors (proportion in the deposit?mix) has got a great impact on my earning. Does any depositor have any such system to regularly watch others' data all over the country? Certainly not. So there must be an alternative. ISR based (i.e. with Variable Management Fee) module may be a solution.
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 (anyone can have practical experience visiting Islamic Windows at Uttara, Shantinagar and Dilkusha's Principal Office Branch of Bank Asia). This process facilitates the depositors and other stakeholders to see month?wise trend of their expected profit instead of hypothetical fixed provisional rate and waiting 12 to 15 months for actual rate of profit. System can workout actual rate of such profit on weekly or even daily basis, if required.
Islamic banking is based on, inter alia, 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 phenomenon; it is yet being evolved. So any better thing from anybody may be adopted without hesitation for the greater interest of the ideology.
Adoption of this ISR based Module would save most of the Islamic banking operators from paying their Mudaraba depositors 'interest' (I mean it) 'at actual rate of profit' finalized for the previous year (usually referred to as provisional profit rate). This sin is done most unIslarnically, particularly in case of term deposits attaining maturity before Annual closing. This is done on the plea of non?finalization of the A/cs which may need many months more after maturity of such instruments). Postmortem adjustment, if any, raising a lot of question, cannot be a better solution than adoption of the ISR base.
There are even rumors against an Islamic bank in Bangladesh which dares to quote the rate of profit (?) in the term deposit instrument. If so, does the nomenclature of profit save them from interest paying (How brave they are to enjoy the fire!). Such misdeed, if any, must be stopped at once for the sake of transparency and the beauty of Islamic banking and Islam as a whole. Wrong operators must not be allowed to engender scandal against a noble cause/ ideology. To prevent distortion, the greatest challenge of tody's Islamic banking, only unquestioned dedication would not be sufficient. Dedication must accompany knowledge, at least in the people in the leadership position. ( The Writer is the First Vice President and Head of Islamic Banking of Bank Asia Ltd. He can be reached at email afzal@bankasia.com.bd Opinions expressed in the article are of the writer and not necessarily of the organization he is serving for)