Money is a product besides medium of exchange and store of value.

Real Asset is a product. Money is just a medium of exchange.

Time value is the basis for charging interest on capital.

Profit on exchange of goods & services is the basis for earning profit.

Interest is charged even in case, the organization suffers losses. Thus no concept of sharing loss.

Loss is shared when the organization suffers loss.

While disbursing cash finance, running finance or working capital finance, no agreement for exchange of goods & services is made.

The execution of agreements for the exchange of goods & services is must, while disbursing funds under Murabaha, Salam & Istisna contracts.

Due to non existence of goods & services behind the money while disbursing funds, the expansion of money takes place, which creates inflation.

Due to existence of goods & services no expansion of money takes place and thus no inflation is created.

Due to inflation the entrepreneur increases prices of his goods & services, due to incorporating inflationary effect into cost of product.

Due to control over inflation, no extra price is charged by the entrepreneur.

Bridge financing and long term loans lending is not made on the basis of existence of capital goods. Rather, they are disbursed on the basis of Windo Dressed project feasibility and credibility of the entrepreneur

Musharakah & Diminishing Musharakah agreements are made after making sure the existence of capital good before disbursing funds for a capital project.

Government very easily obtains loans from Central Bank through Money Market Operations without initiating capital develop- ment expenditure.

Government can not obtain loans from the Monetary Agency without making sure the delivery of goods to National Investment fund.

The expanded money in the money market without backing the real assets, results deficit financing.

Balance budget is the outcome of no expansion of money.

Real growth of wealth does not take place, as the money remains in few hands.

Real growth in the wealth of the people of the society takes place, due to multiplier effect and real wealth goes into the ownership of lot of hands.

Due to failure of the projects the loan is written off as it becomes non performing loan.

Due to failure of the project, the management of the organization can be taken over to hand over to a better management.

Debts financing gets the advantage of leverage for an enterprise, due to interest expense as deductible item form taxable profits. This causes huge burden of taxes on salaried persons. Thus the saving and disposable income of the people is effected badly. This results decrease in the real gross domestic product.

Sharing profits in case of Mudarabah and sharing in the organization of business venture in case of Musharakah, provides extra tax to Federal Government. This leads to minimize the tax burden over salaried persons. Due to which savings & disposable income of the people is increased, which results the increase in the real gross domestic product.

Due to decrease in the real GDP, the net exports amount becomes negative. This invites further foreign debts and the rupee becomes weaker & weaker.

Due to increase in the real GDP, the net exports amount becomes positive, this reduces foreign debts burden and rupee becomes stronger and stronger.

Borrows funds from the depositors paying interest on the liability side of its balance sheet.

Partnership (Mudarabah) or profit and loss sharing arrangement between the bank and the depositors

Lends the funds to the borrowers, charging higher interest on the asset or investment side.

Profit and loss sharing (Musharaka) or trade based financing arrangement (Mubadalah) between the bank and its investment clients

Between the depositors and the bank, there is an iron wall.

Islamic bank entitles the depositors,
(a). To be informed of what the bank does with their money
(b). To have a say in where their money would be invested (Mudarabah-e-Muqayyidah)

The interest or the return is predetermined or fixed in advance

The profit or the return is based on the actual investment outcome

Transactions are financial asset based

Transactions are real asset based

       Permanent Sources of Islamic Banks

Permanent Sources of Funds - Internal

Accumulated Profits (Retained Earnings)
► Capital Reserves
► Revenue Reserves

Permanent Sources of Funds - External

Bank Accounts:
► Non-Profit Accounts or Current Accounts (Demand Deposits) Qard-e-Hassanah Deposits
► Profit Bearing (on Mudarabah basis)
    – Savings Accounts
    – Investments Accounts

External Qard-Hassan Deposits
► Like current account in conventional banks
► Kept for safekeeping and convenience in payments (transfers)
► No return or profit offered
► Checkable
► Face value guaranteed by the ban

Permanent Sources – Profit Bearing

Savings Accounts
► Checkable just like conventional saving accounts
► The term to maturity is not fixed as in the case of term or fixed deposits
► Can be assigned by the depositor to participate in productive activities, thus becoming PLS accounts (Mudarabah-based)

Investments Accounts
► Investor committed for a certain time period
► Usually not checkable
► Early withdrawal may be denied by the bank, but usually allowed as per the norms
► Usually there is a minimum period before which the withdrawal would result in denial of all profits
► For the withdrawals made after the minimum period, the weightage is reduced accordingly

       Temporary Sources of Funds (Liquidity Management)

Special Mudarabah Portfolio
► Islamic alternative to overnight lending and borrowing
► A separate portfolio is created by several banks jointly

Securitization
► Islamic banks can securitize their assets (like real estate, Ijarah assets etc.) and raise the required funds

Salam
► Islamic bank enters a contract with another financial institution agreeing to provide specified commodity to that institution in future and get the money now

Tawarruq
► Islamic bank purchases marketable (real) assets from the Financial Institution and sells it in the market to get funds

Back-to-back Financing
► If the bank has tight liquidity position it can direct the financing of a specific transaction to another bank

       Fee-based Operations

Charge Fee
Islamic banks can charge fee for providing following services:
► Checking account
► Money transfers
► L/C (Non-funded)
► Lockers (safe-keeping)
► Online services
► Debit Card and ATM services
► Collections
► Investment banking services
► Cash and Portfolio management advice
► Brokerage services

Letter of Guarantee
Fee for issuing Letter of Guarantee disallowed
► But the bank has the right to be reimbursed for expenses incurred in providing the Letter of Guarantee
► The amount charged should be uniform if the expenses incurred are same across various guarantees provided