Understanding Islamic Finance - Doha Academy of Tertiary Studies

182 Understanding Islamic Financeused for managing their cash flow. Savings, term, notice deposits and certificates ofinvestment/certificates of deposit (COIs/CODs) are remunerative deposits for the short,medium and long term. A brief explanation of the deposits side of banks follows.Current AccountsThese are a basic type of account maintained mainly by corporate clients and by individualsfor availing credit facilities from the banks/financial institutions. As indicated above,normally such accounts are nonremunerative; however, many regulators allow payment ofinterest on such accounts and some banks give a little return as a part of their marketingstrategy. Hence, a current account in the conventional system may or may not be remunerative.Savings AccountsThese are the normal checking accounts that commercial banks offer for fund mobilizationagainst the payment of interest; savings accounts may have a minimum balance requirement.Different types of savings accounts offer different interest rates depending on the depositamount. The concept of daily product is used for the entitlement of return to variousdepositors. Saving deposits, and to some extent term deposits, are collectively known as“demand” deposits, because one can, at any time, draw the amount without any notice.Fixed-term Accounts/Certificates of Investment/Certificates of DepositIn term deposit accounts (as captioned above), the deposit holder agrees to lock in the moneyfor a fixed period of time while the bank commits to pay an indicated interest rate dependingon the term of the deposit – the longer the term, the higher the interest rate. Some bankscharge a penalty in the event of premature encashment – some banks charge a prespecifiedpenalty over the remaining period of deposit, while others use the period for which moneyhas been with the bank. In financial markets with open competition, the return already givenis adjusted in the case of early withdrawal, keeping in mind the investment and the remainingperiods.Term deposit receipts (TDRs) are issued at par or discounted value. A typical TDR issuedat discount is issued at a value below its par; it grows up to the par value in the agreedtimeframe. TDRs may have a life ranging from an overnight deposit to five/six/seven years,though by custom, it varies from seven days to five years. This type of deposit is also calleda certificate of investment (COI) by investment banks and NBFIs. A typical COI is issuedat its par value with return payment made at agreed intervals ranging from one month to thetime of maturity.Annuities/PerpetuitiesAnnuities are normally built on savings accounts for commercial banks. NBFIs use COIs tooffer annuities. The depositor is entitled to withdraw the amount after the deposit period.However, frequently the annuity converts itself into a perpetuity at maturity, i.e. the depositholder is allowed to withdraw an agreed amount indefinitely at an agreed timeframe. Theseproducts are also offered by life insurance companies. Products of such a nature exist inthe mutual fund industry and share markets as well, and are called “dividend reinvestmentplans.”