By Muhammad Ali Shaikh
Abstract
Deposit taking is an essential component of the financial intermediation process. The deposits of Islamic banks have a different legal and contractual status as compared to the deposits of conventional banks. The relationship between the bank and depositors is that of a fund manager and investors and actual profits earned by deploying these funds are shared between the fund manager (bank) and investors (depositors) instead of the usual debtor and creditor relationship in case of conventional banks. The risk taken by the depositors is different in nature than the risk taken by the counterpart conventional depositors. The paper focuses on the legal structure and corresponding changes required in financial reporting and other issues such as pool management and determination of profits and distribution to depositors, the role of bank management, regulator and external audit in the process and also the attitudinal change which is required to implement the system in letter and spirit.
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