The bulk of financing under the Islamic system is equity oriented. In this mode of financing, the risks and losses are shared by the financer along with the entrepreneur in the ratio of their respective capitals. The profits are, however, shared in an agreed ratio.
Equity financing may be carried out in various forms including participation in equity of joint stock companies or shares in partnership or in the form of temporary equity on profit and loss sharing basis for the working capital requirements for a specified period. As the financing under this mode is based on profit and loss sharing.
Islamic banks pay more attention to the profitability of the project and not merely on collaterals. As is obvious, this mode of financing has some inherent risks and can successfully operate in an honest and just society. If unethical practices are followed, duplicate books of accounts are maintained, and true profits are not declared, this mode of financing is likely to suffer serious setbacks. It is for this reason that Islamic banks have been shy in adopting this mode of financing on a large scale.
Potential of Islamic banks:
Islamic world has tremendous potential. It has about 20%of the world population and as much of its land mass. It produces half of the world’s oil and accounts for 40% of world, s export of raw material. Muslims are now rediscovering their identity and the process of establishment of Islamization of banking is gaining momentum. The establishment of Islamic banks is a recent phenomenon and in a short span of time, over 100 Islamic banks and financial institutions have been established in Asia, Africa and Europe.
According to projections, the Muslim population of the world be middle of next century will be over 2600 million. Many Muslim countries are presently involved in interest-free banking, and it is visualized that by the year 2050, a significant number of Islamic countries would switch over or world be in the process of switching over to interest-free banking.
Equity financing may be carried out in various forms including participation in equity of joint stock companies or shares in partnership or in the form of temporary equity on profit and loss sharing basis for the working capital requirements for a specified period. As the financing under this mode is based on profit and loss sharing.
Islamic banks pay more attention to the profitability of the project and not merely on collaterals. As is obvious, this mode of financing has some inherent risks and can successfully operate in an honest and just society. If unethical practices are followed, duplicate books of accounts are maintained, and true profits are not declared, this mode of financing is likely to suffer serious setbacks. It is for this reason that Islamic banks have been shy in adopting this mode of financing on a large scale.
Potential of Islamic banks:
Islamic world has tremendous potential. It has about 20%of the world population and as much of its land mass. It produces half of the world’s oil and accounts for 40% of world, s export of raw material. Muslims are now rediscovering their identity and the process of establishment of Islamization of banking is gaining momentum. The establishment of Islamic banks is a recent phenomenon and in a short span of time, over 100 Islamic banks and financial institutions have been established in Asia, Africa and Europe.
According to projections, the Muslim population of the world be middle of next century will be over 2600 million. Many Muslim countries are presently involved in interest-free banking, and it is visualized that by the year 2050, a significant number of Islamic countries would switch over or world be in the process of switching over to interest-free banking.