FINANCE

ALTERNATIVE TO CONVENTIONAL FINANCE

INTRODUCTION
 Finance means the mechanism through which fund is
transferred from the surplus side to the deficit side.
 Or finance refers to the flow of fund from the people
with huge amount of money to the people with deficit of
it.
 There are several groups who are in need for finance,
such as:-
 Individuals

 Societies

 Companies

 Governments
TYPES OF FINANCE
 Finance can be categorized depending on two criteria:-
1. Sources of fund
 Debit finance

 Equity finance

2. Financed group
 Personal finance

 Corporate finance (business finance)

 Public finance (government finance)

MODES OF FINANCE
 Finance can be achieved through direct mode or indirect
mode
1. Direct mode is where the investor lend his fund direct
to the borrower depending to their agreements and
conditions agreed but normally under interest
payments.
2. Indirect mode is where now banks comes into existence
to facilitate the process
 Banks perform intermediary function by linking
together between lenders (depositors) and borrowers.
HOW BANKS OPERATES?
 Bank works as intermediary institution by linking
lenders and borrowers together.
 It mobilize funds from the public by paying them with
interest to their deposit.
 In order to generate profit the banks charges high interest
to their clients on their loans granted.
 Not only banks but non banks institutions as well it
provides loans and advances.
AIMS OF FINANCE
 Finance have got different aims depending to the subject
of investor and borrower
 Investor he looks for:
 High return

 High profit

 Business expansion

 Fund diversification

 Borrower looks for

 Startup capital
 Working capital
 Transactionary and precautionary
FEATURES OF CONVENTIONAL
FINANCE
1) Collateral based finance
2) Interest based finance
3) It is cash based finance
4) No consideration
5) Fixed return
ISLAMIC FINANCE
 Is the flow of fund from surplus to the deficit as
complied with islamic law.
 In islamic finance no prohibited elements like:

 Interest

 Gharar (uncertainty or high risk)

 Maysir (game of chance)

MAIN OBJECTIVE OF ISLAMIC FINANCE
 The main objective of islamic finance is:
 To provide alternative to interest based finance
 Spiritual purification
 Social welfare
 Poverty alleviation
FEATURES OF ISLAMIC FINANCE
 Interest free
 Gharar free

 No unlawful objects

 Maysir free

 Profit and loss sharing

KEY PRINCIPLES OF ISLAMIC FINANCE
 Islamic finance is directed by three main principles
which are:
I. Principle of equity
II. Principle of ownership

III. Principle of participation

INTEREST AND ITS IMPACTS
 Interest is the any excess paid on top of principal amount
borrowed.
 Interest is termed as required rate of return (investors
perspective), but also is cost of capital (borrowers
perspective).
 Interest can be simple interest or compounding interest.
TYPES RIBA
 Riba an nasiiah – currency (money) based on time
 Riba al fadl – quantinty / volume
REASONS FOR PROHIBITION OF RIBA
 From the prophetic period, from qurushes' dids
MISUNDERSTANDINGS ON INTEREST
 In mobile phone loans (bundles)
DIFFERENCES BETWEEN RIBA AND
PROFIT
PROHIBITION AGAINST INTEREST
 Islam has strongly prohibited the inclusion of ribah in
any business related activity and has announced openly
painful punishment to those engages in those wrong
deeds.
IMPACTS OF INTEREST
 Interest have both positive and negative impacts to
individual, society, business and community if not
country in general.
 Despite of its positive impacts, interest have very badly
impact to the society
 Poverty

 Intensive stress

 Collapse of business

 Houseless

 Spiritual punishment

 Rise of inflation
TOOLS OF ISLAMIC FINANCE
 Islamic finance applies several methods in supply for
fund. Those methods are classified as follows:
A. Partnership based tools
 Musharaka

 Mudaraba

A. Trade based tools

 Salam sale

 Istisna

 Murabah

A. Lease based tools

 ijara
TOOLS FOR ISLAMIC PERSONAL
FINANCE
 The following are the tools that islamic banks can apply
in order to provide finance to individuals
1. Tawarruq (monetization)

2. Service ijara

3. Ena