Source of funds & uses of funds chapter 3 (ibf4043)
1. Source of Funds
& Uses of Funds
Retail Financing
Corporate
Banking and
Financing
Investment
Banking and
Financing
2. Sources of Funds
• The current financial landscape which is significantly influenced by
the conventional financial system shows that Islamic banks as a
financial intermediary play similar roles as commercial banks in
intermediating financial services.
• If commercial banks are involved in creation of money through
lending and investing, Islamic financial institutions (IFI) normally
create money through trading and entrepreneurship
• On the other hand, an IFI is equivalent to a commercial bank in
providing a payment mechanism for the transfer of funds for
economic activity, pooling of saving for economic and social purposes,
facilitating foreign trade and fund transfer, trusts and assets
management services, safekeeping customer assets and provision of
related financial services.
3. Sources of
Funds
The basic nature of commercial banks typically is to
attract funds from various sources and then invest the
funds in various interest-based instruments which
normally reward their customer with pre-determined
interest rate for the fund deposited in their banks
Conversely, Islamic banking system prohibits Islamic
banks from giving interest. The IFIs are not allowed to pay
any profit, interest for the fund that they collect from
depositors, where the creditor and borrower relationship
is a charitable one
Hence, IFIs differ from conventional commercial banks, as
they do not allow creation of money through lending
activities but they can approve the creation of money
trade and services.
4. SOURCE OF FUNDS
1. Current account(mudharabah)
2. Saving deposit(wadiah,mudharabah, qard)
3. Investment deposit(mudharabah, tawarruq)
4. Non deposit investment (sukuk,mutual funds, structured products & commercial
paper
5. Uses of
Funds
In term of using funds, Islamic banks
generally provide financing to gain profit
Since Islamic banks are trade-base banks,
they provide financing through various
trade-based underlying contracts
In practice, Islamic banks normally provide
financing to both retail and corporate
customers
6. Retail
Financing
For retail financing, Islamic banks
normally issue common products,
such as vehicle financing, home
financing, personal financing and
Islamic credit card
