What is Wadiah?

Wadiah is a term that often gets thrown around in the Islamic community, but what does it mean? The aim of this article will be to explore what Wadiah is, types of wadiah, and how it is different from Qard. The concept of Wadiah involves safekeeping, custody, and trust. The word “Wadiah” refers to a deposit in Islamic finance. This concept involves entrusting one’s belongings to another for a specified number of days without paying any fee.

For ease of understanding, let me simplify it a bit. 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, this is what we call Wadiah.

Wadiah in Islamic Finance:

In our case, asset that you deposited is Wadiah, and it is a liability on Umer. When speaking of an Islamic economic system, it is done by Islamic financial institutions, such as Islamic banks. When you deposit your funds or assets into an Islamic bank for safe custody, this is generally known as Wadiah. However, many Islamic banks charge a nominal fee against any safekeeping they provide for their clients.

wadiah

Key Principles of Wadiah:

The following are some primary features of Wadiah:

  • Islamic banks offer a variety of non-profit wadi products.
  • Islamic bank is 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 shariah-compliant mode.
  • Islamic banks bear the entire risk of investing funds that they obtain from Wadiah contracts.
  • Banks must return the original amount to the owner at any time.

Difference Between Wadiah and Qard:

Qard and Wadiah are two different concepts in Islamic finance that you can utilize for various purposes. Now, coming up next are some key differences between the two:

  • Wadiah involves safe custody of things, while Qard consists of lending funds and assets by one party to another.
  • In Wadiah, the bank is the custodian of money deposited by the customer for safekeeping. On the other hand, the bank acts as a borrower when it comes to Qard.
  • According to Wadiah, banks may share the profits generated out of 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 in Wadiah. On the contrary, banks receive ownership of the funds when it comes to Qard.

Types Of Wadiah:

In general, Wadiah has two types that are as follows:

  • Wadiah Yad Dhamanah.
  • Wadiah Yad Amanah,

Key Differences between “Wadiah Yad Dhamanah” and “Wadiah Yad Amanah”:

The two types of Wadiah are different from each other in their application:

Wadiah Yad Amanah:

It involves safe custody of deposits based on trust. The custodian of the property maintains safekeeping of the funds with due diligence without receiving any profit. He is also bound to return the funds on demand and cannot use the assets for investment.

Wadiah Yad Dhamanah:

On the contrary, it acts as guaranteed safe custody. Banks can utilize the property for investment purposes and have a right to receive profit generated by funds. However, they may also be fully responsible for any damage.

Bottom Line:

Wadiah is a key term in Islamic finance that revolves around the safekeeping of one’s fund by another party. Wadiah is discussed in more details during the Islamic finance certification and diploma in Islamic finance programs at AIMS. 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 transfers to the depositor’s bank which can utilize the funds for profit generation.

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