Introduction to Islamic Banking
The most prominent feature of the Islamic economic system is the prohibition of interest. Islamic economic policies have been applied exclusively in the financial industry, especially in banking. Islamic finance is growing at multiple levels and is now spreading to other financial sectors such as insurance, structural financing, project financing, mutual funds, syndicated finance, investment banking, etc. At the geographical level too, Islamic banking has grown from the Middle East to Europe and now has a good position in the South Asian market as well.
Shariah compliance also ensures corporate social responsibility (CSR) and ethical compliance. Islami Bank does not conduct business with companies involved in tobacco, alcohol production or gambling, casinos, nightclubs, prostitution, etc. This system has given the name of ‘Ethical Banking’ to Islamic banking in Europe.
The balance sheets of Islamic banks are capable of taking a financial push. Islamic banks are not obliged to pay fixed returns to their depositors and general creditors. Creditors, shareholders, and depositors share and participate in the business of the bank. Therefore, if there is a push towards assets (NPL increase), diploma in Islamic banking will be able to share this loss with their depositors and shareholders.
Financing activities of Islami Bank
The following methods are used in Islamic banking for making payments.
In the declining Musharaka, the customer goes to the bank for joint purchase of an asset/property. This is called ‘Diminishing Musharakah’ because the tenant’s ownership increases and the bank’s ownership decreases or decreases with time. If the ownership of the tenant increases, the rent decreases. The bank’s share in assets/property is divided into units. These units are purchased periodically by the customer until he purchases all the units. After purchasing all the units of the customer bank, he becomes the sole owner of the assets/property.
Murabaha is a late payment sales transaction. Murabaha is used for working capital financing, SME financing, and trade financing. The process flow of Murabaha is as follows:
Islami Bank and the client signed a Master Murabaha Islamic finance certification Agreement and an Agency Agreement. According to the agency agreement, the customer purchases the product from the supplier on behalf of the bank. The customer promises to purchase assets from the bank. It is a one-sided commitment and commitment. The bank pays the supplier and receives the title and physical/structural possession of the property. The customer signs a declaration that he has purchased the goods on behalf of the bank and is now willing to purchase the assets.
Leasing means renting something. In a lease, the right to use a property is transferred to another person for consideration. The process flow is as follows:
The customer goes to the bank to get an asset with the lease. The customer is responsible for making periodic lease payments for the lease term. Lease agreements and company agreements are signed. The customer purchases assets as an agent of the bank. The bank receives the title of the asset and pays the seller. The bank leases the assets and the customer starts using the assets and pays the rent for each period. Finally, the customer can purchase assets from the bank through a separate purchase agreement.
It is used to finance products and services that are not ready for spot sale and need to be delivered later. Hi, payment spot, but delivery is delayed. In current practice, it is used in currency trading as an alternative to the bill of exchange discounting and agricultural financing.
It is used to finance products that are not yet ready for sale and need to be made. Examples include tailoring services, architect services, etc. It is the producer’s order to make a specific product for the buyer It is used to finance pre-shipment exports and is useful in all other situations where the product has to be made before the sale.
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