Chapter 9: Relationship of the LARIBA Bank with Its Depositors
The LARIBA bank obtains its funds from two main sources as compared to the RIBA bank.
Shareholders' Capital; which is looked upon as long-term risk money by the shareholders.In addition, the accumulated earnings of the bank, can be reinvested in the bank capital.
Depositors' funds from those community individuals and institutions who have a much lower risk tolerance for their capital.
RIBA banks derive their funds from the same sources outlined above.
However, a very large source of funds for RIBA banks is the Central Bank of the country where the bank operates.
For example, in the U.S.if the shareholders' capital is $100 million, then this RIBA bank can create a lending ability to lend up to 20 times that much ; i.e. $2 billion (provided that it abides by other rules and regulations set by the Central Bank; i.e. the Fed, in the U.S.).
This represents the most important challenge for the growth and stability of Lariba banks in a world which operates by Riba concepts.
It is believed that God in the long run will bless those who commit and have small means (as reported by the Prophet's"Hadeeth" (saying).
However, prudent planning and management are required to meet the challenge.
In the RIBA banking system the RIBA bank focuses on borrowing money at low interest rates (money market deposits, and/or CD's) or no interest rate (checking account/demand deposits) and then lending the money at a higher interest rate.
The spread between the interest earned by the bank on its loans an the interest paid to depositors on their different types of deposits represents a large portion of the profit of the RIBA bank.
The RIBA bank derives its importance from its capacity to accumulate capital from those who own money but are not capable of placing it in productive investments either because they do not have the experience and ability and/or because they are not interested in or can afford to assuming the risk of losing their capital.
The owners of capital are attracted to the RIBA bank by the level of interest paid to them on their deposits and the insurance supplied, in the U.S.A. for example, by the Federal Deposit Insurance Corporation (FDIC) on their deposits that are less than $100,000.
In this context the RIBA bank's legal relationships can be broken into the following two entities:-
1. A legal relationship between the depositors as creditors of the bank and the bank as liable to the depositors
2. A legal relationship of the bank with the business person/entrepreneur who borrows the money to invest it by putting it to work.
In this case, the bank is the creditor and the business persons are liable to the bank.
This way, the bank is not legally looked upon as an intermediary between the owners of capital and the business person who borrows the money for a business activity.
In fact, the bank in this context has become a real principal in two different relationships while there exists no relationship between the owner of capital (depositors) and the real user of capital (the borrower).
In LARIBA banking, the bank is looked upon in a different context, this can be conceptualized as follows:-
1. If the deposits are looked upon as deposits for Amana (trust), then the bank has no right to dispense the Amana without the prior consent of the depositor.
Here comes the question of the effect of inflation and the impact of it on the deposits which after a certain time may have less purchasing power.
In fact, if the depositor wants to keep his/her funds without employing them, as an Amana, their deposits not only decline due to inflation but also because they are required to pay the 2.5% Zakah on them if they are kept unutilized for an economic investment activity of a period of a year or more; Hawl (period/cycle).
2. If the depositors deposit their funds with the purpose of allowing the bank to manage their money on their behalf, then the bank enters into a relationship with depositors as Mudarib (money manager) for the depositors.
The most important ingredient in the agreement is the level of risk the depositor is willing to accept.
In this context, the depositor becomes an investor.
Other ingredients of the Mudaraba agreement (money management agreement) would be the time duration of the investment and the distribution of profits between the bank, Mudarib (money manger) and the owner of capital.
3. If the owner of the capital entrusts the LARIBA bank with searching for business opportunities to invest their capital directly (Direct Investments), then the LARIBA bank takes on the role of an investment banker intermediary who would work on behalf of the owner of the capital and business person for a service fee.
Now the relationship is direct between the owner of the capital and the business person.
The LARIBA bank's responsibility is mainly the performance of the due diligence to assess the business parameters of the relationship and maybe to structure the deal financially and legally and to make sure that it follows the tenets of Islamic financing of LARIBA.