MOBILIZATION OF CUSTOMER DEPOSITS AT ISLAMIC BANKS
I. Introduction
This paper will deal with one of the most important axes of development of the Islamic bank, (BI) that of the mobilization of resources through the collection of deposits from customers.
The collection of deposits is, in fact, one of the pillars of the activity of banking in general and retail banking in particular. For the Islamic bank, the resources collected directly from customers constitute the nerve center of its survival but also the most formidable source of risk. This is due, as we will see, to several reasons which essentially revolve around the commitment of Islamic banks with regard to compliance with the norms and precepts of the Sharia.
It is for this reason that we are going to deal with the problem of the collection of deposits in Islamic banks from three different but convergent angles, namely: the principles and the backing of the offer of the Islamic bank in terms of collection deposits, the challenges led by the BI to succeed in this offer and finally the methods of risk management of these deposits in relation to the specificities of Islamic finance and its obligations.
II. The financial resources of conventional banks
The management of financial resources has always been one of the major concerns of the banking system, starting from their mobilization until the commitment of their restitution while passing through the process of their reinjection into the economy in the form of credit, placement and investment.
In the conventional banking system, thanks to an accumulation of experience, a perpetual effort of innovation and openness to various development attempts, the mobilization of resources is in turn carried out through a large number of mechanisms. and according to different forms of intervention.
The resources of these banks come from three main sources. On the one hand, these resources are made up of deposits from savers and bank account holders, individuals or companies.
On the other hand, these resources include the loans that the banks contract on the financial markets, from other credit institutions (interbank market), or from the central bank.
These resources also come from income generated by their own investments in financial futures, investment fund shares, shares, bonds or Treasury bills.
In addition, conventional banks also have the possibility of strengthening their resources by issuing securities, such as commercial paper or bonds, or even by temporarily lending bills (repo) in their possession to other institutions in exchange liquidity and by resorting to the securitization of their credit portfolios.
However, the multiplicity and diversification of alternatives in terms of mobilization of resources by the conventional banking sector should not hide the risks that weigh on these banks in terms of management of these resources. These risks are multiple and originate in all of the bank’s areas and activities and the actions it takes with others (credit, collection, governance, outsourcing, human resources management, cash management, etc. ).
The concerns with regard to these various risks lie in fact in their impact on the profitability of the bank and on its financial stability. Poor management of the risks associated with deposits (liquidity risk, credit risk, risk of fraud, etc.) can threaten the very existence of the bank and destabilize the entire system in extreme cases.
Our analysis aims to show that Islamic banks, whose alternatives in terms of mobilizing financial resources are rather limited, are in turn subject to other types of challenges and obligations in terms of managing their resources, in particular those collected directly from traditional customers. Islamic banks are also concerned by all the preventive measures imposed on the banking community in terms of risk management by the various national and international supervisory bodies.
III. The offer of Islamic banks to mobilize financial resources
Just like the conventional bank, the Islamic bank needs to mobilize the financial resources which allow it to carry out its mission of financier and investor and to assume its role of economic and social developer devolved to the financial establishments of a general way.
However, the offer of Islamic banks in terms of resource mobilization differs from that of conventional banks. These are differences in design, treatment and obligations that originate in the principles, norms and fundamentals of Islamic Shariah
These are essentially five major lessons that govern, guide and limit the intervention of Islamic banks both in terms of resource mobilization and the allocation of financial resources:
- Prohibition of interest
- Prohibition of uncertainty and speculation
- Prohibition of illicit investments
- Principle of sharing Profits and Losses
- Backing to a tangible asset (Asset Backing)
In this respect, it is important to note that these requirements are not imposed on the Islamic bank solely because of its own commitment to comply with Sharaic precepts, but also because the vast majority of its customers seek to respect and to enforce these requirements by entering into a relationship with it.
The Islamic bank will thus strive to design an offer based on instruments and mechanisms that take into consideration the above-mentioned teachings and take into account the expectations of its customers.
In terms of resource mobilization, three basic instruments are behind the design of deposit products. They define their natures and their management rules. These are:
- The Mucharaka
- The Mudharaba
- The KardhHacen (interest-free credit)
Thus, in order to perfect the two teachings relating to the prohibition of Riba and the Sharing of profits and losses, Islamic banks are based on the foundations of the Mudharaba and the Mucharaka to design the main Interest-bearing deposits products offered by Islamic banks, namely:
- Savings accounts (Tawfir)
- Assigned and unassigned participating accounts
- The Sukuk.
The Mucharaka governs the relationship between depositors and shareholders as “associate” lenders in the investment and financing operations carried out by the bank. The principles of the Mucharaka intervene to define the priorities in terms of the allocation of funds in the process of investment and financing, in the development of the rules of sharing of profits and the definition of the obligations of each other. in case of loss.
The Mudharaba administers the relationship between the bank and the holders of remunerated accounts (Participatory savings, allocated and unallocated participating accounts), also known as “PSIA, Profit-Sharing Investment Accounts”. It specifies the remuneration of the bank responsible for managing the funds made available to it as “Mudharib” and protects the interests of the client as “Rab Al-Mel”
Demand deposit accounts are governed by the principles of “Kardh Hacen” which embody the fundamental teaching of the prohibition of Riba. Indeed, the precepts of Shariaa prohibit any kind of advantage derived by the borrower by the simple fact of granting a credit of money. The same precepts require that the money credit be returned in principal on simple request or at agreed deadlines.
Demand deposits are thus considered as “KardhHacen” credits granted by depositors to the Islamic bank. The latter has the obligation to return the credit on simple request while the customer for his part refrains from claiming advantages, whatever their nature on these credits. Considering that any advantage drawn on a credit of money is a Riba, the charaic committees of Islamic banks go so far as to prohibit the end-of-year gifts usually granted by banks to holders of current accounts. The services provided by the bank on sight deposit accounts must be remunerated and it is preferable to decline the services at zero rate.
The sukuk, on the other hand, presents an increasingly popular alternative resource with Islamic banks. It is characterized by a longer maturity and much more granularity (diversification) compared to other deposit products. This resource, which is based according to its nature (Sukuk Murabaha, Sukuk Mudharaba, Sukuk Ijara, etc.) on all of the five basic teachings, is still in the integration phase.
That being so, and to take only the case of Tunisian Islamic banks as an example, the analysis of the figures produced by the three Islamic banks in the place, shows us that the share of the PSIAs in the mass of financial resources was in average of 65% during the three years 2018; 2019;2020.
This analysis also tells us that the mobilization of deposits by the Islamic branch of the Tunisian banking system is evolving better than that of the conventional branch. Indeed, the share of deposits from Islamic banks in all deposits in the sector was successively 6% in 2018; 7% in 2019 and around 8% in 2020. These findings are illustrated by the following graphs (source: BCT-Rapport Supervision Banking 2020).
IV. The challenges of Islamic banks in collecting deposits
Islamic banking faces an array of resource mobilization constraints. It is called upon to achieve the balance between its vital needs to drain deposits and the sometimes blocking and limiting requirements of different kinds.
Indeed, the majority of the alternatives offered in this area to the conventional banking system are practically inaccessible to Islamic banks due to incompatibility with the five teachings mentioned above.
On the other hand, innovative resource collection products compatible with Sharaic standards and precepts are often subject to technical and regulatory constraints that hinder their integration with donors, both private and institutional.
Thus, the Islamic bank is called upon to meet several challenges among which we can mention in a non-exhaustive way:
- The design of information systems adapted to the specificities of sight deposit accounts (no value date, prohibition of debit positions, etc.)
- The development of remunerated deposit management software (Profit Management system)
- Adaptation to regulatory constraints that do not take into account the specificities of Islamic products and subject them to the same rules as conventional products: specific provisions such as Investment Risk Reserves (IRR), Profit Equalization Reserves (PER) which are not taken into account in the determination of the tax base and profits accruing to depositors which are treated in the same way as bank interest…
- Recourse to the practically illicit interbank market
- Remuneration by the central bank of banks’ regulatory deposits which does not take into account the specificities of Islamic banks
- The lack of specific tools allowing Islamic banks to access financial assistance from the central bank.
- The reinjection of resources into the economy by respecting the principle of backing to a tangible asset or Asset Backing
- Donor education and communication effort on deposit products specific to Islamic banks.
- The management of market risks and the yield of interest-bearing deposits
V. Participatory account management (PSIA)
One of the cardinal principles of Islamic finance lies in the 3Ps (profit and loss sharing), which gave rise to a liability product, Profit-Sharing Investment Accounts (PSIA). ) known commercially as participatory accounts.
These deposits form one of the pillars in terms of resources and constitute, in the absence of a dynamic and efficient Islamic interbank market, a major support for the financial stability of Islamic banking.
However, and despite its importance, this class of liability constitutes for the Islamic bank a source of serious risk which can weigh heavily on the sustainability of the bank in the event of late identification and inappropriate management;
PSIA and liquidity risk:
Depositors therefore share in the Islamic banking returns offered by these PSIAs. If returns are insufficient, the bank is (rationally) subject to a risk of “bank run”, which is nothing less than the materialization of a liquidity risk.
PSIA and translated business risk
This is the risk that an insufficient return on the assets of the Islamic bank translates into a liquidity crisis, a consequence of the dissatisfaction of depositors and which consequently can impact the profitability of the bank which is in the obligation to sacrifice part of its income to stabilize the yield of the PSIAs
PSIA and Asset Return Risks
Islamic banks do not operate in a closed economy and must maintain a competitive level of deposit remuneration compared to that of the conventional banking sector in order to prevent the migration of deposits to conventional banks.
In the same vein and to guarantee a suitable level of competitiveness of investment and financing operations as well as for commercial reasons specific to Islamic finance, Islamic banks use reference rates such as LIBOR , EURIBOR, TMM to determine the short and medium term financing rates granted to clients in the form of Murabaha, Ijara, Salem or Istissnaa (sales instruments).
Moreover, the effects of changes in interest rates can be transmitted indirectly to Islamic banks through these reference rates. This risk becomes even more serious in the event of changes in reference rates (LIBOR and others), because Islamic banks will be obliged to pay more profits to future depositors while realizing less gains on the uses of long-term funds.
Participatory Deposit Risk Mitigation Measures (PSIA)
To better understand the scope and impact of the above-mentioned risk mitigation measures, we first set out the terms and conditions for the distribution of profits between the bank, shareholders and holders of PSIA accounts:
In the practice of Islamic banks, the contract for PSIA accounts generally includes clauses relating to these types of risk and how to remedy them or simply mitigate their effects.
To build customer loyalty of participative deposits, the Islamic bank adopts three techniques to fight against the translated commercial risk and the risk of return.
The objective behind these measures is to improve the return on investment of participatory deposits so as to guarantee a more attractive return compared to what conventional banks offer.