Future direction of hibah for CASA after 2016 By Dr Hanudin Amin
CASA is the acronym for current and saving accounts, which is a commonly used term in the banking sector across South-East Asia, including Malaysia. Current account is used for payment transactions involving personal and business entities. Savings account is typically used for precautionary purposes by individuals in which the money saved is extended to contingency or when an event is of unforeseen. This describes the importance of CASA. CASA is of essential not only as a main source of funds for Islamic banks but also as liquidity component, investment and serves as a payment transaction mainly current account.
Many aware that CASA is offered based on al-wadiah yad dhamanah that defines as a safekeeping with guarantee. The operation of hibah according to this principle is easily understood. Hibah is based on Islamic banks’ discretion without made it compulsory to avoid riba. Usually, hibah is given based on an indicative rate. This rate refers to a rate representing the future prospect of return payable to depositors for money placed with the bank where the rate is determined based on projection.
Given this issue, this week I intend to explain hibah principle in the context of Islamic deposit products. Three questions are addressed. 1. What is meant by the term hibah? 2. What are discrepancies of hibah practice between al-wadiah yad dhamanah and qard? 3. What are impending issues related to hibah?
In its simplest form, hibah refers to a transfer of gift from an Islamic bank to a depositor that is given out of volunteer basis or consideration. In other words, a person gives a financial benefit to other without hoping for return. In turn, however, the Almighty gives him a return for the good deed in the form of pahala that improves his ranking in the thereafter. The Quran has mentioned the importance of hibah for unilateral benefit.
Surah al-Baqarah verse 177 details the need of hibah as follows:
“The truly good are those who believe in Allah and the Last Day, the Angels, the Book and the Prophets, and who, despite their love for it, give away their wealth to their relatives and to orphans and the very poor, and to travellers and beggars and to set slaves free, and who establish salat and pay zakat.”
This verse provides three significant lessons but are not confined to. Firstly, hibah can improve wealth sharing among individuals in society that shapes their brotherhood. Secondly, hibah assists individuals to face financial hardship who requires extra financial assistance. Thirdly, hibah should be given according to the sequence that begins with our family members first while others follow. In all, hibah creates a value proposition to Islamic banks to improve their relationship with depositors.
Needless to say, Islamic banks are in their position to reward hibah to depositors for attraction for an improved portfolio management. It is a key factor to improve an asset-liability management for an enhanced liquidity of the banks. The deposit products involved are operationalised using two typical Shariah contracts namely Qard and al-wadiah yad dhamanah. Qard is a contact of lending money by a depositor to a bank where the latter is bound to repay an equivalent replacement amount to the lender. Money may include cash in any currency, gold or silver. Al-wadiah yad dhamanah is a safekeeping with guarantee.
Some features are: The bank is liable for any loss to the deposited money, profit gained from the use of the deposited money is exclusively owned by the bank, the bank can use the deposited money, and the deposited money can be pooled together with other assets of many depositors.
Beyond 3rd August 2016, hibah practice tends to be a new challenge for Islamic banks to implement. The banks are given until 31 July 2018 to revise all products based on al-wadiah yad dhamanah to qard and fully comply with the requirements (According to Qard guideline by Bank Negara Malaysia, 3rd August 2016). The banks need to notify the customers of any changes in terms and conditions arising from the transition from al-wadiah yad dhamanah and give their customers leeway to terminate the contract if they decide not to opt the changes.
By qard-based CASA, banks have more control to manage their liability effectively. The banks can use the deposited money directly and without obligation to publish an indicative rate to compensate the depositors. According to BNM, hibah giving is solely based on the bank’s discretion. The bank is not required to disclose the indicative rate or prospective granting of hibah. The bank has the discretion to disclose historical information on the hibah granted provided that such information shall not be construed as an indicative rate or give rise to any obligation on the part of the bank to provide such hibah to the lender.
By qard concept, the bank does not need to pay hibah but at the bank’s wisdom perhaps instead of convenience. Now the customer serves as a lender and the bank as a borrower. Are we similar to a creditor-debtor relationship like in the conventional bank? What will happen to a custodian-depositor relationship? Issues like reconciliation and public literacy on qard-based CASA need to handle them accordingly. Yet, BNM allows Islamic banks to give hibah based on ‘historical hibah’ - defining as the actual hibah paid to customers in the past. This concept, however, invites a confusion mainly to tap into this question “What are differences between indicative rate of hibah and historical hibah?” Are they the same? A question to ponder.
The formula used is also a question mark. If the current formula used, therefore, there is no a discrepancy between hibah-based qard and hibah-based al-wadiah yad dhamanah. What makes hibah for qard- based CASA better than the latter? It is observed that Islamic banks still extend the extant formula to compute hibah for qard-based CASA that is P*R*T, for instance a principal is MYR1,000, rate is 1% and duration is 31 days concluding a total of MYR0.85 hibah. Does it matter? Is R computed after considering the cost of fund? This issue overtly warrants empirical investigations for better comprehension.
Going forward, the current move indicates CASA is the cheapest platform of source of fund for banks given a tendency that the banks may or may not pay hibah to depositors. This is, however, one-sided conception. Indeed, the banks at their discretion may provide hibah to reflect the Islamic giving and for the purpose of market transparency that help to maintain their survival and competitiveness in the industry. In fact, ‘one good deed creates multiple benefits to many’, at least.
*The author is an Associate Professor/Dean at the Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance (PG310163). He can be contacted at hanudin@ums.edu.my