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Markfield Institute of Higher Education Presented By Bashir Uj Jaman Alternative Model For Profit Distribution on Deposit You can reach Bashir at bashir07@live.co.uk

How does depositor get benefit from Conventional Banks ? ---By fixed Interest Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative Model for Profit Distribution on Deposit

Markfield Institute of Higher Education Presented by Bashir Uj Jaman What is wrong with predetermined Interest? How does it effect Economy? Alternative Model for Profit Distribution on Deposit

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative Model for Profit Distribution on Deposit Riba Bank Of Kuffar Deposit taking on X% interest Investment with (X+Y)% interest Fixed rate of x% interest to depositors forces to charge fixed rate of (x+y)% interest to customer, hence if no chance of investment with expected interest, Money will not be invested. Sometimes customers are forced to pay more than ROI Impact of predetermined interest

What is the solution for Islamic banks? Instead of predetermined interest, islamic bank sets pre determined profit ratio. eg; 80%:20%. So actual profit will be determined after getting outcome from investment Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative Model for Profit Distribution on Deposit

Practice of design of deposit account around the world based on Qard a Hasana/ Wadia- Iran, Client can’t demand profit. Current account Mudaraba – Savings account Murabaha (Bai al ina & Tawarruk) – Malaysia, fixed deposit account.term deposit Wakala - by treasury department to raise fund for special purpose. Bank receives agency fee. Long term deposit account. Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative Model for Profit Distribution on Deposit

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative Model for Profit Distribution on Deposit Comparison - conventional vs Islamic Approach Flexible, Ethical, realistic investment Profit increases if ROI increase Restricted, Unethical higher interest rate investment Profit is fixed Last to first variable approach Profit/Loss sharing Predetermined first to last fixed approach No loss sharing Islamic Bank Conventional/Riba Bank

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Logic behind profit distribution Alternative Model for Profit Distribution on Deposit Conventional -Time is money. The higher the duration the higher the percentage. Islamic -Not only duration but the higher the risk, the higher the profit

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Sharia requirement for declaring profit distribution method. Do you know the percentage of your profit in your account with Islamic Bank? Alternative Model for Profit Distribution on Deposit

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Currently, bank keeps it profit first and then distribute remaining profit to mudaraba depositors based on weightage system . So It is called two tier Profit Distribution. Alternative system is a Income sharing ratio (ISR) based system treating different mudaraba depostors individually.It is a single tier profit distribution which distributes profit to bank and depositors at a time. Example will make it clear Alternative Model for Profit Distribution on Deposit

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative model for profit distribution on deposit Table A: Profit Distribution Based on Current Weightage system. 1.8 300 Total Investment) .7 100 Term Deposit C 25:75 300* 20% (on .6 100 Savings B .5 100 Curret A 7 6 5 4 3 2 1 Collective Income Distribution Ratio between Bank: Client Income from Bank’s Investment Investmet Amount(Tk.) Weightage Deposit Amount (Tk.) Type Of Mudaraba Deposit Depositors Name

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative model for profit distribution on deposit Table Al: Determination of amount of Investment Income and collective distribution thereof Tk.45 Tk.15 Tk.300 x 2O% = Tk.60 10= Col. 8 X 75% 9= Col. 8 X 25%; 8= Col. 5 x Col. 6 Client Bank Total Share of Investment Income as per Col. 7 Income Investment Tier 1:

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative model for profit distribution on deposit 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 Tk.45.00 1.8 Total Tk.45x.7~1.80 = Tk.17.50 .7 C Tk.45x.6-* 1.80 = Tk.15.00 .6 B Tk.45x.5-* 1.80 = Tk.12.50 .5 A Profit Distribution Weightage Depositors Name Tier 2:

Problem with Existing System Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative model for profit distribution on deposit 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 (Current, 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.

ISR (Income Sharing Ratio) based Module for distribution of profit to Mudaraba Depositors : 300 Total % Deposit 87.50% 12.50% Investment) 100.00 100 Term C (on 300* % 20% 100.00 75.00% 25.00% 100 Savings B 100.00 62.50% 37.50% 100 Current A 8 7 6 5 4 3 2 1 Total Client’s Share Bank’s Share Income from Bank’s Investment Investment Amount (Tk.) Income Sharing Ratio (ISR) Deposit Amount (Tk.) Type of Mudaraba Deposit Depositor/ Client

Markfield Institute of Higher Education Presented by Bashir Uj Jaman ISR based Single tier profit distribution would be as under: Table X: Client wise Profit Distribution 45.00 15.00 Total C 17.50 2.50 17.50% 2.50% B 15.00 5.00 15.00% 5.00% A 12.50 7.50 12.50% 7.50% 13= Col. 1 12= Col. 3 X Col. 10 11=Col. 3 X Col. 9 10= Col. 8 X Col. 5 9=Col. 8 X Col. 4 Client/ Depositor Profit to client (Tk.) by Bank (Tk.) Client’s Profit Rate Rate of Profit (on deposit) Retained by the Bank Profit Retained Income Sharing Ratio (ISR)

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative Model for Profit Distribution on Deposit Comment: Inputs or given data/ information are same both for Table A & Table X. The former distributes profit on Weightage basis and the later 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 Comparison: 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 60.00 60.00 60.00 Total Distributable* Investment Income 13.50 15.00 - 15.00 - Profit Retained by Bank 46.50 - - 45.00 2.0 45.00 - - 1.8 Total of Clients’ Profit 19.00 95.00% 05.00% 20.25 .9 17.50 87.50% 12.50% .7 C 15.00 75.00% 25.00% 13.50 .6 15.00 75.00% 25.00% .6 B 12.50 62.50% 37.50% 11.25 .5 12.50 62.50% 37.50% .5 A 10 9 8 7 6 5 4 3 2 1 (Tk.) Client Bank (Tk.) System (Tk.) Client Bank Client’s Profit ISR Client’s Profit Weightage Client’s Profit under both ISR Weightage Client/ Depositor Result under Revised ISR Result under Revised Weightage Result of Weightage & ISR (From Table A-A2 & X-X1)

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative Model for Profit Distribution on Deposit Analysis: 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. In weightage syestem, 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.

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative Model for Profit Distribution on Deposit 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.

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative Model for Profit Distribution on Deposit 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. 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

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative Model for Profit Distribution on Deposit Conclusion: Islamic banking is based on 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 market. it is yet being evolved. So any better thing from anybody may be adopted without hesitation for the greater interest of the ideology.

Markfield Institute of Higher Education Presented by Bashir Uj Jaman Alternative Model for Profit Distribution on Deposit References: An alternative module to distribute profit on deposits under Islamic banking by Afzalul Haq The Writer is the First Vice President and Head of Islamic Banking of Bank Asia Ltd. He can be reached at email [email_address] . Article Available at : http://csbib.org/publications/an-alternative-module-to-distribute-profit-on-deposits-under-islamic-banking-afzalul-haq#more-48 http://www.islamicbankingway.com/2010/11/21-investment-fixed-deposit-account.html Central sharia Board of Islamic Bank Bangladesh http://csbib.org/ Islamic Finance in a Nutshell by Brian Kettell http:// books.google.co.uk/books?id = CgjsYcxNLuUC&pg =PA130&dq= types+of+deposit+account+in+islamic+banks+non+specialist&hl = en&ei =pIj8TI23Jsv1sgbO06GUBA&sa= X&oi = book_result&ct = result&resnum =1&ved=0CC4Q6AEwAA#v= onepage&q&f =false

Markfield Institute of Higher Education Presented by Bashir Uj Jaman May Almighty help us to get benefit from this presentation. Zazak Allahu khairan for listening Any Question ? Alternative Model for Profit Distribution on Deposit

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