Taking Deposits

An Islamic bank may levy a fee for the secure holding of deposits. No interest is payable to the depositor. The contract under which money is deposited (which may be implicit, by conduct) is more akin to a trust than the conventional model where the bank customer occupies the position of creditor to the bank.  Unlike in a loan, ownership does not follow possession; the customer remains the owner of the deposit which is surrendered only for safe-keeping.

The bank acquires fiduciary duties upon acceptance of the deposit. As with current accounts in a conventional banks the deposit is payable on demand. Either party may terminate the contract at will.

The bank is not in the first instance acting as a guarantor. However under certain conditions the law of guaranty does apply and the bank may be liable for compensation and damages to the customer. When deposits are lost the following circumstances render the bank liable:

  • bank negligence
  • transfer of the deposit to another, without the authorization of the customer
  • transfer of the deposit to a business which incurs a loss — absent customer authorization
  • for mixing the deposited property with other properties without customer permission, where separation is possible
  • refusal to return a deposit on demand or denial of the existence of an account
  • mistaken return of a deposit to someone other than the customer
  • failure to follow instructions or other conditions stipulated by the customer regarding the property
  • the bank transports or travels with the deposit

In addition a bank becomes a guarantor rather than a trustee when investing customer’s deposited property. The following rules apply to investment of a deposit:

  • permission of the depositor is a condition precedent
  • the deposit remains payable on customer demand
  • the bank is liable for any losses incurred by means of the investemtns
  • the bank is entitled to any profits of the investment
  • on a discretionary basis however the bank may re-direct the proceeds of investment as a gift to the customer
    • such gifts however must not become routine or customary
    • furthermore the amount of such a gift cannot be stipulated in advance but must be guided by the profits earned by the investment activities of the bank
      • should the customer demand a share of the profit s/he must also be exposed to risk of loss and such a contract would be a Sleeping Partnership contract, not a contract of deposit
    • such gifts may be in monetary or other forms of property

 

 

 

Mejelle, 6th Book, Preface-Definitions and Chapters I-III