Liability and fee Products in Islamic SACCOs

1. Introduction

Front Office Service Activity (FOSA) is the deposit side of SACCOs, where members deposit their money for banking services. These deposits are collected through several Islamic Liability based products such as current accounts, saving accounts, transactional accounts among many others, by use of various Shari’ah contracts like; Qardh, Tawarruq (Commodity Murabaha), Mudharaba, Musharakah and Ijara. SACCOs also render a number of fee (service) based products such as funds transfer, debit and credit cards, ATMs services, investment management and advice, foreign exchange etc.

2. Liability products

2.1 Current accounts

Islamic SACCOs mobilize deposits from account holders of current accounts based on the principle of Wadiah or Qardh. In both Wadiah and Qardh, the SACCO is deemed as a keeper and trustee of funds, and has the depositors’ permission to use the funds for its operations in a Shari´ah compliant manner, and the SACCO guarantees refund of the entire amount of the deposit, while these deposits can be withdrawn at any time, and the depositors have no right to any return/profit on such deposits.

2.2. Savings and Fixed Maturity accounts

Islamic Saccos also mobilize deposits through Mudarabah, which is one of the profit sharing (PS) modes in Islam. It takes the form of a partnership contract, where one party (Rabbul-Maal) provides capital, while the other (Mudharib) provides labour and entrepreneurial skills to manage the Shari’ah complaint business; and in case of profit, distribution amongst the depositors and the shareholders is made according to the weightage assigned usually at the beginning of each month to their investments. And in case of loss, it is borne solely by the capital provider (the depositor). However, according to the guidelines of Central Bank of Kenya, financial institutions are required to guarantee the depositors’ money from any loss, hence it does not allow loss sharing. Loss sharing is also not allowed under Islamic Law in case the manager of the fund (the Sacco) is proved to have done a fraud, negligence, or breach of contract.

Mudharaba Deposits Mobilization process in Islamic Saccos

Those with excess funds come to the Sacco and place the funds under a Mudharaba agreement, and agree on the profit-sharing ratio. Some Saccos give a 6% p.a return of the profit.
The deposits are placed by the Sacco in a Mudharaba pool, which has a number of categories depending on the period (term) and capital invested. The categories are given weightages in order to strike a balance on the terms and amounts deposited, because KES 1,000,000 deposited for say one month is not equal to KES 1,000,000 deposited for say 3 months.
The Sacco receives a return/profit from the financed customers based on the contract, performance and the agreement.
The Sacco pays deposit owners profit based on the contract, performance and the agreement.

3. Fee based Products

3.1 Agency services

SACCOs are authorized or requested by their clients to do a certain well defined legal action on their behalf against a fee. Some of these services include sale and purchase, investment activities, letting and hiring, borrowing and lending, assignment of debt, guarantee, pledge, gifts, bailment, taking and making payments, litigation and relinquishment, admission and acknowledgment of rights, payment and collection of trade bills and fund management

All the above fall under the agency contracts in Islam. Wakala means agency. In the case of investment, it is permissible for the investment arrangement to be restricted to a particular kind of investment, or a specific place or be subject to other restrictions. It is also permissible that it be unrestricted, in which case it would still be restricted by customary practice and that the agent acts in the principal’s best interests. Wakala for investment is same as Mudharaba, except that in Mudharaba, the manager (Mudharib) has a share of the profit, while in Wakala the manager (Wakil) is paid an agreed upon fee even if there is no any profit generated. Some contracts such as Ju’ala (commission) and Hawala (transfer of debt) also fall under the fee based services.

3.2 Guarantee (Kafalah)

Kafalah is a fee based product whereby a SACCO accepts to guarantee or take responsibility for a liability or duty of a member. When it relates to an act, it is about ensuring the performance of a certain act, the failure of which may render the surety liable and responsible. A member maybe required by a supplier (seller) on credit to produce a security in form of Kafalah to which the seller could have recourse in the event of failure by the member to fulfil the obligation of payment for the goods. Kafalah is a non-commutative contract, and the Shari´ah scholars do not allow any remuneration to be received for issuing financial guarantees. The reason why this is forbidden in Shari´ah, is that guarantor’s payment of the guaranteed sum will be similar to a loan generating a profit to the lender, which would involve Riba. However, some Islamic SACCOs offer this service to its members on a fee basis (Wakalah bil Ajr), they claim the right to seek fees representing actual administrative expenses.

Steps for guarantee

The member enters into a contractual agreement with the beneficiary (e.g. a Statutory Body) to fulfill an obligation.

The member approaches his/her Islamic SACCO to request the issuance of Guarantee facility.
Islamic SACCO issues Kafala to the member, as a surety to discharge the liability of beneficiary in case the member defaults. In return, a sum amount of fee is charged to the member.
In the event of default by the member, the beneficiary will claim from Islamic SACCO, and the Islamic SACCO makes immediate payment on first demand provided the claim meets all the conditions of the guarantee.
If there is no default, the beneficiary will return the kafala to the member followed by Islamic SACCO’s cancellation upon maturity.

Lesson materials

Module 2 Products of Islamic SACCOs

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