Treasury Pressure: A Conventional Bond, a Profit Top-Up and a Guaranteed Return Request
An Islamic bank holds USD 180 million of deposits, of which 55% are demand (current) accounts and 45% are unrestricted mudarabah savings accounts. Sixty percent of its liquid assets sit in three-month commodity murabaha placements with two other Islamic banks; the remainder is cash. The treasury head proposes buying a five-year conventional government bond yielding 7.2% because local sukuk issuance is thin and the bank's return on assets has fallen. He also proposes paying mudarabah savers a 'target' 8% by topping up from the bank's own funds whenever the actual profit share falls short, to stop deposit flight. A large corporate depositor has asked for a written guarantee of 9% on a new USD 10 million mudarabah placement. The Shariah Supervisory Board must respond before the asset-liability committee meets.
1. Evaluate the bond purchase, the profit top-up and the requested guarantee, citing the governing contracts.
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Conventional bond - not permissible. A conventional bond is a loan paying interest; acquiring it for the bank's own account places the balance sheet, including depositors' funds, in an interest-bearing instrument. 'Sukuk are scarce' is a commercial constraint, not a Shariah justification. Permissible alternatives: sukuk (ijara, wakala, mudarabah), Islamic interbank placements, Islamic money-market funds and a central bank Islamic liquidity facility.
Top-up to 8% - not permissible. In an unrestricted mudarabah the bank is the mudarib and the depositors are the capital providers. Profit is shared by an agreed ratio; losses fall on the capital unless the bank breached its fiduciary duties. Topping up returns from the bank's own funds converts a variable return into a guaranteed one, shifts risk back to the bank and is riba in substance, whatever the label.
Written 9% guarantee - not permissible. A mudarabah cannot carry a capital or return guarantee for one investor without corrupting the structure for all. If the client needs certainty, offer a current account or a trade-based deposit structure whose mechanics genuinely produce that result, or a wakala bil istithmar with a disclosed expected profit rate and no guarantee.
2. Assess the liquidity profile and concentration in commodity murabaha, and propose alternatives.
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The profile has three weaknesses:
- Contract character. A commodity murabaha receivable is a debt. It cannot be traded at other than par, so it cannot be sold to raise cash; it is a hold-to-maturity liquidity buffer, not a tradable one.
- Concentration. Sixty percent of liquid assets with only two counterparties creates concentrated credit risk and correlated funding risk. If either counterparty falters, the bank's liquidity and its depositors' returns are hit together.
- Maturity mismatch. Three-month placements fund a book that is 55% demand deposits, meaning the bank depends on rolling placements to meet withdrawals.
Alternatives to build a laddered buffer:
- Short-dated sukuk across several issuers and maturities.
- Islamic money-market funds with daily or weekly redemption.
- Commodity murabaha spread across more counterparties and shorter tenors, with a cap per counterparty.
- A committed Islamic central bank facility or commodity murabaha line for stress.
- Ensure each tawarruq is genuine: real ownership, real risk, no same-day organised sale back to the same broker.
3. How should the bank handle the corporate depositor without breaching Shariah constraints?
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The bank should decline the written guarantee and explain why, then offer compliant alternatives.
Refusal. Issue a written response stating that a guaranteed return on a mudarabah is not permitted and that the bank cannot issue the letter. Refusing in writing protects both parties and records the advice.
Alternatives to present:
- Wakala bil istithmar: the bank acts as agent for an expected profit rate, with a performance incentive above a benchmark; capital is not guaranteed and the expected rate is explicitly not a promise.
- Mudarabah: disclose the historical profit distribution, the profit-sharing ratio and the loss-bearing rule, with a scenario showing a loss.
- Current account or trade-based deposit: if the treasurer genuinely needs certainty, the right product is one whose mechanics produce that certainty, not a label on a mudarabah.
Process: document the client's objectives, the suitability discussion and the client's acknowledgement. Escalate to compliance if the client insists on the guarantee, because pressure to book the deposit must not override the product's legal character.