Wadiah Contract and its Application in Islamic Banking Practices

Compiled by:

Nabil Bello

Contents• Introduction• Meaning of Wadiah • Sources of Ruling on Wadiah• Pillars of Wadiah• Types of Wadiah• Conditions of Wadiah• Issues on Amanah and Dhaman • Applications of Wadiah in Contemporary Islamic

Banking Practices• Conclusion

Literal Meaning• The term wadi’ah is derived from the verb

formودع “wada’a”. • Literally it means to keep, lodge, store, entrust,

leave, or deposit. • In simple terms it means “something placed under

somebody who is not the owner to keep.” • It also means to abandon or to forsake. Allah says:

�ى� �ك� و�م�ا ق�ل ب م�ا و�د�ع�ك� ر�“Thy Lord has not forsaken thee, nor is He

displeased.”

Technical Meaning• Technically it refers to the act of keeping or the property

that is being kept.• The Hanafis defined it as:

تسليط الغير على حفظ ماله صريحا أو داللة

“Authorizing someone to keep his wealth explicitly or implicitly.”

• According to Malikis and Shafi’is:

توكيل فى حفظ مملوك، أو محترم مخصوص، على وجه مخصوص

“Representation in keeping possession or respectable private good in a specific way.”

Sources of Ruling• Not mentioned explicitly in the Qur’an but the

concept can be observed in the following verses:

�م�ن� ت �ذ�ى ل �ؤ�د� ي ا ف� � �م ب ض�ك � �م�ن� ب � أ ؤ�ف�إ ٱ ٱ ؤ� �� ض ؤ� ؤ ؤ�ه�  ب �ه� ر� لل �ق� �ت ي �ه�  و� �ت �ن م�ـ

� �أ ۥ‌ ٱ ؤ� ۥ“..then if one of you entrust the other, let the one who

is entrusted discharge his trust (faithfully), and let him be afraid of Allâh..”

�ه�اإ ل� �ى�* أ �ل �ت� إ �ـ �ن م�ـ

� أ - �ؤ�د�وا �ن ت � أ ك �م�ر� �ه� ي لل ؤ�ن� ؤ� ٱ ؤ� �� ؤ ٱ“Verily! Allâh commands that you should render back

the trusts to those, to whom they are due..”

Sources of Ruling• In the hadith the Prophet (SAWS) says:

أد األمانة إلى من ائتمنك وال تخن ))((من خانك

“Discharge the trust to the person who entrust it to you, and do not betray the one who betrays you”.

• The contract of wadiah has been approved by the consensus of scholars of all times on its permissibility since it is necessary by the people in general to keep their properties in the hands of other people.

Pillars• Hanafi school: Offer and acceptance. • When the owner says to the keeper/trustee, ‘keep or

save this for me, or take this thing and keep it under your trust’ or any other similar statement and the second party accepts the offer.

• The majority Jamhur of the scholars:– The depositor(المودع) who is the owner of the property– The keeper (الوديع) who is entrusted or the keeper– The subject matter ( المودع (الشىء– Offer and acceptance ( والقبول (اإليجاب

Types• Wadi‘ah Yad al-Amanah (Act of Trust):

– This simply means keeping with trust. – No compensation in case of loss or damage– No reward for keeping– No right at all to use the property– This type of wadi’ah is also called Amanah.

The Apostle of Allah (saws) said: “he who accepts a trust property (as a trustee) has no liability.”

• Wadi‘ah Yad al-Damanah (Safekeeping with Guarantee): – Responsibility is in form of guarantee. – Allowed to utilize the deposits– Must replace or compensate whatever gets lost– He is also expected to give the deposits whenever they are requested by the

owners– According to many scholars, this category is most suitably termed as qard – loan.

Some do not even consider this type in Islamic law.

Conditions• The general conditions are that:– The contracting parties should all be sane, meaning that they

must not be mad people or small children who cannot comprehend things.

– A child can as well be the keeper if he is capable of doing so. – The person must not be restricted (al-mahjur) because he is

not allowed to use his money traditionally. – The property must be a property that can be handed over.

For instance, a bird in the sky or a property in the sea cannot be given as wadiah. Even when it is done under such situation there is no guarantee.

Issues on Amanah and Dhaman• The original ruling in the Shariah is that wadiah is that it is a

– trust (amanah)– righteous act (qurbah) which is encouraged and rewarded– no agreement of guarantee because it is a pure amanah– issue of replacement/warranty should follow a weakness from the

keeper or custodian. This is in accordance to the saying of the Prophet (SAWS):

(( ضمان المغل غير المستودع على ((ليس“There is no compensation on the keeper who is not negligent.”

(( مؤتمن على ضمان ((ال“There is no compensation on the trusted person”

Issues on Amanah and Dhaman• How and when does amanah changes to dhaman? Below are

some of these situations:– Where the custodian - wadi’ forfeits from keeping the

wadiah.– When the wadi’ gives the property to a third party to keep

the property without any necessity. – Using the property– Traveling with the property– Denying the wadiah contract– Putting the property together with another property– Refusing to follow the instructions of the owner

Applications of Wadiah Islamic Banking

Customer(Wadi’ – Owner)

Bank (Mudi’ - Keeper)

Savings Account

Current Account

Savings Account• Meant to serve the needs of customer surplus• Also for customers to get a return from these deposits• The principal amount of the deposit is guaranteed• The customer can withdraw his amount at any given time• The customer permits the bank to use the deposits in its

investments• Returns may be given to the customer in the form of hibah –

gift, which is at the discretion of the bank • Such deposits are used in short-terms projects, which are

normally risk free and the returns are relatively lower• Some banks treat the savings account in the form of mudarabah

investment accounts where less conditions will be attached to the contract.

Savings Account• Bank Islam Malaysia Berhad describes savings deposits in the

following way:“The Bank accepts deposits from its customers looking for safe custody of their funds and degree of convenience in their use together with the principle of Al- Wadi‘ah. The bank requests permission to use these funds so long as these funds remain with the bank. The depositors can withdraw the balance at any time they so desire and the Bank guarantees the refund of all such balances. All the profits generated by the Bank from the use of such funds belong to the portion of the Bank. However, in contrast with the current account, the Bank may, at its absolute discretion, reward the customers by returning a portion of the profits generated from the use of their funds from time to time.”

Savings AccountBank Islam - Wadiah Savings Account-i

• Minimum opening: RM10.00• Minimum balance: RM1.00• Age requirement: Open to all, 12 years and above• Types of Account: Individual Account (12 years old and above)

Trust , Entrust account (for children under 12 years old opened with an individual adult),

Joint Account, External, Association, Societies• Contract: Wadiah • Benefits: Token (hibah), which is given every month

based on Bank’s discretion, Free savings passbook, Bankcard facilities, Salary crediting &

sweeping facility, etc.

Current Account• The Islamic Bank mobilizes customers· to deposit into its Current

Account package under the principles of Al-Wadi·ahYad Dhamanah (guaranteed custody).

• The bank guarantees the full return of these deposits on demand

• The depositor is not paid any share of the profit or any other return in any form.

• Depositors authorize the bank to utilize their funds at the bank’s own risk

• Usually account holders have a right to draw cheques on their accounts.

Current AccountBank Islam - Wadiah Current Account-i

• Minimum opening: Minimum RM500.00 initial deposit for individual account and RM1,000.00 for non-individual account. Introducer is also required.

• Age requirement: Open to all, aged 18 and above• Types of Account: Individual Account, Joint Account, Partnership

Account, Government Account, Association Account, Private Company Account and

Company Account• Contract: Wadiah• Benefits: Token (hibah), given every month based on

Bank’s discretion, Free cheque book holder, Bankcard facility (for Individual / Joint account

& Private Company Account Only), Salary crediting & sweeping facility etc

Conclusion• In contemporary Islamic banking, wadi’ah yad dhaman is the

most widely used i.e. safekeeping with guarantee since the resources are put together with the bank’s investment.

• As it has been discussed above, the traditions of the Prophet (SAWS) have indicated that – wadiah is purely a form of assistance being rendered to the owner. – the trustee is not allowed to use the property– if he uses it, it is no longer wadiah, but qard or ariyyah, that is loan or

lending– no return is expected as the agreement is not for partnership rather it is

deposit in trust

Conclusion• In the modern practice of Islamic banking all the above

mentioned issues are present. In the original wadi‘ah, if the trustee discharges his duty as prescribed under Islamic law is not liable for any loss or damages to the deposited item.

• On this note the modern application wadiah is more likely to be considered as loan given to the bank and if that should be the case, the principles involved in the qard should be strictly applied.