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KembaraXtra–Islamic Finance–Islamic Capital Market – Wadiah (Safekeeping)
• Wadiah is synonymous with the concepts of trust, custody, deposit, and safekeeping in Islamic finance.
• A Wadiah contract is a Shari’ah-compliant arrangement in which a depositor places funds or assets with an Islamic bank solely for the purpose of safekeeping.
• Under this contract, the relationship between the depositor and the bank is based on trust rather than profit generation.
• The bank is responsible for ensuring the safe custody of the depositor’s funds or assets.
• Wadiah contracts are often characterised by the charging of a fee by the bank for providing safekeeping services.
• Wadiah generally exists in two main forms.
• Wadiah yad Amanah refers to deposits made purely on the basis of trust, where the bank guarantees safe custody but does not guarantee the value if loss occurs without negligence.
• Wadiah yad Dhamanah refers to deposits made with a guarantee of safekeeping, where the bank guarantees the return of the deposited amount.
• Wadiah originates from the traditional concept of Amanah, where one person entrusts assets to another solely for protection and security.
• As a financial practice, Wadiah has been widely implemented in Islamic banking systems in countries such as Malaysia and Bangladesh.
• Islamic banks charge an account maintenance fee for Wadiah accounts to cover administrative and operational costs associated with managing funds or assets in safe custody.
• Wadiah bank accounts do not involve profit-and-loss sharing mechanisms.
• These accounts do not generate profit for the depositor.
• The bank guarantees the full return of the deposited amount upon demand or at maturity at its own risk.
• No financial risk is shared by the depositor under a Wadiah arrangement.
• With the approval of the depositor, the bank may utilise or invest the deposited funds.
• Any profit earned from such use of funds belongs to the bank.
• The bank may choose to share part of the profit with depositors if approved by senior management, but such sharing is voluntary and not contractually guaranteed.
• A maintenance fee is applicable for Wadiah accounts to sustain account administration and safekeeping services.
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