What is a Fixed Deposit ?
In Conventional Banking, a Fixed Deposit (FD) is a special type of savings account that pays a certain amount of interest for a specific sum of money invested over a predetermined period of time. Though unlike the generic savings account, a Fixed Deposit pays a significantly higher interest rate, thus allowing account holders the opportunity to earn more interest revenue.
However, in order to benefit from the higher interest rate, holders are required to commit their money for a predetermined specific tenure of time also known as the FD tenure. FD tenures offered by the bank can range from a period of one month to up to 5 years. Suffice to say, if a holder chooses to withdraw his/her money before the lapse of his/her FD tenure (maturity date), then the holder will effectively forfeit any potential interest payments.
Thus, unlike a generic savings account, a FD does not give users the liberty of withdrawing their money at any given time. Hence, as a rule of thumb, a FD investment should only be chosen by people who have the financial stability to tuck away their money for a certain period of time. In terms of interest rate, a FD offers different variations of payment, such as the Step Up, CASA and a combination of the two.
What is a General Investment Account ?
In Islamic Banking, the equivalent of the Fixed Deposit (FD) is known as the General Investment Account. A General Investment Account follows the laws and principles of Islamic Shariah as set by the Qur’an whereas the aforementioned conventional Fixed Deposit (FD) instead operates on banking laws and financial practices as set by the country of origin.
In terms of general practice, a Fixed Deposit (FD) essentially follows the exact same style as that of a General Investment Account. Holders are required to lock in their money for a specific predetermined period of time, though instead of interest, General Investment Account holders instead earn Hibah (gift).
Conventional Fixed Deposit versus Islamic General Investment Account
So, what’s the difference between interest earned from Fixed Deposit and Hibah earned from General Investment Account?
The depositors from
conventional banks receive profit from their investments in the form of
predetermined interest rates irrespective of bank’s performance. This means that if for example, a conventional bank agreed to pay you 3% in interest for a sum of money over a certain period of time, then the bank is obligated to pay you the interest at the end of the tenure (even if the bank makes a total loss on its investments!). For that very reason, a conventional bank is allowed to maximize profits without any general restriction.
In Islamic Banking, on the other hand, bank depositors receive their returns depending solely on the bank’s performance. Unlike Conventional Banks, an Islamic Bank acts as an intermediary between the depositor and the entrepreneur. As such, Islamic banks declare their profits on a monthly basis as part of their risk sharing scheme. Profits are shared on a predetermined profit sharing ratio that is agreed between the depositors and bank while losses are shared equally between all the participated parties. This means that depositor’s profit/loss will vary from month to month directly depending on how the bank performs. While this may be the case, it is probably very unlikely for a bank to under perform and for you to actually make a loss on your deposit.
It should be noted that Islamic Banks are not allowed to maximize profits as earning excessive profit or “Riba” is illegal under Shariah Law. So for example, if you placed the
deposit under a 6-month tenure, there could be as many as 6 different profit rates
throughout the period with the final profit paid upon maturity. Thus any “Interest rates” that you might have seen on Islamic bank websites are actually reference rates based on the performance of the bank in previous periods.
|Operates based on Country’s banking laws and financial practices.||Operates based on Shariah, the Islamic principle.|
|Maximizes profit without any restriction.||Maximizes profit subject to Shariah principle restriction.|
|Profit of pre-determined rate of interest.||Profit based on agreed profit sharing ratio.|
|Not based on Profit and Loss sharing.||Based on Profit and Loss sharing.|
|“riba” is illegal for Muslims.||“halal” for Muslims.|
The Rates between Conventional and Islamic Banks
Conventional Bank Fixed Deposit
|Tenure||Interest Rate (% p.a.)|
The table above represents the interest rates of a Conventional Fixed Deposit Account. As otherwise explained, the rates have a direct correlation with tenure period, i.e. a long tenure period means a higher interest rate. Though it should be noted that Banks have been known to offer tenure periods that are longer than the aforementioned 12 months.
Islamic Bank General Investment Account
|Tenure||Profit Sharing Ratio||Profit Rate (% p.a.)|
|1||48 : 52||3.00|
|3||53 : 47||3.05|
|6||55 : 45||3.10|
|9||57 : 43||3.15|
|12||58 : 42||3.20|
The table above, which represents the rates of a General Investment Account,
is virtually identical with that of a conventional Fixed Deposit with
the exception of an extra column representing the profit sharing ratio
(PSR). The PSR, as the name suggests, is the pre-agreed ratio of profit
sharing between depositors and the bank.