A Comparison of Two Interest-free Banking Methods: Pooled vs. Separate Deposits

There are various methods for mobilizing resources in an interest-free banking system, including pooled deposits and separate deposits. The purpose of this study is to develop a theoretical model to study the implications of pooled and separate deposit methods for initial paid profit and also expected profit from depositor's viewpoint. In the pooled deposits, bank receives deposits in one unified contract. But in the separate deposits, bank provides an option form depositors to choose between murabahe or musharakah contracts. The results of our theoretical model show that the Initial paid profit to depositors in pooled method is greater than or equal to initial paid profit in separate method. The result verifies the Markowitz’s portfolio theory. In other words, the portfolio diversity reduces the risk of bank customers. Moreover, we find out that the expected profit of depositors in pooled method is more than that of separate method. One can show that under certain condition when the depositors are very risk averse, they prefer the separate deposit to pooled one. Finally, we conclude that the best method for an interest-free banking system is to use both methods simultaneously. This provides more options for depositors with different preferences and hence increases their utility.