With each passing year, Islamic banking and finance continue to grow in popularity. Its products are turning into the choice of not only Muslims but also non-Muslims. This is especially true here in Malaysia, considering that the country is a pioneer in the industry.
According to a 2017 report by Bank Negara, Islamic financing in this country now accounts for 34.9 per cent of total loans and financing. Compare that, if you will, to the 5.3 per cent market share it enjoyed in 2000.
Islamic banking is a system that follows Islamic Laws (Shariah) principles and Islamic-based economics. Money lending (interest-based) as well as investing in businesses are among the prohibited elements. Other reasons for its rise in popularity include:
- Fairness and protection from high risks
- Safe from crisis
- Fixed and clear fees
- Lower penalties
Among the products that Islamic banking offers are Fixed Deposits. They are worthy options to have in your investment portfolio.
What is a Fixed Deposit?
A Fixed Deposit works as both a savings and investment account. Money is deposited into it for an agreed amount of time. In return, the investor is promised a fixed rate of interest. Unlike a regular Savings Account, the money can only be withdrawn from the Fixed Deposit upon completion of the investment period. The interest is also only paid at the end of this tenure.
The period for a Fixed Deposit can vary from one month to five years. Each duration offers different interest rates. Usually, the longer the money stays in the account, the bigger the interest returns will be for the investor.
A huge advantage of Fixed Deposits over normal Savings Accounts is the much higher interest rates. This is made possible because they are calculated by an annual rate. The interests for normal Savings Accounts, on the other hand, are calculated by a daily rate.
Other advantages of Fixed Deposits are lower risks, a guarantee of investment returns, and protected from inflation.
How are Islamic Fixed Deposits different?
As mentioned earlier, Islamic banking is a system that follows Sharia principles and laws. Therefore, unlike conventional banking, the use of interests (riba) is forbidden. Instead, in Islamic banking, the investor receives his returns solely dependent on the bank’s performance.
There are several common arrangements for an Islamic Fixed Deposit, such as:
- Mudharabah — This is a partnership arrangement where one party gives money to another to invest in a business venture. Profit from the project is seen as being “shared” between the two parties based on percentages which are agreed upon in advance.
- Wadiah — In this arrangement, the bank is seen as a party entrusted to safe-keep funds deposited by bank customers. Subsequently, the bank offers gifts (“Hibah”) back to the customers. This usually represents a portion of the profit made using the deposited funds.
- Murabahah — A contract where the financier purchases assets required by the client. These assets are then sold to the client at a cost that includes a disclosed profit margin. Payment is usually in instalments.
With the absence of riba, an investor’s profit or loss will vary from month to month. This directly depends on how the bank performs. However, it is extremely unlikely for a bank to underperform and thereafter, for the investor to actually make a loss on your deposit. This is especially true considering the many risk management practices adopted by the banks.
Therefore, you will still be able to reap returns on your investments without breaking any sharia rules.
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