What is Wadiah?

It 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 it and types of wadiah, which are wadiah yad dhamanah, and wadiah yad amanah. It is different from Qard, and the concept involves safekeeping, custody, and trust. Wadiah in Islamic banking refers to a deposit. It 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 is Wadiah contract.

Wadiah in Islamic Banking:

In our case, asset that you deposited is a liability on Umer. When speaking of an Islamic economic system, it is done by Islamic financial institutions through Islamic banking. 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.

wadiah

Key Principles:

Islamic banks offer a variety of non-profit wadia 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 the contracts. Banks must return the original amount to the owner at any time.

Difference Between Wadiah and Qard:

These 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:

  • Wadia involves safe custody of things, while Qard consists of lending funds and assets by one party to another.
  • 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.
  • 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. On the contrary, banks receive ownership of the funds when it comes to Qard.

Types Of Wadiah:

Difference between Wadiah Yad Dhamanah and Wadiah Yad Amanah:

It’s two types are different from each other in their application:

Wadiah Yad Amanah:

Wadiah yad amanah 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, wadiah yad dhamanah 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.

Conclusion:

It is a key term in Islamic finance that revolves around the safekeeping of one’s fund by another party, and it is classified as wadiah yad dhamanah and wadiah yad 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 transfers to the depositor’s bank which can utilize the funds for profit generation. It, along with several other Islamic financial instruments (like mudarabah) are explained during the online Islamic finance course and diploma in Islamic banking and finance programs at AIMS.

Share This Blog, Choose Your Platform!