By Dr Hanudin Amin

Uncovering prohibitions of riba in Islamic current, savings, fixed accounts

THE Islamic CASAFA stands for current, savings and fixed accounts, which are employed for transaction, precautionary and investment purposes, respectively.

Owing to Islamic Financial Services Act (the IFSA) 2013, the Islamic CASAFA learnt a new direction pertinent to the practical forms of financial rewards that differentiate themselves from interest incomes (riba).

Vitally, the prohibition of riba covering both interest expenses and interest incomes is best described by the Hadith as follows: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt – like for like, equal for equal and hand to hand; if the commodities differ, then you may sell as you wish, provided that the exchange is hand to hand” (Muslim & Tirmidhi).

The six commodities mentioned can be clustered into groups and types. The groups include medium of exchange and food. The types include the contents of medium of exchange and food. For instance, RM10 is exchanged for RM10 on the spot. Riba does not occur since quantity exchanged is equal and it is transacted on the spot. Riba is transpired when RM10 is exchanged for RM20 on the spot, in which the addition of RM10 is known as riba.

Before the IFSA 2013, hiba is employed for the Islamic CASA through al-wadiah yad dhamanah contract, while a dividend is used for Islamic fixed deposit via mudarabah contract. After the IFSA 2013, qard replaces alwadiah yad dhamanah but hiba is still in use whilst tawarruq contract is employed for Islamic fixed deposit that is based on profit rate

Instead, conventional CASAFA is subject to the practice of riba, which is expounded as an interest income for the depositor but an interest expense for the bank. As for savings account, the bank serves as the debtor whilst the customer acts as the creditor. The customer lends a money to the bank in which the bank rewards the former with interest incomes. The same basis can also be found in the context of conventional fixed account in which the bank rewards interest incomes to the depositor for the money he places in the bank.

Unlike the conventional CASAFA, the Islamic CASAFA does not reward interest incomes to depositors but instead hiba for both current and savings account and profit for Islamic fixed account, typically. Hiba is ‘discretionary’ but riba is ‘contractual’. The conventional CASAFA earns interest incomes, constantly paid regardless of whether the bank is running at profit or at loss. The magnitude of profit earned by the bank will not affect the magnitude of interest incomes earned by the depositor.

Assume that qard contract is used, Islamic current and savings accounts earn hiba but it is not promised. There is a relationship between the bank performance and hiba. The bank is the debtor, the customer is the creditor similar to conventional current and savings accounts. The bank’s high profit means the customer earns more hiba and vice versa. Under the qard concept, Islamic banks are not allowed to pay interest but are ‘allowable’ to give hiba out of their discretion.

Islamic banks also reward profit to their customers mainly for the banks that govern their savings and fixed accounts using tawarruq contract. Tawarruq is a sale-based contract in which the customer sells good to the bank, and the bank will sell it to the third party. The cash obtained will be invested by the bank for profit in return. The customer’s portion of profit is then credited according to the agreed percentage determined at the beginning of the contract, which is defined as a sale-based transaction.

In principle, the depositor deposits a sum of RM1,000 to the XYZ Bank under a savings account. Riba is raised when 1 percent is rewarded, which is charged in relation to the duration of the deposited fund. The interest of RM10 represents riba al-qard. He does not work to earn it. His money works for him, resulting in a culture of laziness to himself and others in the social cycle. In contrast, however, riba has no place in the Islamic CASAFA. Riba is a bad practice that crafts an encumbrance to banks as they have to repay the principal as well as interest incomes. Evidently, money cannot grow by itself, it needs a business to make it grow. Qard savings account is free from any element of riba and so do Islamic savings account that is governed by tawarruq.

Under tawarruq contract, savings and fixed accounts are transacted based on commerce, where the two counter values are exchanged hand to hand, notably price and goods. The buyer pays the price for the goods whilst the seller sells the goods for the price. In the case of fixed deposit, for instance, the depositor places a sum of RM10,000 to the Islamic Bank XXL. The bank uses the money to buy a commodity from the Broker XXL. Once it is bought, the customer subsequently sells it to the bank on murabahah basis, say RM10,500. The depositor can reap the principal plus the profit say after three months. Makes it sound easy?

Likewise, there are some issues related to the Islamic CASAFA that can be thought of as vital but are not limited to: (1) Fallacy of riba – Some laymen are of the opinion that both Islamic and conventional CASAFA are subject to riba, given the excess reported in the both accounts are, somehow, promised. They believe that the terminologies used are nothing but a promotion tool to attract a patronage by customers who are faithdriven. (2) Convergence – Except tawarruq contract, qard contract makes Islamic and conventional CASA products now share the same concepts though they are different in modus operandi. Qard defines the depositor as the lender whilst the bank as the borrower, and this definition is also embedded in conventional savings account. (3) Financial rewards – The ‘implications’ of the rewards drawn from Islamic deposits are in tandem with their peers, which is the ‘the power of addition’. Laymen believe that the thinking of hiba and profit are both used as a mechanism to camouflage. (4) Competitiveness – Today, however, qard-based savings is not allowed to provide a consistent hiba to avoid urf, allowing conventional savings account to be outperformed. Instead, some Islamic banks employ tawarruq to govern savings and fixed accounts. In turn, this can cannibalise qard-based savings within the categories of Islamic deposit products.

To cope with these issues, there is a need to generate a pool of Islamic Banking Believers (IBB). The IBBs are also recognised as loyal users who are continually patronising Islamic banking products and share their beliefs to others for knowledge extension and thus creating a new demand with an improved customer base. Yet, there is also a need for Islamisation of Conventional Bankers’ Knowledge (ICBK) to improve their quality of explanations to customers and thus enabling an adoption.

With a joint educational programme, a better knowledge of discrepancies between riba, hiba and profit can be established to increase the demand of the Islamic CASAFA products through an improved information intermediation and the development of maqasid-based CASAFA that promotes maqasid al-Shariah in any of deposit taking transactions, at least.

About the author: Dr Hanudin Amin is an Associate Professor 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. This write-up is funded by Fundamental Research Grant Scheme (FRGS): FRG0438-SS-1/2016, Ministry of Higher Education (MOHE), Malaysia.