Understanding Islamic Finance - Doha Academy of Tertiary Studies

188 Understanding Islamic Finance“Bank Holding Company Model” (a bank holds separate organizations owned by itselffor different activities, e.g. investment banking, Murabaha/trading transactions, commercialbanking, etc.). The first two models may not best suit Islamic banks because of the widedifference in the nature of activities that they will have to adopt for their operations. 6 Thefully owned (by the parent bank) subsidiaries model is best suited to banks if they establisha number of subsidiaries for various types of operations, namely investment banking, commoditytrade-based banking, leasing-based banking, Istisna‘a-based banking and the normalcommercial banking. Alternatively, IFIs can have special branches for industry, agriculture,commerce, real estate and Takaful businesses.Both on the liabilities and assets sides, the risk profile will be determining the return/chargeand the nature of relationship between the savers, banks and fund users. Funds of risk-aversedepositors will be used for low-risk financing and vice versa. In certain cases, the banks mayalso work as fund managers managing funds of investors/clients and charging commissionfor their services. As trustees, they will manage the clients’ portfolios and the investors willhave flexibility in choosing the best way and place to invest, according to their prioritiesand the risk profile.The modes available to banks/their subsidiaries in order of priority will beMusharakah/equity participation, Mudarabah or profit-sharing and loss-absorbing, Ijarah andtrading in real goods or sale contracts with deferred payment (Bai‘ Mu’ajjal) or with deferreddelivery of goods (Bai‘ Salam and Istisna‘a).As the banks take deposits mostly from the middle class, they need to be very careful whileinvesting their funds to safeguard the interests of the depositors as well as the shareholders.Therefore, depending upon the share of risk-averse deposits in their liabilities, they will haveto use Murabaha and other debt-creating modes to reduce the risk and Shirkah-based modesfor those who can take the risk of loss. Instruments for liquidity can be developed on thebasis of all above modes, subject to the condition that return thereon depends upon the levelof risk borne, entrepreneurship or real economic activity and involvement of real assets.8.5.2 The Deposits Side of Islamic BankingIn the fast-developing world of finance, Islamic banks are obliged to innovate a set oftechniques to mobilize deposits, keeping in mind the priorities and risk preferences of variouscategories of depositors. They will also have to cater for safeguarding the depositors fromloss on PLS deposits.Recent developments on the deposits side reveal that Islamic banks, in addition to thegeneral categories of savings and investment deposits, have started offering commodityfunds, leasing funds, Murabaha funds and COIs. The funds thus mobilized are used inlease or Murabaha operations, giving fees or fixed margins of profit to the banks. Thus,savers are in a position to get a quasi-fixed return. However, this fixity of return may createambiguity with respect to their Sharī´ah position unless strict Sharī´ah controls are appliedto the operations and distribution of returns thus achieved. The majority of authors allowthird party guarantee to depositors to the extent of a nominal amount of deposits. However,for enhancing confidence of the depositors and to avoid any scares or chaos, any Takafulscheme for deposits would be desirable. This is because the provision of third party guarantee6 Khan, 1999.