Is profit sharing investment account a deposit? The case of Institutions offering Islamic Finance

This paper provides a conceptual discussion on the impact of regulatory requirements on deposit behaviors as exemplified by prescribed guidelines and regulations. It is postulated that given the distinguishing nature of profit sharing investment account (PSIA), the reporting requirements for existing deposits may not ensure information content of PSIA are effectively communicated to Investment Account Holders (IAH). Key distinguishing financial intermediation feature between IIFS and conventional banks is compared to describe and discuss the nature and classification of deposit and PSIA. The term “deposit” extends to a broad class of deposits including PSIA, suggests the need to examine the regulatory reporting requirements affecting information disclosure. Distinctions in the treatments on PSIA by Institutions offering Islamic Finance (IIFS) and that of deposit in the conventional counterpart, found in the literature are explored. Regulation and policy issues in the mobilization of PSIA and on the need for transparency in the PSIA related disclosures with supervisory and governance mechanisms are analysed. The issue is to what extent present practice in the treatment of PSIA ensures appropriate information content of PSIA to assist informed decision by IAH. The paper concludes with the need to examine the contents of regulatory guidelines to ascertain whether based on the effect of the interpretation of regulatory guidelines by the IIFS, PSIA is a deposit. This has consequential effect on behavior of the deposit and that of equity type deposits (PSIA). Existence of any regulatory disclosure gap in the prescribed guidelines; and likelihood of ‘skewed interpretations’ on the part of (IIFs), would stifle the potential growth of PSIA. Similarly, the existence of any ‘skewed interpretations’ on the part of IIFS would provide opportunity for manipulative behavior in the management of PSIA