Question No. 27 Discuss Islamic Modes of financing. How far they are helpful in financing Trade and industry.
Introduction:
Islamic banking has always been a very important issue. In the present world it has gained great importance due to the harmful effects of the interest based banking. As interest has been completely forbidden in Islam, the Islamic modes of financing provide various ways of interest free financing.
Let us now. Study how to Islamic banking works and what are the Islamic modes of financing. Basically there are 2 Islamic modes of financing. One is “Qard Hasna” and other is “Profit and Loss sharing”. However there are different technique and models of financing which is interest free and in accordance with Islamic teaching. There are as follows.
I- FINANCING BY LENDING
Under this finance the banks may provide finance in any of the following form:
1. Service Charge Loans
Under this system the banks advances loans with full guarantee of repayment of principal sum. However at the time of returning the principal sum a service charge is paid by the borrower to the bank. This service charge is calculated on the basis of administrative cost of financial institution. In this way interest is replaced by service charges.
2. Qarde Hasna
Under this bank provide loans to deserving people for their consumption purposes such as marriage, education, health care etc. in such cases only the principle amount is payable by the borrower after an agreed period if time. However at the agreed time, if the borrower is not able to repay the debt he can’t forced to do so.
II- TRADE RELATED MODES OF FINANCING
The trade related modes of Financing are as follows:
1. Mark up Financing (Bai Muajjal)
This is a deferred payment sale. Under this the customer enters in to an agreement with the bank whereby the bank finances to purchase of goods or machinery.
This financing mechanism which is sometimes called “Mark up Financing” is very useful for meeting short term input needs of business.
However, although this system is completely in accordance with Shariah care must be taken while practicing it because a back door for dealing on interest basis could easily be opened in this system.
2. Leasing (Ijarah)
Under this mode of financing the lesser is called “Ajir” and the lessee is called “Mustajir”. In simple words leasing is a contract whereby the lessee uses an asset which is owned by the lesser. The ownership remains with the lesser and the lessee pays monthly or annual rent for the use of the asset.
3. Hire Purchase (Ijra-Wa-Iqtina)
Under Hire purchase system, the bank purchases the required goods at thee request of the client. After that the bank hires those goods to the client. The client makes periodic payment to the bank. Those rentals are so calculated that hire purchase price is amortized evenly over the life time of the asset.
4. Purchase of Property with Buy Back Agreement.
This mode of financing is to satisfy both short term and long term needs of finance of client. The client who is need of cash sells an immoveable or moveable property to bank. The bank makes whole payment in cash afterwards the client buys back the same property at some higher price in future. Client can pay for the property either in whole or in installment.
5. Bai-Salam
This Islamic mode of Financing is best suited to the agricultural sector. Under Bai-Salam the bank or the financer makes an agreement with the farmer to purchase his crops in advance. The investor makes payments to the farmer at the time of the agreement, thus the farmer gets necessary finance to purchase agricultural inputs.
6. Development Charges
Under this the bank advances to the client for the development of a land or property. As a result of this the value of the property increases. The bank then shares this increase in value with the client.
7. Investment Auctioning
Under this the bank joins hands with other financial institutions to form a consortium. This consortium than works on an industrial project, specifying all detail and making sure availability of all inputs and requirements of machinery. Afterwards the consortium a place this project for auction. Bids are invented from the investors. The project is handed over to the person making the highest bid. And the profit so earned is shared by the consortium.
iii. INVESTMENT RELATED MODES OF FINANCING
The investment related modes of financing are as follows.
1. Al- Musharakah
Under this the bank enters into an agreement with the client that bank will invest in a business with client. The actual net profit realized will be divided into three parts. One will be retained by the client. Other two will go to the bank. Out of these two parts one will be used to offset the principle whereas the other will be the bank’s share of the profit in the business.
2. Al-Modaraba
Under this the financer, a bank invests money in the business and the client invests his knowledge and skills. The client becomes the “Modarib” where as the bank becomes the “Amil”. The profit will be shared by both where as the loss will be borne by the “Amil” onluy.
CONCLUSION
The Islamic modes of financing are becoming very popular because of the awareness among the people to get money free from any sort of interest.
