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Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Common terms used in Islamic banking include profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).
In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank's profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha. Another approach is EIjara WA EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).
An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank's share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party's current equity. This method allows for floating rates according to the current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia.
There are several other approaches used in business transactions. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy.
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How Islamic bank make profit?
Islamic Banks make a profit by buying and selling at a profit. for ex: If you want to buy a car, a regular bank will give you a car loan and you will use that money to buy a car. You will repay the money as monthly installments along with interest, to the bank. An Islamic Bank will buy the car and then sell it to you for a higher price thereby making a profit.
How do banks profit from Islamic finance?
Islamic banks profit differs from most other countries. It is illegal for an Islamic bank to charge interest on a loan. A loan can only be for the value of the item. The person receiving the loan however, will pay an extra amount which is considered a gratuity.
What are the vision of commercial banks?
to make profit
Why banks do mergers?
For profit. To make money.
Banks lend out the money that you deposit to make a profit?
Yes.
What is Islamic bank of Bangladesh?
Banks are banks. By prefixing 'Islamic' before a donkey does not make it Halal, similarly Usury is never 'slamic'. Anyhow, it is a bank operating in Bangla Desh.
What are the innovations of IT in the banks?
IT companies do inovation in IT not Banks. Banks make large amounts of profit from money people put into the bank. IT companies make money on the volume of IT they sell
Which three organizations exist to make a profit?
SLA's building and loan associations banks
Why is fractional reserve banking system necessary?
To enable banks to loan out money to make a profit.
Why is a fractional reserve banking system necessary?
To enable banks to loan out money to make a profit
Should big banks profit from micro financing?
Banks are a business. They exist for the purpose of making a profit. That is what businesses do.
Explain why banks must balance profit and security when making loans?
Banks must balance security and profit when making loans because loan interests are partially how banks make their money. They must take appropriate security measures to ensure customers keep returning.
