Islamic Banking and Finance: Fundamentals and Contemporary Issues

Sayyid Tahir

transfer of funds against cash payments, the clients maintain balances with
banks for payment purposes. In this regard, the thinking needs to be clear on
four issues:

i) the legal relationship between the banks and their clients;
ii) the type of account that would serve the clients' needs and suit the
banks as well;
iii) the banks’ stake in the arrangement, whether in lump sum or on a
transaction-by-transaction basis; and
iv) the banks prescribing minimum balance requirements for their
clients and charging penalties in the event of a default.
Let us consider the case of the government using the medium of banks
for making and receiving payments. In principle, the government can have its
own disbursement officer in order to give salaries and to make other
payments. Quite obviously, efficiency and safety considerations necessitate
recourse to the banking system. This perspective immediately draws attention
to two points:

a) The banks role in doing the needful would be similar to that of
an employee of the government. The employee-employer
relation between a bank and the government can be
accommodated in the framework of the ijarah contract.
b) The banks may claim compensation that can be a lump sum
wage, a fraction of the sum involved, a per person fee in the case
of disbursement of salaries or a per cheque fees in the case of
payments to third parties.
The funds to be kept with the banks ought to be handled as interest-free
loan for two reasons:

1. The amanah contract will not be feasible and the wadi[ah contract
   not admissible for reasons noted earlier.


2. An ijarah contract can be supplemented by a loan contract,
   though not vice versa. This will also give the banks the flexibility
   of using any idle funds held with them as loans till such time as
   they are needed to make the necessary payments.
   Keeping in view these factors, payments services can be sought from the
   banks through supplementing the existing current account medium to an
   ijarah contract, not the other way round, between an interested party and a
   bank.