The Rise of Qardh


I wrote earlier in July 2014 about re-branding Wadiah following discussions the industry had with BNM. In that meeting, the key take-away was that there is an intention to re-brand Wadiah into Qard, to which the industry reacted negatively as Wadiah has always been used for short-term deposit structures where discretionary hibah “gifts” are given to depositors. BNM contention was that Wadiah do not meet the practice of the Bank where Wadiah was supposed to be taken as “safe-keeping based on trusteeship” (Wadiah Yad Amanah) or “safe-keeping with guarantee” (Wadiah Yad Dhamanah). The main argument was the under the Wadiah structure, the ownership of the fungible asset remains with the customer and the Bank has not obtained sufficient consent from the customer to utilise their funds, specifically for Wadiah Yad Dhamanah.

Wadiah 2014

The solution for the above conundrum, offered by BNM, is therefore, migrate to Qard-based products, where by virtue of it being a loan from the customer to the Bank, the ownership is transferred to the Bank allowing the Bank to utilise it as it pleases, while guaranteeing the loan amount upon demand (you have to repay back the loan).

As mentioned in my earlier writing, some industry players has clear reservation to convert Wadiah to Qard, seeing that the various guidelines are coming thick and fast to comply with requirements under Investment Accounts. Handling another major change in regulations will just hamper the industry’s growth.

Now, 16 January 2015. The revised Concept Paper for Wadiah was issued. We are given 1 month to respond with our feedback.

Wadiah CP

The biggest shock is that the paper has re-defined Wadiah as only Wadiah Yad Amanah i.e. safe-keeping trusteeship. There was NO mention of the contract that most Banks are currently using for Current Account / Savings Account i.e. Wadiah Yad Dhamanah (safe-keeping with guarantee) which allowed the Banks to utilise the funds for Bank’s activities. What this removal of definition means:

  1. The Bank takes Customer Assets and safely keeps as Wadiah in the Bank until a request to withdraw the Asset is made by the customer. The Bank must return the initial Asset to the customer upon request, with no obligation to provide any other benefits.
  2. The Bank does not have the right to utilise this Asset under Wadiah anymore #.
  3. If the Bank intents to utilise the money for purpose of generating returns, then the rules of Qard must apply i.e. for the Bank to obtain the right to utilise the money, the ownership of the money must be transferred to the Bank i.e. the customer no longer has financial and ownership rights when the funds are utilised by the Bank to generate returns. It is a loan by the customer to the Bank. As owner of the money now, the Bank has full rights to the returns. The Bank has no obligations to the customer except of return of the loan on demand. Discretionary hibah “gift” may be given, but questions may soon come on its validity when it is deemed as “Urf” (customary, no longer discretionary).

# Previously under the rules of Wadiah Yad Dhamanah, if the Bank intends to utilise fungible Assets deposited by customers to Banks such as money, sufficient consent must be obtained before the Bank utilise the money for other purpose (including for generating returns). In reality, this consent is really lacking especially for a daily product such as Current Account or Savings Account, resulting in insufficient rights to use customer’s fund to generate returns. The Banks are also not allowed to agree the returns up-front for the use of the money yet circumvents this by publishing historical rates of returns instead. This “historical return” soon was construed as non-discretionary and deemed as returns that is treated as Urf’. Therefore, Wadiah Yad Dhamanah was totally removed by BNM as a viable Islamic Banking concept, and now to be replaced by Qard (where ownership of funds are wholly transferred to the Bank).

Utilisation of Money

In any circumstances, Banks do utilise the Customers’ money for banking activities, including investments. If we retain Wadiah under this new BNM definition, then it will greatly impair Islamic Banks if we are not able to utilise collected funds for generating profit. The Wadiah moving forward will only apply for Safe Deposit Box services where the Bank can charge a minimal fee for safe-keeping services. Trying to apply it to anything else will be a challenge.

Wadiah 2015

The Qard guidelines needs to come sooner than later. At least the Exposure Draft or the Concept Paper needs to be available for discussion and for Banks to assess the Impact going forward. The impact by IFSA 2013 will be fully felt right after the coming months of June 2015, and this new regulation will further add to the re-branding of Islamic Banking currently taking place in Malaysia.

2 thoughts on “The Rise of Qardh

  1. From maqasid perspective I don’t see any significant different to migrate the existing wadiah to qard. Under both wadiah yad dhomanah and qard bank has to return the money as and when customers demand. If consent would be the issue, bank can simply asks for a blanket consent saying that bank may utilise the money deposited under bank’s custodian and will return it as and when customer request it. As far as I am concern, under the rule of fungible asset, the custodian may return the equivalent assets and not necessary to return exactly the same asset e.g:money with the same serial number. From maqasid perspective, the rule of wadiah is primarily to protect the interest of the depositor in the sense that, the custodian has to return the depositor assets be it fungible or non-fungible as per requested by customer. While in case of non-fungible asset the bank has to return exactly the same asset, for fungible asset it is sufficient for bank to return the equivalent asset. So what the fuss to migrate to al-qard then? My 2 cents

    • Salam Ustaz, good to see you visiting my site. How have you been?

      For me the issue of Wadiah or Qard is not on the fungible asset, but on what is written into the Qard guidelines itself. I have not written in this post what the Qard concept paper is going to look like as it has not been issued yet, but as the industry, we are aware of what the intended contents are going to be.

      The main item would be the behaviour of Qard is that as a loan, any returns must be discretionary. No returns can be implied upfront, and more significantly, banks will no longer be allowed to display historical rates as well, to drive down the point of the “discretionary returns” to customers.

      With the behaviour of Mudharabah as Investment Account imposing various compliance requirements and operational challenges, many banks have opted to migrate their customers account to Wadiah as the main fund raising product. However with now the expected Qard concept paper, Wadiah/Qard will be a difficult proposition for bank to raise deposits to fund financing.

      How would banks raise deposits? Under the investment account, most of the funds may flow out of the bank into safe government investment assets and to channel it back to banks own portfolio requires massive disclosures and active portfolio management, which may not sit well with customers immediately. And under Qard, nothing is indicated therefore may not be attractive to depositors. How then do we raise deposits? This is the main question we have now, and something we have to solve.

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