In the backdrop of expansion of Islamic banking operators in the country, recently this scribe attended few seminars on Islamic banking. In most cases, he observed debates on two different methods of 'profit distribution' to the Mudaraba depositors.
For the very first time, while preparing Islamic Banking Guidelines, no other method but Weightage was available for the above purpose. Naturally that Guidelines circulated by Bangladesh Bank 15 years back contained the sole sample of Weightage method
Later, the ISR method has evolved and presently the industry practise two frameworks namely, i. Weightage method and ii. ISR method. Instead of going into detail, I would just sketch a glimpse of the two methods in question.
Weightage based framework, developed in 1983 is a syndicated Mudaraba framework. It is a two-tier process. At first, it provides a sharing ratio between bank and entire Mudaraba depositors collectively. Then, in the second tier, each group of depositors gets different sharing ratio in the name of Weightage. A simplified calculation may exhibit as under:
On the other hand, ISR (Income Sharing Ratio) based module, developed in 2008, suggests separate ISR with different types of depositors (instead of Weightage applied on residual income, after Tier-I deduction of bank's share therefrom). To illustrate ISR module, we may now again refer to our first table (Table A) and set client-wise ISR therein:
With uniform given data, both for Table A & B above, the former distributes profit on Weightage basis and the latter on ISR- although profit to clients under both the systems is found identical (Col 13 of TableA2 and Col. 12 of Table BI), profit may also differ with different proposed ratios and other assumptions.
Our autopsy observes that both the methods use sharing ratio. Weightage method at first applies sharing ratio (PSR) collectively. Then on Weightage, it redistributes final profit. The other method applies sharing ratio, based on ISR direct and need no further calculation.
As alleged, the latter overcomes limitations of Weightage system. But we are not going into details of those allegations. We halt to the fact that Shariah scholars ascertain ISR method as fully compliant. Irrespective of its nomenclature, proper Mudaraba agreement, free from uncertainty and possibility of dispute is important.
The issue of different methods in question may be compared with 'commercial' name vis-a-vis 'generic' name of a medicine. Different pharma companies sell medicine with same generic ingredient in different names. Likewise the name, neither Weightage nor ISR, matters. What is essential is appropriation in Mudaraba principles.
Usually one refers to the whole calculation process thereof as the ISR method (the same is also valid for Weightage method). But in fact the generic ingredient therein is the 'direct bilateral agreement of profit sharing ratio of the bank with each and every Mudaraba depositor' (all other calculi are like powder used in making pills).
Such a direct bilateral agreement bears the essence of Mudaraba. Moreover, the ISR method is undoubtedly easier to calculate and simple to understand the beauty of Mudaraba and thus Islamic banking as well.
Revision of the Guidelines (2009) for Islamic banking operations is expected to be imminent. Under the above noted considerations, we would invite attention of the concerned wing of Bangladesh Bank not to insist solely on Weightage method and abandon the ISR. They may keep options open stipulating stick compliance with Mudaraba principles
Afzalul Haq, formerly Head of1slamic Banking of Bank Asia Limited.
afzalulhaq1961@gmail.com