Question

how Islamic banks operate in fund mobilization and fund utilizations ?

Answer 1

Islamic banks are banks that comply with Islamic law (sharia), also known as interest-free bank. The Islamic Bank serves primarily as a trading or investment house. The Islamic banking system is based on the principle of association/partnership. In the Islamic banking sector, depositors and borrowers would all participate in the sharing of profits and losses.
Within the Islamic banking system, resources are mobilized by shareholders and savings owners. Shareholders own the bank's net shares, while savers participate in holding the bank's investments. In other words, savings are mobilized on the basis of sharing rather than interest-based loans. under this system depositor's are treated as special category of shareholders. They do not share the bank's private capital, such as its construction and equipment, but they share "as fund owners" in the bank's profit-sharing investment operations. In Islamic banks, the deposit agreement is a contract to provide funds which will be managed by the bank, on behalf of the owner, as a designated agent. As a result, deposit agreements in Islamic banks are not loan agreements. There are multiple agency or delegation contracts in which depositors authorize the bank to invest its funds and share the yield with them. In the event of a loss, the financial burden falls on the owners of the funds and the bank would have lost its efforts (administrative expenses) which were without compensation.

Islamic banks use the funds available through three main categories of financing methods: sharing methods, sales methods and leasing methods. None of them have any component of interest. In the Share mode, Islamic banks provide financing for projects with the expectation of a performance share. Obviously, if a project loses, all the capital providers and lenders lose together and proportionately. There are two ways to apply this principle: full partnership and partnership without voting rights. In full partnership, the bank would be represented on the board of directors of executive directors and share political and administrative decisions, while in non-voting financing (called in Arabic mudaraba), Islamic banks completely entrust the management decision-making process to the user of the funds. The idea of ​​how to finance the sale is also simple. The bank would be asked to purchase goods and deliver them to users (producers and consumers) for any future repayments. Sales methods can take various forms. The simplest is derived from the regular sales contract in which the bank sells real goods, equipment and machinery to its users at an agreed price. Construction contract and deferred delivery contract are the other forms of sales method under this banking system. Construction is generally used to finance the development of the territory, infrastructures, production and industrial construction; while deferred delivery is generally an agricultural financing contract that provides farmers with the necessary funds for their operations against the delivery of cereals and other products in season. All sale-based methods can end in a deferred lump sum payment or installments distributed over a specific period of time. Leasing arrangements can take a variety of forms with fixed or variable rents, declining or fixed ownership, operational or financial, together with various conditions relating to the status of the leased assets at the end of the leasing period.