An Islamic term deposit is money locked for a set period and rewarded not with interest but with the margin on a deferred-payment sale of goods or the profit of an investment agency, under a structure approved by the bank's Sharia board.
How can a fixed return exist without lending at interest?
A conventional bank borrows the customer's money and pays a rate. An Islamic bank must instead go through a real exchange: it buys an asset from the customer on deferred payment, or manages the funds as an agent. The gain arises from the commercial transaction.
Tawarruq in four steps
The customer appoints the bank to buy a metal on their behalf from a commodity platform, then sells it to the bank at a mark-up payable at maturity. The bank sells the metal for cash. At term, the customer receives the deferred price.
Holding the goods and bearing risk before resale
For the sale to be valid, the customer must actually own the commodity, at least through constructive possession, before selling it to the bank. Ownership certificates identifying the purchased lots serve as evidence during the Sharia audit.
Commodity platforms in use
Banks generally rely on base-metal brokers or specialised exchanges such as Bursa Suq Al-Sila in Malaysia, which trades palm oil among other goods. Gold and silver are avoided because trading them falls under the strict rules governing currency exchange.
Organised Tawarruq, a contested practice
The International Islamic Fiqh Academy ruled against organised Tawarruq, in which the bank arranges the whole chain. AAOIFI regulates it tightly. Some boards accept it with conditions, while others reserve it for liquidity management and prefer other structures for retail savers.
Fixed-term investment Wakala
Another formula: the customer appoints the bank as agent to invest a sum for three, six or twelve months. The bank announces an expected profit, earns a fixed fee and may keep any surplus as a performance incentive. The agent does not guarantee the capital.
Expected profit versus guaranteed profit: the decisive nuance
In a Wakala, the quoted rate is only an estimate; a loss without the agent's fault reduces capital. In a Tawarruq, the margin becomes a firm debt owed by the bank once the resale is made, comparable in safety to a conventional deposit.
Withdrawing before maturity and the ibra rebate
A margin already fixed cannot be changed unilaterally. If the customer withdraws early, the bank pays the deferred price minus a voluntary rebate, called ibra, which brings the gain down to the level agreed for early withdrawal, with no interest penalty.
Terms, minimum amounts and automatic rollover
Offers often run from one month to several years, with an entry amount set by the bank. Automatic rollover means a new purchase and resale at every maturity, which requires a standing power of attorney signed by the customer.
Why the IFSB cares about locked deposits
IFSB principles on liquidity risk note that Islamic banks have relatively few instruments for refinancing. Term deposits stabilise their liabilities, provided maturities are spread out and early withdrawals remain predictable for the treasury team managing daily cash.
Brokerage fees and the hidden cost of the structure
Each Tawarruq generates brokerage fees on the commodity. Most banks absorb them, but some pass them on. Check that the stated margin is net of these fees and that no cost appears only when the deposit is closed.
Before opening the deposit: documents to request
Ask for the agency contract, a description of the commodity, the ibra calculation rule, the product's deposit-protection status in your country and the Sharia board's opinion. Finally compare the net margin with a profit-paying instant-access account.
Specialist external source
IFSB standards set out prudential principles for Islamic banks, notably on liquidity risk management and the treatment of funds raised from customers.