Non Interest Banking and Islamic Banking

 

Introduction

Council of Islamic banking

 

In October 1977 the council of Islamic ideology was charges with responsibility of bringing about Islamic economic system to be enforced in the country according to t aching o f Holy Quran and Sunnah. The council constituted a panel of economists and bankers which was assigned to prepare a blueprint for non interest banking system.

 

 

Islamic modes of financing

 

There are 12 Islamic modes of financing. These have been approved by State Bank of P kistan from July 1985. A brief description of Islamic instrument of financing as under

 

 

1. Loans financing by lending

 

1. Interest free loans
2. Qard-e-Hasana

 

1. Interest free loans

 

It is a new concept of lending based IJTIHAD the banks are permitted to lend funds free of interest. They are to cover only the service charges. This modes is beings used to finance exports agriculture inputs and provision of funds to salaried persons.

 

 

2. Qard-e-Hasana

 

Under this scheme, interest free loans are granted to students who do not sufficient funds to continue their education. Qard-e-Hasana is given to the students who are less than 35 years of age and available for post intermediate students in engineering, medical, agriculture, economic commerce etc. loans given will be in the name of student and secured by guarantee of parents guardians for repayment of loans a grace period of 2 year granted after completion of studies.

 

 

Trade related modes of financing

 

1. Mark up

 

The mark up or BAI MUAJJAL is a purchase of goods by banks and their sale to clients at inappropriate mark up in price on deferred payment basis. The mechanism is as follow.

 

1. The customer contacts the bank for finan ing the purchase of goods.
2. The bank purchases the required goods and sells these to

him on a price mutually agreed b tw n the bank and customer. The price is based on the banks cost plus profit margin of the bank

3. Payment can be made in installments or lump sum over a specified period of time.

 

2. Mark down

 

It is a purchase of moveable or immoveable property by the bank with buy back agreement according to this mode, the customer se s the moveable or immoveable property to the bank with promise to buy back the same from the bank on future date. The payment can be made in installment or lump sum. The difference between the customer price and purchase price is the profit of the bank.

 

3. Leasing

 

Leasing also called IJARA is a medium and long term financing mode. In the mode the lessee acquired the use of an asset form the lessor. For fixed period of time. On payment of specified refund as over a period. The title of property remains with the lessor and asset is given back to the lessor after specified period of time.

 

 

4. Hire purchase

 

The state bank of Pakistan has allowed the commercial banks to provide finance for the purchase of machinery to their clients in trade and industry on the basis of hire purchase. In this deal the bank purchases the specified goods at the request of customers and hires them to the client on the payment in periodical installment. The bank charges a fair return form the goods.

 

 

5. Development charges.

 

It is a very useful mode of trade financing. The bank makes advances to customers for the development of land or property. It then shares in value addition of property. This share is known as development charges.

 

 

Investment mode financing

 

1. MUSHARKIA

 

IT IS an agreement between the bank and the client to participate in a business as temporary partn r by providing agreed amount of funds for sharing profit and losses during a specified period of time.

1. Business is run by the client but the bank will examine the feasibility and profit proj ction so as to monitor and supervise the business tra sactions.
2. Profits are to be shared as agreed.
3. Losses will be shared strictly in the ratio of their respective investment
4. This mode is applicable to finance working capital needs of a business.

 

2. MODARABA

 

MODARABA means the business in which the subscriber participates with money and manager with knowledge and skill.

1. It is an agreement in which one party invest funds and other party with managerial efforts.
2. Modaraba must be registered under the Modaraba ordinance 1980
3. As per rule the partner who puts in managerial skills must have at least 10% share Modaraba
4. Profit is shared in agreed ratio.
5. Modaraba certificates are transferable.
6. It may be perpetual or for a specified time.

 

3. Participation term certificates

 

PTC is an instrument of finance issued by company for meeting medium and long term capital needs. A company is authorized to issue the ptc’s to schedule banks and financial institutions.

1. Ptc’s is an investment of medium and long term financing
2. It is transferable
3. Profit is shard in agreed ratio
4. Losses are shared in the ratio of banks and companies investment
5. Only joint stock company can issue ptc’s
6. Short term ptc’s are issued to meet working apital needs of a business
7. Long term PTC’s are issued in order to m et the fixed capital needs.

 

4. Investment on the basis of equity participation

 

 

Equity participation means sharing of risks and rewards of ownership

1. Under this scheme the financer (bank) purchases the shares of the company at market price or at an agreed price.

 

2. Profit will be shared in the form of interim or annual dividend
3. Loss will be borne in the form for reduction in the market price of shares purchased.

5. Investment on the basis of rent sharing

 

 

Rent sharing is applicable to finance the constriction of houses.

 

1. The bank and the client will contribute funds as agreed.
2. Rent of building will be calculated area wise
3. Rent may able revises after three years.

 

“Reading is to the mind what exercise is to the body.” – Joseph Addison. His thinking abilities, his ability to perceive, analyze, and process information are enhanced. Vocabulary expands, new knowledge appears Is it worth spending time reading books: pros and cons. Brain development can be compared to training in the gym. With regular exercise, the muscles grow, become stronger, more prominent. The same thing happens with the brain.