WHEN depositors put their monies in wadiah deposit or savings accounts held at Islamic financial institutions, it may be assumed that their purpose in taking such a decision is safe custody rather than investment.
As owners of the money so deposited, their position according to Islamic law is that of real owners; they are not creditors to the institutions as would be the case if they were depositors with conventional financial institutions.
In the above context, Islamic financial institutions are actually trustees of the money deposited and not debtors as envisaged under a conventional framework.
Therefore to talk of monies kept by Islamic financial institutions as being liabilities in their balance sheet is rather confusing if rules relating to Islamic deposits were to be applied.
Firstly, such monies do not belong to the institutions concerned since their status according to Islamic law is merely as trustees. Ownership of the monies still belongs to the depositors.
Hence to consider them assets belonging to an institution is both a misstatement of fact and law. To classify them as being liabilities is also inaccurate since these institutions do not owe the depositors as would conventional institutions.
In the conventional sense, however, depositors’ monies are classified as liabilities of the institutions as opposed to assets, which represent loans given to borrowers. This difference in treatment of Islamic deposits and their conventional counterpart gives rise to a different legal implication.
As far as wadiah deposits are concerned, the original rule in Islamic law is that liability of a trustee is fault-based. The trustee is only liable for loss if it is proven that it is guilty of wrongdoing or negligence.
In the absence of such factors, the owner-depositors shall bear the loss.
This is contrary to the position of a financial institution in the conventional system when liability for loss is one that is based on strict liability since the institution is under a duty at all times to refund the monies on demand or at specific times in reference to time deposits.
With reference to conventional institutions, a failure to affect withdrawal brings about the breach of debtor and creditor duties in the context of the bank-customer relationship.
Another important implication is that of returns. To whom do they belong? In the conventional sense, the institution is free to use the funds as it sees fit since the monies are in its possession by virtue of the creditor-debtor relationship.
The only obligation on its part relates to the need to pay interest as agreed or contracted to. Interest in this context has become one of the rights of the depositors exercisable in law.
For Islamic depositors, their status is entirely different. In the absence of permission to use, all returns legally belong to them since they are the rightful owners of the funds.
According to Islamic law, if any loss should occur in relation to the fund that was not the result of wrongdoing or negligence of the trustee/bank, such loss is to be borne by the depositors and not by the trustee/bank.
In return, and based on the well-known principle of al-gunm bi’l gurmi (risk-for return), the depositors are entitled to the returns since they bear the ownership risk.
But when permission is not sought by the financial institutions or trustees before using the fund, Muslim jurists differ in their opinions as to whom the returns belong to.
However, almost all agree that such an action by the parties constitutes a breach of wadiah rule. This condition may lead them to be held liable for any loss that may be caused even if such a loss is triggered by factors beyond the trustees’ control i.e. an act of God.
Jurists differ in their opinions with regard to who is entitled to any returns that may have accumulated by the said unauthorised use of the wadiah fund.
