Waidah Meaning:
Wadiah means “custody” and “trust.” In Islamic banking, it refers to a deposit. It has two types: Wadiah yad Dhamanah and Wadiah yad Amanah. وَدِيعَة differs from Qard; the concept involves safekeeping and entrusting one’s belongings to another for a specified number of days without paying any fee. For ease of understanding. Imagine you own a property and want it to be in the safe hands of someone else named “Umer.” If Umer accepts your property for a specified period for safekeeping without charging any fees, then he is “Muwakkil,” this contract will be called the “Wadiah contract.”
Wadiah in Islamic Banking
In the above example, an asset deposited was a liability on Umer. When speaking of an Islamic economic system, it is done by Islamic financial institutions through Islamic banks. When you deposit your funds or assets into an Islamic bank for safe custody, this is generally known as Wadia. However, many Islamic banks charge a nominal fee against any safekeeping they provide for their clients.
Key Principles of Wadiah
Islamic banks offer a variety of non-profit وَدِيعَة products. Islamic banks are liable to return the funds on a specified period. The depositor of funds allows the bank administration to use his proceeds for investment purposes in Islamic financial products. Islamic banks bear the risk of investing funds they obtain from the contracts. The banks must return the original amount to the owner at any time.
Difference Between Wadiah and Qard
These are two different concepts of Wadiah in Islamic banking system that you can utilize for various purposes. Now, coming up next are some key differences between the two:
- Wadia involves safe custody of things, while Qard involves lending funds and assets from one party to another.
- The bank is the custodian of money deposited by the customer for safekeeping. However, the bank acts as a borrower when it comes to Qard.
- Banks may share the profits generated from a customer’s funds. However, Qard acts like a loan-free agreement, where no return is offered to lenders.
- The ownership of assets remains with the depositors. On the contrary, banks receive ownership of the funds when it comes to Qard.
Types Of Wadiah
The two types of Wadiah are different in their application. Here is the difference between Wadiah Yad Dhamanah and Wadiah Yad Amanah.
1. Wadiah Yad Amanah
Wadiah yad amanah involves safe custody of deposits based on trust. The custodian of the property maintains the funds safely and with due diligence without receiving any profit. He is also bound to return the funds on demand and cannot use the assets for investment.
2. Wadiah Yad Dhamanah
On the contrary, wadiah yad dhamanah acts as a guarantee of safe custody. Banks can utilize the property for investment purposes and have a right to receive profit generated by Islamic funds. However, they may also be fully responsible for any damage.
Final Words
وَدِيعَة is a key term in Islamic finance that revolves around the safekeeping of one’s fund by another party, and it is classified as Dhamanah and Amanah. The ownership of funds remains with the original depositors, and they can claim the amount at any time. However, in the case of Qard, this ownership is transferred to the depositor’s bank, which can utilize the funds for profit generation.