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Different sources of fund of islamic banks27.1.2016

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Different Sources of Fund of Islamic Banks.in detail

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Different sources of fund of islamic banks27.1.2016

  1. 1. Different Sources of Fund of Islamic Banks. Similar to conventional banks, Islamic banks also need funds to operate its banking activities. Basically there are two (2) main sources of funds, namely (a) Shareholders’ working capital and (b) Deposits collected from Customers. For a dual window banking operation, all funds belonging to the Islamic banking scheme are segregated from those related to conventional banking. In addition, to avoid co-mingling of the funds, separate accounting books are maintained by the Islamic The original source of the Islamic funds has to be ascertained to ensure it come from a “halal’ sources. Under a dual window banking operation, the initial paid-up capital is normally given on al-Qard basis (benevolent loan which is free of interest) from the conventional counterpart thus there should not be any issue in regards to the source of the funds. Here we are going to discuss with the details Sources of Islamic banks and identifying where Islamic create and get funds which are included as following:
  2. 2. SOURCES OF FUNDS In general Islamic banks rely on the following sources of funds: 1. Capital & Equity; 2. Transaction deposits that are risk free and yield no return; and 3. Investment deposits that carry the risks of capital loss for the promise of variable returns. Capital & Equity  Capital is the amount injected into the Islamic bank during the setting-up stages i.e. the paid-up capital of the Islamic bank.  Equity is usually the retained earnings of the Islamic bank that accumulated during its operational period. Transaction Deposits  Current accounts Current accounts are based on the principle of Wadiah, whereby the depositors are guaranteed repayment of their funds. At the same time, the depositor does not receive remuneration for depositing funds in a current account, because the guaranteed funds will not be used for PLS ventures. Rather, the funds accumulating in these accounts can only be used to balance the liquidity needs of the bank and for short-term transactions on the bank’s responsibility.
  3. 3.  Savings accounts Savings accounts also operate under the Wadiah principle. Savings accounts differ from current deposits in that they earn the depositors income: depending upon financial results, the Islamic bank may decide to pay a premium, hiba, at its discretion, to the holders of savings accounts. Investment Deposits  Investment accounts An investment account operates under the Mudaraba al-mutlaqa principle, in which the Mudarib (active partner) must have absolute freedom in the management of the investment of the subscribed capital. The conditions of this account differ from those of the savings accounts by virtue of: 1. A higher fixed minimum amount, 2. A longer duration of deposits, and 3. Most importantly, the depositor may lose some of or all his funds in the event of the bank making losses.
  4. 4.  Special investment accounts Special investment accounts also operate under the Mudaraba principle, and usually are directed towards larger investors and institutions. The difference between these accounts and the investment account is that the special investment account is related to a specified project, and the investor has the choice to invest directly in a preferred project carried out by the bank.