Understanding Wadi’ah in Islamic Banking: Concept and Distinctions from Conventional Accounts #
Original Question: The core idea of Islamic Banking involves wadi’ah especially in the savings and current accounts (not investment account where mudarabah and/or musharakah contracts are utilised). So what is wadi’ah and how it is different from the conventional savings and current account?
The word wad’iah comes from the verb wada’a, which means to leave, lodge, or deposit. Legally, Hanafi scholars define it as authorising someone to keep the owner’s property, either explicitly or implicitly. In contrast, according to Shafi’i and Maliki scholars, wadi’ah is a representation of holding respectable private goods in a specific manner. The Hanbali scholars add the element of charity to their definition of wadi’ah as representation to keep (another’s property), stating that it is done as a benevolent act.
In summary, wadi’ah refers to a contract whereby the owner or his representative entrusts another party with custody or safekeeping of an asset. And in Islamic banking, wadi’ah refers to the acceptance of sums of money for safekeeping within a Shariah-compliant framework.
In Islam, wadi’ah (deposit) is among the permissible contracts and dealings. Allah (SWT) says:
If you trust one another, then let him who is trusted fulfil his trust, and let him be conscious of God, his Sustainer (Quran, 2:283).
Indeed, Allah commands you to render trust to whom they are due and when you judge between people, to judge with justice (Quran, 4:58).
The meaning of the above verses was reiterated by the Prophet (PBUH) in his saying: “and perform the trust (amanah) to those who entrusted you and do not betray those who betrayed you” (Sunan Ab Dawud, hadith no. 3534).
In principle, wadi’ah can be classified into two types:
Wadi’ah yad amanah (safe custody based on trust). This type of wadiah refers to an amanah-based custodianship (trust). As a result, the contract is regarded as a charitable and benevolent act. The custodian is in charge of the asset’s security. When the depositor requests it, the custodian must return the asset. However, because it is an amanah act, the custodian is not liable for any loss or damage to the asset unless the loss or damage results from misconduct, negligence, or a breach of specified terms.
Wadi’ah yad dhamanah (guaranteed custody). The contract is considered yad dhamanah if the custodian guarantees the return of the property entrusted to him and also agrees to return the item upon request. This wadi’ah combines two contracts: safe-keeping (wadi’ah) and guarantee (dhaman). The jurists cited examples of when the custodian would be considered a dhamin (guarantor). For example, if the custodian takes from the trust and later returns it or uses it for business, or if he deliberately destroys the property or mixes it with another property that cannot be distinguished, the trustee’s hand would then be considered yad dhamanah.
In our current context, wadiah yad dhaman (guaranteed custody) is commonly used as the structure for various deposit products, such as savings and current accounts. The Islamic bank, as custodian, will use depositors’ deposits to provide financing or to invest in various investment portfolios, in which all the profits generated belong to the Islamic bank. However, an Islamic bank may, at its discretion, give hibah (monetary gift) to depositors, provided that the hibah is not promised upfront and is not a customary practise.
In contrast to the Islamic bank’s custodian relationship with the depositors, the bank’s relationship with the depositors for conventional deposit products is one of debtor and creditor, with the depositors (as creditors) entitled to a fixed-interest rate from the conventional banks (as debtors).
As Muslims, we are enjoined to stay away from interest-based dealings, as how it is mentioned in surah Ali ‘Imran, verse 130: “O you who believe, do not consume the amounts acquired through riba (interest), multiplying it many times over. And be mindful of Allah, so you may prosper.”
