118 AN INTRODUCTION TO ISLAMIC FINANCE
for the demand deposits but stipulates no reserve requirement for the sec-
ond window. This is based on the assumption that the money deposited as
demand deposits is placed as amanah (that is, for safe keeping) and must
be backed by a 100-percent reserve, because these balances belonging to the
depositors do not carry with them the innate right for the bank to use them
as the basis for money creation through fractional reserves. Money deposited
in investment accounts, on the other hand, is placed with the depositors’
full knowledge that their deposits will be invested in risk - bearing projects,
and thus no guarantee is justifi ed. In this model, too, the depositors may
be charged a service fee for the safekeeping services rendered by the bank. The
provision of interest - free loans to those who may need them is limited to the
funds deposited in such accounts by the depositors who think that the bank
may to better equipped for this purpose. No portion of the deposits in the
current account or investment accounts will be required to be used for this
purpose.
Wikala model A third, but lesser - known, model for an Islamic bank has also
been suggested. This model is based on the contract of wikala where an
Islamic bank acts purely as wakil (agent/representative) of the investors and
manages funds on their behalf on the basis of a fi xed fee. The terms and
conditions of the wikala contract are to be determined by mutual agreement
between the bank and the clients.
Figure 6.1 shows a simplifi ed version of how a typical Islamic bank
can be structured to mobilize funding from the deposits and how the
funds are invested in different instruments. The bank’s relationship with
the depositors could be based on a mudarabah, amanah, wikala or wadia
basis on its liabilities side. However, on the assets side, the bank has more
freedom and choices to invest depositors’ investments. Islamic banks carry
FIGURE 6.1 Islamic fi nancial intermediation
Investors
(Depositors)MudarabahWikalaWadiaI S L A M I C
MurabahahIjarahIstisna’SalaamMudarabahMusharakahJo’alah/RahnFunding/Resource Mobilization Investment/Revenue Generation