Islamic Modes of Financing

Islamic banking has always been a very important issue. In the present world it has gained great importance due 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.

ISLAMIC MODES OF FINANCING 
There are different techniques and models of financing which are interests free and in accordance with islam which are as follows:

I) Financing By Lending
II) Trade Related Modes of Financing
111) Investment Related Modes of Financing

1- 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 bank 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 institutions. In this way Interest is replaced by service charges.

2. Qard Hasan
Under this the banks provide loans to deserving people for their consumption purposes such as marriage, education, health care etc. In such cases only the principal 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 ho can't be 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 the purchase of goods or machinery. This financing mechanism which is sometimes called 'Mark up Financing" is very useful for meeting short tort» input needs of business. However, although this system is completely in accordance with Sunnahh 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 lessor 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 lessor. The ownership remains with the lessor and the lessee pays monthly or annual rent for the use of the asset.

3 Hire Purchase (Ijra-Wa-lqitina) Under Hire Purchase system, the bank purchases the required goods at the request of the client. After that tho 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 in need of cash sells an immovable or movable property to bank. The bank makes whole payment in cash. Afterwards the client buys back the same properly at some higher price in future Client can pay for the property either in whole or in installments.

5. Bai-Salam This Islamic mode of Financing is best suited to the agricultural sector Under Bai Salarn the bank or the financer makes an agreement with the farmer to purchase his crops in advance. The investor makes payments to the farmers 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  the value of the property increases, Thu bank then shares this increase in va!ue with the client.

7. investment Auctioning
Under this the bank joins hands with other financial institutions to form a consortium. This consortium then works on an industrial project, specifying all details and making sure availability of all inputs and requirements of machinery. Afterwards the consortium places this project for auction. Bids are invited from the investors. The project is handed over to the person making the highest bid. And the profit earned is shared by the consortium.

INVESTMENT RELATED MODES OF FINANCING

The investment related modes of financing are as follows:

1 Al- Musharabah
Under this the bank enters into an agreement with the chant 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 he used to offset the principal whereas the other will be the bank's share of the profit in the business

2. AI- Modaraba
Under this the financer, a bank invests money in the business and the client invests his knowledge and skills. The client becomes the "Modariba whereas the bank becomes the "Amil. The profit will be shared by both whereas the loss will be borne by the "Amil" only,


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