The interest-based banking system accepts deposits of different maturities and pays varying interest rates on such deposits. Similar to conventional banks, Islamic banks require funds to operate and finance their banking activities. Islamic banks collect deposits. However, they do not pay interest on such deposits. One may wonder how Islamic banking depositors are rewarded when they don’t get interest like their conventional counterparts.
Apart from the shareholders’ funds, Islamic banks maintain two main sources of funds that is to say; (i) the transactional/demand deposits, which are risk-free and provide no fixed return to the depositor apart from the bank discretionally gift (hiba). These accounts are maintained by depositors who are risk averse or just need safe custody of their funds in savings and current account. (ii) investment deposits, which expose the customer to losses from investments made by the bank.

Islamic demand deposits are operated in accordance with contracts and principles of Shari’ah, that is to say, agreeing that the deposited money will be repaid in full with/without any returns, and that the proceeds to be paid shall not be less than the principal sum deposited.
Under the Islamic demand deposits, money is placed into a banking institution for safe keeping under either savings or current accounts.

The account holder has the right to withdraw the deposited funds at any time, as such deposits are treated as a liability (Qardh) owed by the bank to the depositor/customer.
Because the bank guarantees safe custody and refund of the deposited money with or without any gain in money or money’s worth, it is acceptable under Shari’ah for the bank to use such deposits to finance its assets and activities, which is relatively cheaper for the bank as it is not obliged to pay in excess of the principal amount deposited.
The most common Shari’ah contracts applied in Islamic demand deposits are benevolent loan (Qardh), guaranteed safe custody (wadi’a yad dhamanah), and monetisation sale (tawarruq). The contractual relationships between the bank and depositor in a benevolent loan is that of a lender (depositor) and borrower (bank), while in safe custody, the relationship is that of owner (depositor) and custodian (bank), and in monetisation sale, the relationship is that of seller (depositor) and buyer (bank).

SOURCES
Islamic banks maintain two main sources of funds: (i) the transactional/demand deposits, which are risk-free and provide no fixed return to the depositor apart from the bank discretionally gift (hiba). These accounts are maintained by depositors who are risk averse or just need safe custody of their funds in savings and current account.
(ii) investment deposits, which expose the customer to losses from investments made by the bank.

Dr Lujja Sulaiman,
E-mail: lsulaiman@trobank.com,
Tropical Bank Limited