Islamic Financial Intermediation and Banking 153
principal amount in full and a predetermined return, an Islamic bank
would not be able to offer such explicit guarantees of principal and fi xed
return but would have to assure depositors that it would select the best
opportunities that minimize risk of any loss for the depositors but still
provide attractive market - competitive returns. Using the techniques of
portfolio management and diversifi cation, an optimal portfolio of trade -
related and asset - linked securities can be fi nanced by the depositors’ funds.
By deploying the funds in this fashion, the intermediary will be able to not
only offer short - term time deposits with minimized fi nancial risk and suf-
fi cient liquidity, but will also facilitate a system - wide payment system that
is backed by real assets.
Current accounts are demand accounts kept with the bank on custodial
arrangements and are repayable in full on demand. Current accounts are
based on the principle of wadia (trust or safe keeping) or amanah (trust),
creating an agency contract for the purpose of protecting and safekeeping
the depositor’s assets. The major portion of the bank’s fi nancial liabilities
would consist of investment accounts that are, strictly speaking, not liabili-
ties but a form of equity investment, generally based on the principle of
mudarabah. Investment accounts are offered in different forms, often linked
to a pre - agreed period of maturity, which may be from one month upwards
and could be withdrawn if advance notice is given to the bank. The profi ts
and returns are distributed between the depositors and the bank, according
TABLE 8.1 A stylized balance sheet of an Islamic bank
Assets Liabilities
Trade Financing
(Salam, Murabahah)
Demand Deposits
(Amanah/Waad)Leasing / Rentals
(Ijarah / Istisnah’) Investment Accounts
(Mudarabah)
Profi t/Loss Sharing Investments
(Mudarabah)
Special Investment AccountsEquity Investments (Mudarabah)
(Musharakah)
Fee for Services Capital
Equity
Reserves