Sayyid TahirLast but not least, the clients may engage banks in order to look after
their payments and receipts matters. In the process, they hold deposits with
the banks.
Banks, on their part, want maximum flexibility in the use of the funds at
their disposal with no or minimal interference by the depositors. They are
commercial concerns interested in their return.
The issues of interest for us are as follows. What are possible contractual
arrangements to regulate the bank-depositor relationship? What are their
implications for management of funds at the banks’ end? Answers to these
questions are explored hereunder. We start with a recounting of the factual
position in the existing interest-based framework.
3. The Conventional (Interest-based) Deposits Scene
In first four of the aforementioned cases, the contractual relationship
between owners of funds and banks is a lender-borrower relationship. In
the 1 st case, namely Demand Deposits, the depositors are not interested in
any return. The 2 nd, 3 rd and 4th options are made attractive for depositors
with provisions of interest payments. The return is predictable for the
depositors in the case of ordinary Investment Deposits (the 2 nd case) as well
as other Investment Deposits offering Stable Income Flows (the 4 th case).
However, rate of return on General Savings Deposits (the 3 rd case) is at the
discretion of the banks who employ a complex formula to determine the
various depositors’ entitlements to interest.
In the 5 th case, banks render a service, and receive funds for discharging
it. But they also invest any idle balances in their own interest. Technically
speaking, this implies that the ownership of funds is treated as if vested with
the banks until a payment claim against the client arises. In this sense, there is
again a lender-borrower relationship between the clients and the banks in
respect of the unutilized funds.^1
Funds in all of the above deposits are shown on the liabilities side of the
banks. This is again an acknowledgement of the deposits being “debt” against
the banks.
In the management of these deposits, banks follow an aggregative
approach (see Figure 1). All funds, regardless of the category of the deposits
or depositors, are put together in one financing pool. Banks make all
advances from this pool. There is a financial year for accounting purposes. At
the end of the year, banks do their financial closures. Income and expense are