WADI’AH DEPOSIT TAKING INSTRUMENT
The term wadi’ah is derived from the verb “Wada’a”. It means to keep, lodge, store, entrust, leave, or deposit. It also means to leave something in someone’s custody. In technical terms, it refers to the act of keeping or the property that is being kept.
It has also been used to refer to assets given to someone for safekeeping without any return. From a scholarly view, Wadi’ah is a safekeeping or trust contract without any given compensation and the asset should be returned at the request of the owner.
The contract of wadi’ah has been approved by the consensus of scholars of all times on its permissibility since it is necessary by the people in general to keep their properties in the hands of other people.The Shafi and Maliki scholars suggest that Wadi’ah is the representation in keeping the possession of private goods in a specific way.
The Hanafi school of thought defined it as: “Authorizing someone to keep his wealth explicitly or implicitly.”
In the scriptures, it is also used to mean abandon or to forsake. Allah the Almighty says: “Thy Lord has not forsaken thee or left thee, nor is He displeased.” Quran: Adhuhaa verse 3.
Types of Wadi’ah.
There are two kinds of Wadiah, namely;
1. wadiah yad al-amanah also known as Amanah
2. wadiah yad al-dhamanah also known as Wadi’ah yad al-amanah (Safe keeping)
This is a safe keeping concept which is based on custodianship model. It is therefore an Amanah or trust in nature.
Wadi’ah yad al-dhamanah (Guaranteeing of Deposits)
This type of wadi’ah is based on a guarantee concept used for the return of deposit (Dhaman) which is used for the investment of deposit but return them when the owner needs them.
Difference between the two
Custodian in wadiah yad al-amanah cannot utilize the deposit without the owner’s consent. At the same time, since there is no guarantee that the deposit can be returned when needed, hence no liability is charged on the custodian in case of loss or damage except for negligence.
On the other hand, the custodian in wadiah yad al-dhamanah is entitled to use the deposited assets for transaction and other profit purpose with risk-taking regardless of consent from the owner, but since any profit from this type belongs to the custodian, offering some portion of profit as a gift (hibah) is at the custodian’s discretion.
In particular, the wadiah yad al-dhamanah contract has similarities with the loan (Qardh) contract. And thus, this type follows the principles of the loan contract; no pre-determined excess/ benefit is expected from the investment.
Application of Wadi’ah
Today, most Islamic banks employ wadiah yad dhamanah instrument which means safe-keeping with guarantee. Practically it is used as a wadiah yad dhamanah current account and wadi’ah yad dhamanah savings account.
In Islamic banks both wadiah yad dhamanah and wadi’ah yad al-amanah can be used for both current and savings accounts. Though the use of wadiah yad al-amanah contract is mainly used for simple safe-keeping of valuable items rather than money.
Current Account deposits with Islamic banks follow the principle of Amanah where the deposits cannot be guaranteed hence the use of wadiah yad al-amanah contract. Never the less wadiah yad dhamanah contract can be used as well, where the customers principle amount is treated as loan and therefore guaranteed, in this case, the Islamic bank has the permission to use the deposits for their own operations. The depositors have no right to any return or profit on such deposits.
However, gifts to such depositors can be given entirely at the discretion of the Islamic banks. And as the banks are not allowed to pay any return for the use of the depositors’ funds that take the form of loans, awarding such gifts should not take the form of a custom or a permanent feature of a bank’s operations or have a tariff on how the gifts are awarded.
In some jurisdictions, Wadiah yad dhamanah Contract, is used for transaction between the Central Bank and Islamic banking institutions. Islamic banking institutions place their surplus/residual funds with Central Bank/Regulator based on the concept of Al- Wadiah. Under this concept, the acceptor (Central bank/Regulator) of funds is viewed as the custodian for the funds and there is no obligation on the part of the custodian to pay any return on the account.However, if there is any dividend paid by the custodian, it will be deemed to be a ‘hibah’ (gift).
Wadiah and the central bank
The Wadiah Contract facilitates the Central Banks’ liquidity management operations through liquidity management instruments like Tawarruq (monetization) as it gives flexibility for the Central Bank to declare dividends from its investments. Under the liquidity management operations, Central Banks’ uses the Wadiah Contract to absorb excess liquidity from the Islamic financial institutions by accepting overnight money or fixed tenure wadiah basis.
Two other contracts sometimes used by Islamic finance institutions for pay-back-on-demand accounts instead of qard al-hasanah, are Wadi’ah yad Amanah to mean safekeeping and or trust. Scholars disagree over the definition of these two contracts. Some argue that wadiah and amanah behave the same way as Qardh al Hasanah. While some banks have different meanings. Sometimes wadiah and amanah are used interchangeably.
Operation of the Wadi’ah contract
In Islamic banking, Wadiah Current Deposit is a deposit product operated according to Islamic Shari’ah where the depositor will deposit money in an Islamic bank in the form of Amanat or trust and thus expects neither profit nor loss.
The Islamic bank takes permission from the depositor to use the deposit according to Shari’ah principles but guarantees that the amount deposited would be available to depositors whenever they demand. If the Islamic Bank incurs a loss using this deposit then bank will incur all responsibilities. Since depositors do not take any risk of loss, so they cannot demand any profit.
Current Account deposits are based on the principle of Amanah / Wadiah or that of Qard. In the first type, interest-free deposits are held by the banks either in trust (Amanah), or in safe-keeping (Wadiah). Under Amanah arrangement, (wadiah yad al Amanah) the Islamic bank treats the funds as a trust and cannot use these funds for its operations; it does not guarantee the refund of the deposit in case of any damage or loss to the Amanah resulting from circumstances beyond its control.
In Wadiah therefore, the bank is deemed as a keeper and trustee of funds and has the depositors’ permission to use the funds for its operations in a Shariah compliant manner. Deposits under Wadiah (Wadi’ah yad al Dhamanh) take the form of loans from depositors to Islamic banks and the bank guarantees refund of the entire amount of the deposit. While these deposits can be withdrawn at any time, the depositors have no right to any return/profit on such deposits.
In the second type, the client gives the bank authority to use current accounts funds to invest in its operations, in that case, the deposit amount is considered as a non-interest loan by the depositor to the bank. The bank has the obligation to return the credit balance upon demand clients who have no right to receive any profit on their balances. The liability to return a card deposit is not affected by the bank’s solvency or otherwise.
Current account deposits are regarded as trusts or safe-keeping and offer the depositors safety of their money against the bank’s guarantee to return their funds on demand. Similarly, the current account, as operated by conventional banks, is essentially a safekeeping arrangement between the depositors and the bank, which allows the depositors to withdraw their money at any time and permits the bank to use the depositors’ money.
However, deposits in these banks have their principal guaranteed, and they may agree to pay a return on the deposits that is either fixed or floating, but not linked with the outcome of their economic activities. The mobilized funds are freely used by the banks and are totally liable for their repayment even if the banks incur a loss.
In the case of Islamic banks, current account deposits can be categorized as loans. In fact, the bank guarantees the full return of these deposits on demand to the depositors, who in turn, authorize the bank to utilize their funds for any purpose permitted by the Shari’ah at the bank’s own risk. Hence, if there is any profit resulting from the employment of these funds, it accrues to the bank and if there is any loss, it is also borne by the bank.
Loans accounts are not eligible for a share in profits, as they are not subject to risk and there shall be no return or mark up payable on them. Therefore, Islamic banks that have ruled current accounts may be eligible for payment of gifts, but not profits.
Scholarly Arguments on Wadi’ah Agreement/Contract.
Sources differ over whether Wadiah deposits are simply guaranteed by the bank or must be kept unused with 100% reserve, with another contract called Wadia yadd ad daman allowing rights of utilization for the Islamic bank to invest but guaranteeing the return repayment of the whole or part of current account deposit.
Scholars also differ over whether banks can use Amanah accounts for its operations if it obtains the authority of depositor or not. Sources do agree that the trustee of Amanah is not liable for unforeseen mishap. Resulting from circumstances beyond its control or if there has not been a breach of duty on the part of the bank. All in all these words are used interchangeably to refer to the same actions of Current account deposits.