Modes Of Operations

Islamic Banks employ their funds in the following interest free loans:

1. Modaraba        (Venture Capital or Project Finance)


2. Musharaka       (Partnership / Profit and Loss Sharing)


3. Leasing             (Financial Leasing)


4. Bai-Salam         ( Deferred Payments Sales)


5. Murahaba         (Financing on cost plus basis)


6. 
   

Basic Concept of MUSHARAKA & MUDARABA

ISLAMIC FINANCING AND BANKING

The structure of Islamic Banking and financing is raised on profit or loss basis completely alienating itself from interest or usury.In other words the system is a substitute for interest-based economy.

Islamic bank can be defined as a financial institution which operates in accordance with the principles of Shariah. It does not advance loans at interest, and rather shares all risks with borrowing business corporations or individuals.

Central Bank

Almost every country in the world has a Central Bank. In Pakistan. State Bank of Pakistan is the Central Bank of the country. A Central Bank performs special work. It occupies a central position in monetary and banking structure of a country. It issues notes, it controls currency and credit in a country. A Central Bank acts a Government Bank. It also acts as the banker's bank. All the banks of a country keep a certain amount of their balances with the Central Bank. It lends money to the scheduled banks. It also regulates the exchange rate. It establishes the value of money.

Exchange Banks

These are banks which are generally found on the port towns. They finance the import and export trade of a country. In Pakistan, they finance the export trade against D/A bills and the import trade against D/P bills. Beside this, such banks also finance some internal trade in the country. They receive a letter of hypothecation from the persons wanting a loan so that their loans may be safe. They also purchase and sell foreign securities.

Savings Banks

Saving Banks are established to encourage thrift and to discourage hoarding. They mobilizing the savings of men of small means. They collect their savings. They pay interest on the deposits of the people. These banks also provide them (depositors) the necessary facilities to withdraw money according to their needs. They allow drawls of small amounts only. Post Offices in Pakistan also provide this facility. People generally keep their savings in the Post Office Savings Banks. Commercial Banks also render this service.

Industrial Banks

These are special types of banks. They lend money to the industries for purchasing machinery land, building, furniture etc. They advance credit for long periods, 10,15 or 20 years. They receive deposits for long periods. They generally raise fund by issuing debentures. These banks also keep an expert staff to judge the value of land, building, machinery etc. Of the industries. There are hardly such banks in Pakistan. In foreign countries like Japan and Germany, these banks have helped a great deal in the development of these countries. Industries Development Bank of Pakistan (IDBP) and Pakistan Industrial Credit and Investment Corporation (PICIC) are playing very important role for financing and promoting industries in Pakistan.

Land Mortgage Banks

These banks advance loans to cultivators for long term needs such as the paying off old debts, purchasing of land, purchasing costly machinery and effecting permanent improvement of land. They keep expert evaluators of land and on receipt of an application for loan.they get the land valued and find out that the land is not ready pledged or encumbered.They do not advance money for more than 50% value of the land mortgaged with them. Hardly there is a bank of such a nature in Pakistan, although the need for them is very great.

Cooperative Banks

These banks grant loan to agriculturist for financing current agriculture needs such as for purchasing seeds, manure, implements, ploughs, bullocks and even fir digging wells and purchasing land. These banks mostly raise their funds from loans, reserve fund and sometimes from share capital. They do not generally receive deposits. They generally lend money on personal security. The underlying principle of these banks is generally self-help.

Commercial Banks

There banks deal with businessmen and traders. They receive money on fixed, current, saving and home safe account. They lend money for short periods of three months against easily marketable securities such as bills of exchange, agricultural produce like jute, rice, wheat etc and government securities. There are schedule banks in Pakistan, They grant loans for financing trade and industry where money is required for financing temporary contingency.

Kinds Of Banks

In the present world of specialization we come across different types of banks. All of them are called banks, because they borrow money from the public and later on lend it to the public in need. But they differ from one another in the following respects