Current account

Current accounts are opened as demand accounts that are designed for everyday transactions such as deposits, withdrawals, and payments. They can be opened in local or foreign currencies. Banks normally do not charge any account maintenance fee for current accounts. 

• Conventional

- No specific underlying mode is used in Current account. 

- Banks can use deposited funds in lending and interest bearing financing, and other purposes regardless of Sharia prohibition. 

- Typically, current accounts don't earn interest on the balance. However, some banks offer interest-bearing current accounts, although they're less common and often require certain conditions, like maintaining a minimum balance or having a linked savings account. 

- Banks may offer overdraft facilities, allowing users to exceed their account balance. The overdraft limit is typically one monthly income, but penalties for non-repayment within a month are steep. Unlike regular loans, any funds credited to the current account are automatically used to repay the overdraft debt. 

• Islamic

- Islamic Current Account is based on Qard or Wadia contracts. 

    Qard contract is an interest-free loan. 

    In the legal sense, 'wadia' signifies an item entrusted to the care of another; in other terms, it represents a contract of safe custody. In both contracts, Islamic banks are responsible for the deposits and must repay the entire deposited amount upon demand, regardless of  circumstances.

- Islamic banks can use these funds for financing, investments and other purposes that are in line with Sharia principles. The bank retains any revenue generated from investing the funds deposited in the current accounts, while also assuming full responsibility for any incurred losses. 

- Customers are not eligible to receive any form of remuneration and do not bear any risks regarding the bank's investments. This means that customers' current accounts do not accrue interest or profit.  

- Islamic current accounts do not offer overdraft facilities, meaning customers cannot exceed their account balance. 

Saving account

A savings account is a deposit account designed specifically to meet the needs and requirements of customers, fulfilling their precautionary motives of holding money for short to medium-term savings to meet some of their transactional and investment needs as relevant. It offers flexibility in deposit and withdrawal amounts and transactions. In conventional banks, it provides lower interest rates compared to term deposits and is low-risk. In Islamic banks, customers' deposits go into an investment pool invested in various projects. The actual profits received are calculated and shared monthly normally at the ratio of the Expected Profit Rate (EPR) advertised by the bank.

• Conventional

- Savings accounts in conventional banks operate on a loan principle, wherein conventional banks pay interest earned to depositors as returns. 

• Islamic

- Savings accounts in Islamic banks normally are structured using the Wakala contract. 

- Legally, the term "Wakala" entails the delegation of one person (the principal) to another (the agent), allowing the latter to act on behalf of the former in a known and permissible transaction. In this arrangement, the bank acting as the agent (known as the wakil) manages the deposited funds and preserves them in exchange for a fee for managing the savings account. The fee referred to as the Wakala fee does not depend on investment performance of the bank. It is fixed, typically symbolic, and defined and agreed upon before the commencement of the Wakala arrangements, along with the deposit amount, tenor, and EPR.

The deposited funds are invested in an investment pool, which is then allocated to various projects. The profit of the Wakala arrangement is based on the actual performance of the underlying pool, typically capped at EPR. If the actual profit rate of the investment pool equals or exceeds the agreed EPR, the customer receives the expected profit, while the bank retains any profit amount exceeding the expected profit as an incentive for good performance. If the actual profit rate is lower than the agreed EPR, the client receives the actual profit, which may be less than the expected profit, while the bank does not receive anything.

Usually, the bank chooses to top up the actual profit to reach the expected profit, which is an optional act and not a contractual obligation. It is more a gesture to retain depositors and customers.

If the agreement is terminated early, the Islamic bank will return the deposited funds in the savings account, along with any accrued profit up to the termination date that remains unpaid.

Deposit amounts cannot be unconditionally guaranteed by Islamic banks, and any losses incurred are borne by the customers based on their respective investment ratios. However, if a loss is incurred due to the Islamic bank's gross negligence, willful default, fraud, misconduct, or breach of the agreed Wakala terms and conditions, then the bank bears any losses associated with it. 

Term deposit and Islamic investment accounts

The term deposit in conventional banks refers to a type of savings product. Customers deposit a lump sum of money for a fixed period, typically ranging from a few months to several years, at a predetermined interest rate. During the term of the deposit, the funds are inaccessible without incurring penalties or forfeiting some of the interest earned. Term deposits are often favored by individuals or businesses seeking higher interest rates and are willing to commit their funds for a specific period. They are considered low-risk investments, especially when insured, and offer a predictable return on investment.

Islamic investment accounts serve as an alternative to traditional fixed time deposits. With these accounts, customers can deposit predetermined amounts with the bank for durations ranging from a few months to several years.

• Conventional

- Term deposits in conventional banks operate on a loan principle, wherein conventional banks pay interest earned to depositors as returns.  

• Islamic

- Islamic investment accounts in Islamic banks are based on the concept of Mudaraba.

Mudaraba is a profit-sharing partnership where one party provides labor (services), and the other party provides capital (rab-ul-mal). In Islamic banks, the bank acts as the mudarib, offering its services and expertise in exchange for a share of the profit generated by the investment project. This profit is earned against the capital (deposit) provided by the customer, who acts as the rab-al mal. The profit - sharing ratio is defined and agreed upon before the commencement of the Mudaraba arrangements.

The deposited funds are then invested in an investment pool, which is allocated to various projects. When customers transfer funds into the investment pool, it is considered the purchase of investment shares, while withdrawals, encashments, or premature encashments are deemed the sale of investment shares.

Profits generated from the investment pool are shared between the bank and clients according to the agreed profit-sharing ratio and weightages. Any losses incurred are borne by the customers based on their respective investment ratios unless a loss is incurred due to the Islamic bank's gross negligence, willful default, fraud, misconduct, or breach of the agreed Mudaraba terms and conditions, then the bank bears any losses associated with it. 

Deposit amounts cannot be unconditionally guaranteed by Islamic banks. Normally, customers have no access to their deposited funds until the end of the agreed term, but they do have the flexibility to withdraw profits at designated intervals. Early termination of an Investment account may result in incurring penalties and forfeiting some of the profit earned.