Intro to Islamic Banking

Intro to Islamic Banking

Islamic economic principles have prominently been applied in financial industry especially in banking. Islamic Finance is growing in multiple dimensions and is now spreading in other financial sectors like insurance, structured finance, project finance, mutual funds, syndicated finance, investment banking etc.

The balance sheet of Islamic banks is capable of taking financial shocks. If incase, there is a shock on asset side (NPL increasing), Islamic banks will be able to share this loss with their shareholders and depositors.

Islamic banks are obliged to have backing of assets in all their investments. Islamic banks losses even theoretically can not go beyond the value of the real asset.

Financing Workflow of Islamic Banks.

Shariah compliance also ensures Corporate Social Responsibility (CSR) and ethical compliance. Islamic banks do not conduct business with companies producing tobacco, alcohol or engaged in business of gambling, casino, nightclubs, prostitution etc. This mechanism has given Islamic banking the name of ‘ethical banking’ in Europe.

For the provision of finance, following modes are used in Islamic banking.

Reducing Musharakah

In Diminishing Musharakah, the customer approaches the bank for joint purchase of an asset/property. It is referred to as ‘Diminishing Musharakah’ because the ownership stake of the tenant increases and that of the bank diminishes or decreases with the passage of time. After the customer has purchased all the units of the bank, he becomes the sole owner of the asset/property.

Murabaha Muajjal

Murabaha is a deferred payment sale transaction. Murabaha is used in working capital financing, SME financing and trade financing. The Process flow of Murabaha is as follows:

Islamic bank and the client sign a Master Murabaha Finance Agreement and an agency agreement. The customer undertakes to purchase the asset from the bank. The customer signs a declaration that he has purchased the goods on bank’s behalf and now he is willing to purchase the asset.

Ijarah

Ijarah means to give something on rent. In Ijarah, right of use of a property is transferred to another person for a consideration. The process flow is as follows:

The customer approaches the bank for obtaining an asset on lease. The bank leases the customer and the asset starts using the asset and pays rent for each period. In the end, the customer can purchase the asset from the bank by way of a separate purchase agreement.

Salam

It is used in financing goods and services that are not ready for spot sale and will have to be delivered later. In current practice, it is used in currency trade as an alternative for bill of exchange discounting and in agriculture financing.

Istisna

It is used in financing goods that are not yet ready for sale and will have to be manufactured. It is used in pre-shipment exports financing and usable in all other situations where goods have to be manufactured before sale.

Deposit Side Operations of Islamic Banks

The two main categories of deposits are checking accounts and non-checking accounts. Some accounts are remunerative and some are non-remunerative. For offering deposit products, following modes are used in Islamic banking.

Non-Remunerative Accounts

The money is invested in the fund by the bank. Bank utilizes the money to invest in Ijarah, Murabaha, Diminishing Musharakah, Salam, Istisna etc.

Remunerative Accounts

The site provides the critical financial data on these products and the related news to help investors make the best decision on their investment in Islamic finance universe. The site also endeavors to guide Investors on different concepts of Islamic finance and increase their understanding of the subject.

Remunerative accounts can be checking i.e. Savings Account or non-checking accounts i.e. Term Deposits. The money is invested in the fund. The bank acts as ‘Mudarib’ i.e. ‘Fund Manager’ and the customer acts as ‘Rabb-ul-maal’ i.e. ‘investor’.

HalalTamweel.com is an Islamic Finance Portal with a clear aim to bridge the gap between the Investors seeking Shari’ah compliant investment options and the financial institutions offering the Shari’ah compliant solutions. In our exclusive Islamic Finance portal, we cover all aspects of investment options i.e. from simple saving account to Shari’ah compliant mutual funds, and Halal stocks. Featured in our website are details of various financing facilities available for the purchase of assets like automobiles and homes for a consumer seeking Shari’ah compliant financing solutions.

The money is only invested in Shariah compliant assets. Bank utilizes the money to invest in Ijarah, Murabaha, Diminishing Musharakah, Salam, Istisna etc.

We have an aim to provide financial planning to high net worth individuals, businesses and families with the goal of growing long term wealth complying with Islamic principles. We provide our expertise in investment management, estate planning, legal planning and tax planning through our in-house research expertise and through our publications in which many experts share their expert insights.

Islamic banks do not conduct business with companies producing tobacco, alcohol or engaged in business of gambling, casino, nightclubs, prostitution etc. If incase, there is a shock on asset side (NPL increasing), Islamic banks will be able to share this loss with their shareholders and depositors.

Islamic banks are obliged to have backing of assets in all their investments. Islamic banks losses even theoretically can not go beyond the value of the real asset.

Islamic bank and the client sign a Master Murabaha Finance Agreement and an agency agreement.

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