Understanding Islamic Finance - Doha Academy of Tertiary Studies

Financing Principles and Practices 359different countries. While banks and non-banking institutions like investment banks aremanaged mostly by the central banks, equity and debt market businesses, funds, unit trusts,venture capital, etc. are governed by the Securities and Exchange Commissions in respectivejurisdictions. But there may be some slight differences in regulatory set-up in variousjurisdictions.Islamic financial institutions (IFIs) obtain funds from a number of sources, which include:shareholders’ equity, customers’ general or investment deposits, inter-bank borrowings and,in some cases, the central banks. The bases for mobilization of funds are Mudarabah andWakalatul Istismār (agency). Unrestricted or restricted investment deposits are based on theprinciple of Shirkah, while current accounts are normally kept as loans and are not entitledto any return.14.3.1 Management of Deposit Pools and InvestmentsFor the purpose of investment of funds, IFIs maintain common and separate pools or generaland individual portfolios. The volume of investment deposits determines the banks’investment strategies. If depositors are risk-averse, banks should also be risk-averse, investingin less risky modes and avenues. Keeping in mind the depositors’ risk profiles,profitability and liquidity, they should invest through PLS modes in high-risk venturesand through debt-creating modes in low-risk investments. They should also deploy fundsin financial markets and make fee-based earnings through investment management andservices.The financing assets of Islamic banks are grouped into different investment pools withrespect to the source of funds. The funds and financing assets can be allocated to thefollowing investment pools:• general deposit pools (domestic or foreign currencies);• central bank’s refinance scheme pools (like the Islamic export refinance scheme of theState Bank of Pakistan);• treasury/financial institutions pool;• equity pool;• specific customers’ pools.The above pools are managed at the Head Offices or the Area Offices of the banks.The internal auditor and/or Sharī´ah advisor have to take the following steps to ensurethe Sharī´ah compliance of deposit management with respect to investments by an Islamicbank:• Distinguish between various kinds of deposits offered by the bank under variousschemes and to see that proper ratios for sharing profits/losses have been given andweightages assigned based on the tenors of deposits and disclosed to the depositors;assigning different weightages on the basis of size of accounts of the sametenor, although permissible with proper disclosure to all depositors, has to be generallydiscouraged, as it may lead to favouritism and injustice. It should also be ensuredthat the profit is allocated using the concept of daily product and the weightagessystem.• Ensure that the bank has not assured any fixed return to any individuals or groupof depositors; if any projected rates have been quoted, the same must be subject to