Banking

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With the growing accessibility of information online, modern entrepreneurs in search of to grow their businesses have a huge leg up on generations past. Yet for every bit of accurate and genuinely helpful advice, there is an increasing amount of misinformation and myths surrounding the small business lending space. Unfortunately, much of that misinformation can give business owners a false sense of their own eligibility for .

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Don’t miss out on opportunities to secure funding for your business due to false information. Let’s separate fact from fiction and bust five of the most common small business lending myths we hear every day.

Myth 1: Approval takes forever

Whether you’re itching to move forward with a new business idea or need cash quickly to cover an unexpected expense, one of the most common questions business owners have when applying for funding is “How fast can I get cash in hand?”

You may hear from well-meaning friends and relatives that getting approved for a business loan can take weeks or even months, but that information is outdated. With new online loan applications, an organized business owner can complete their application in less than an hour, and it can be reviewed and approved within 24 hours of submission. Many lenders can even offer cash in hand in as little as two days.

While some borrowers may take additional time to gather financial statements or get their credit reports in better shape, once you hit “submit,” the approval practice is very efficient. Don’t let the fear of a long approval process hold you back from seeking a loan.

Myth 2: New businesses never qualify

The startup funding quandary is a difficult one. You need an established business to secure funding, but you need cash in hand to get your business off the ground. Seeking funding from or angel investors is a popular route for securing startup funding, but is it the only way?

Many startup entrepreneurs assume they need to be in business for a few years and have established business credit before they can qualify for a loan. However, more and more lenders are specifically offering startup loans that require little or no business credit history to qualify.

Applying for a startup loan will involve more scrutiny into your personal finances than other types of business loans. Your personal credit score will be the most important part of the application. You may also be faced with less favorable rates than you would receive as an established business. But if you’re committed to finding funding and open to the necessary conditions, securing a loan for your brand new business is possible.

Myth 3: Online lenders are con artists with unreasonable rates

We get it. The online alternative lending market is relatively new, and people are skeptical of new things. Unfortunately, many unscrupulous and brokers have engaged in predatory and dangerous lending practices, giving the entire industry a bad rap.

But in reality, some alternative lenders operating online offer single-digit interest rates. Those offering higher rates are often working with borrowers who are considered risky. Online lenders regularly consider a wide variety of borrower credentials aside from just the traditional credit report and score. Business owners who were turned down by their bank can frequently find the funding they need online.

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As with any financial transaction, it’s critical that business owners do their about an online lender before signing the dotted line.

Myth 4: Loan officers only care about your credit score

This myth, carried over from the outdated traditional bank model for loan approvals, can leave business owners with less-than-stellar credit feeling hopeless about their funding prospects. Luckily for these entrepreneurs, growth in the alternative lending sector has led to a larger spectrum of factors being considered in the loan approval process.

Many lenders will now give equal weight to your company’s revenue history,  and other financial documents in determining your loan eligibility. This information often paints a very different picture of a business and its owner’s financial standing than what a credit score alone can convey.

Even so, before applying for a business loan, it is still important to take steps to make your credit report and score the best possible reflection of your financial history. Always make debt payments on time and manage your credit usage responsibly. Also frequently check your credit reports for accuracy. If you find errors, contact the reporting agencies to correct the mistakes.

Myth 5: Approval is determined by a heartless algorithm

Once upon a time, entrepreneurs seeking small business funding could walk into their local community bank, build face-to-face relationships with managers and loan officers and be confident they understood the whole picture behind their loan application, including the cold hard numbers as well as the more intangible elements of their qualifications as borrowers.

These days, technology has all but replaced those in-person banking relationships, creating the impression that loan approval decisions are controlled by nothing more than a few concrete variables and an algorithm saying “yes” or “no.”

But while you may have lost the ability to look your loan officer in the eye and strike a deal with a handshake, the modern funding process isn’t actually as impersonal as this suggests. In reality, lenders consider a wide variety of objective, number-based factors as well as more subjective considerations, like your business and .

If you’re concerned about certain elements of your loan application, like your credit score, take the time to flesh out your business plan, fully explaining how the funds you are borrowing will be used and how this investment will lead to a successful business. You’ll read more about credit scores later in this chapter.

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Ultimately, your lender’s main consideration is whether you will make your loan payments on time, every time. Your loan application should, both through financial documents and through your written statements, paint the best possible picture of your future ability to repay the loan.

If you do your research, stay organized and clearly and concisely convey this information to lenders on your loan application, your chances of being quickly matched with a loan will tremendously improve.

Mobile money transfer, also referred to as mobile money, mobile payment, and mobile wallet generally refer to payment services operated under financial regulations and performed from or via a mobile device. Instead of paying with cash, cheque, or credit cards, a consumer can use a mobile phone to pay for a wide range of services and digital or hard goods.

Although the concept of using non-coin-based currency systems has a long history, it is only recently that the technology to support such systems has become widely available. Similarly, Julia s. cheney defined mobile financial services from her paper examination of mobile banking and mobile payments as follows “Mobile financial services is a term applied to a range of financial activities conducted using mobile devices, such as cellular phones or personal digital assistants.

These activities fall into two broad categories: mobile banking and mobile payments. Mobile banking allows bank customers to check balances, monitor transactions, obtain other account information, transfer funds, locate branches or ATMs, and, sometimes, pay bills. In the United States, depository institutions’ mobile banking platforms rely on one or a combination of the following three strategies: SMS text messaging, browser-based programs, or downloadable mobile-banking applications.

The term mobile payments refer to payment transactions initiated or confirmed using a person’s mobile cellular phone or personal digital assistant. These may be such things as making a purchase at the point of sale, sending money to a person or a business, or purchasing a product or service remotely.

Mobile payments generally fall into two categories. Those made at the point of sale are called “proximity payments” and are typically initiated using NFC technology. Mobile “remote payments,” on the other hand, are not transmitted by NFC but rather require payments to be initiated and settled through the mobile cellular phone network in combination with an associated payment network.

These payments may involve person-to-person, person-to-business, or business-to-business payments and rely on SMS text messaging, wireless Internet technology, or a downloaded application in order to execute the payment.Mobile payment is being adopted all over the world in different ways (wirelessintelligence.com) (erricson.com 2011).

In 2008, the combined market for all types of mobile payments was projected to reach more than $600B globally by 2013 (juniper research 2013), which would be double the figure as of February, 2011 (bonsoni.com 2011). The mobile payment market for goods and services, excluding contactless near field communication or NFC transactions and money transfers, is expected to exceed $300B globally by 2013 (juniper research 2013).

In developing countries mobile payment solutions have been deployed as a means of extending financial services to the community known as the “unbanked” or “under banked,” which is estimated to be as much as 50% of the world’s adult population, according to Financial Access’ 2009 Report “Half the World is Unbanked” (financialAccess.org 2009).

These payment networks are often used for micropayments. The use of mobile payments in developing countries has attracted public and private funding by organizations such as the Bill & Melinda Gates Foundation, United States Agency for International Development and Mercy Corps. Mobile financial services cover a “broad range of financial activities that Consumers engage in or access using their mobile phones” (Boyd and Jacob, 2007:6).

They can be classified into three separate categories: mobile banking , Mobile money transfer ), and mobile payments  (GSMA, 2008a). Banking is subsumed under the larger category of electronic banking.Electronic banking  refers to “the provision of retail and small value banking products and services through electronic channels.

These include deposit taking, lending, account management, the provision of financial advice, electronic bill payment and the provision of other electronic payment products and services such as electronic money” (Basel 1998:3). As a form of ebanking, mbanking is defined as:”…financial services delivered via mobile networks and performed on a mobile phone.

These services may or may not be defined as banking services by the regulator, depending on the legislation of the country in question, as well as on which services are offered.” (Bångens and Söderberg 2008: 7).Porteous (2006) further explains that mobile banking can either be additive or transformational.

For the former type, banking is considered an additional channel for existing clients to access banking services; in the transformational category, however, it targets clients who do not have bank accounts, aiming to include them into the formal banking system. (Bångens and Söderberg 2008).

Money, on the other hand, is a form of electronic money. Electronic money refers to “stored value or prepaid payment mechanisms for executing payments via point of sale terminals, direct transfers between two devices, or over the computer networks, such as the Internet. Stored value products include hardware or card based mechanisms (electronic purses or wallets), and software or network based cash (also called digital cash)” (Basel, 1998:3?4).

M? money then refers to “services that connect consumers financially through mobile phones. Mobile money allows for any mobile phone subscriber – whether banked or unbanked – to deposit value into their mobile account, send value via a simple handset to another mobile subscriber, and allow the recipient to turn that value back into cash easily and cheaply” (GSMA, 2009:7). In this way, money can be used for both transfers and payments.

In fact, money is generally used in payments and money transfers rather than for banking. As such, money does not earn interest compared to bank deposits. This ensures that all cash (of which money is one) dispensed and circulating corresponds to actual funds in the system. This helps the central banks track movements in money supply1 (Mapa, 2009). With this, money cannot be used for savings and cannot be lent by m?money service providers (Sec 5.C and D of Circular 649) (BSP 2009).

However, whether these funds should not earn interest has been questioned by some, especially when the funds that are pooled to backup the issued e-money can be deposited in a prudentially regulated institution or invested in “lower risk” securities (Tarazi, 2009).Thus far, the use of money has primarily been transactional, such as payment of bills (including payment conversion of money to electronic loads), transfer of funds.

In microfinance, for instance, the system has largely been utilized to transfer and pay loans.Mobile banking models:Lyman et.al. (2006) makes two distinctions of branchless banking: bank led Non?bank commercial actors. This was further expanded by Goswami & Raghavendran (2009) by breaking down mobile banking variants into 5 models based on how they partner up with telecommunication providers:  carriers going solo,  banks going solo,  exclusive bank and telecom partnership, (bank telecom open partnership, and  open federation model.

These variations indicate that there is much innovation occurring with respect to delivering m?banking/m?money services. Although innovation is important, at some point, standardization would be needed to support interoperability that would enhance services among customers (GSMA, 2008a).

In fact, of the five models mentioned, the open federation model is considered by Goswami & Raghavendran (2009) as the most flexible and dynamic since it allows for a partnership between all banks and telecom companies while sharing a common platform form banking. The platform then expands the coverage of mobile banking and gives the unbanked a freedom to choose with whom to maintain an account.

The other implication of the variety of existing models is that it creates different regulatory arrangements depending on the nature of partnerships between telecommunication carriers and financial institutions. In the case of SMART Money in the Philippines, for instance, the banking regulations have complied with by its banking partner, whereas the telecommunications aspect is addressed by the telecommunications provider.

A regulatory distinction however occurs once there is e?money issuance by a telecommunication company or non?bank entity through the telecommunications operator (Lyman, et al. 2006), as was the case with Globe Telecom’s G?Cash. In both cases, they had to work with financial regulators on banking regulations it was not previously concerned with.

Mobile phone payments is a popular and most preferable way of sending and receiving money in Africa since the vast majority of the continents’ population are ruler dwellers or uneducated (Ayo, Ukpere, Oni, Ometo, & Akinsiko, 2012; Mangudla, 2012). The concept of mobile money transfer dates back to the history of telecommunication and banking industries.

There are collaborations between the two industries for the facilitation of MMT service (Ayo et.al, 2012). M-PESA was the first MMT service in Africa, which was introduced by Safaricom of Kenya (A Vodafone partner) in 2007. M-PESA (M refers to mobile, and PESA refers money in Swahili language) can be accessed from the different outlets such as the headquarter, main branches of the company, or an authorized business outlet.

Safaricom registered over 20, 000 consumers for M-PESA within the first month of introducing the service (Hughes & Lonie, 2007), and the number reached more than 15 million users of MMT in Kenya after five years of launching (Michaels, 2011). He contends that there are several factors behind the wide adoption and acceptance of this service by the users including rapid migration to cities for work, a significant unbanked number of the populace, the credibility of the service provider, and finally their commitment towards families in home villages.

Therefore, as asserted by Hughes & Lonie, (2007), the M-PESA is primarily designed for the unbanked populace in Kenya. The MMT also was later introduced in several African countries such as Nigeria, South Africa, Tanzania, Ghana, Somalia among others. The success of these services in South Africa and Ghana were less than the Kenya’s M-PESA success (Tobbin, 2010).

MMT service in Somalia was first introduced by GOLIS , HORMUD and TELESOM telecommunication companies working with puntland, south central Somalia and Somaliland respectively. SAHAL and ZAAD money transfer was the first product; however, EVC, the hormud version of MMT, was banned by al-Shabab Group. The hormud company later introduced a more advanced service named EVC Plus.

Other telecommunication service providers later offered similar products with different brands. For example, Nation link offer E-MAAL and somtel offers E-DAHAB services respectively. The lack of effective government in Somalia affected the necessities of the life and the telecommunication industry filled the governmental gap by introducing revolutionary technologies (Osman, 2012).

The industry provides several services such landline, mobile phones, internet and mobile banking. The mobile banking or what we can refer to mobile money transfer is very popular in the most sophisticated and active people in Africa with regard to mobile phone payment (Osman, 2012).Many diverse factors contribute to the adoption and acceptance of these MMT services in Somalia.

One major reason is that the banking systems in the country are very limited. In addition, there is much risk for caring cash since the country is still politically unstable and recovering from more than two decades of chaos and civil war (Mohamed, 2013). There are huge remittances sent by the Somali Diaspora back home to their families, friends, relatives, or business associates.

There is also huge migration to the major cities because of economic crisis, famine, droughts, and job seeking. All these factors can contribute to the acceptance and usage of MMT service by the Somalis as they were behind its usage in other countries especially in Africa. There are limited empirical studies on the state of art of MMT adoption in the country.

Sayid, Echchabi, and Abd. Aziz (2012) examined the mobile money acceptance in Somalia by drawing on the TAM model. Sayid et.al’s (2012) study suggested that perceived usefulness and security positively affected the attitude towards mobile banking, whereas social influence and perceived usefulness significantly and positively influenced the intention to accept mobile money.

Furthermore, their study suggested that perceived ease of use had positive effect on perceived usefulness of mobile money. Sayid et.al’s (2012) sample size was very small (N=100) which is difficult to draw a statistical conclusion from it. In addition, this study looked at the MMT in a broader scope. However, their study provided useful insights about the factors influencing the acceptance and adoption of MMT in the country.The current study will examine the trends, challenge and future of mobile money transfer and banking in puntland. The study will focus sahal service as particular as there is no such in depth analysis in this service before.

This service has 597,000 sahal service active subscribers which do mobile money services across puntland, similarly it has 86,000 active mobile payment subscribers which use sahal payment as their first choice paybills.The study will focus on these customers, the regulation and the mobile network operators to study the trends, challenges and future of this service.

The Australia and New Zealand Banking Group Limited commonly called ANZ is the fourth largest bank in Australia after the Commonwealth Bank, the National Australia Bank, and Westpac Banking Corporation. [birgitdaube. de] ANZ is also the largest bank in New Zealand, where the legal entity became known as ANZ National Bank Limited in 2004 and where it operates two brands, ANZ and the National Bank of New Zealand. ANZ warned its customers to be careful of a fraudulent portal of a website that is generated by a virus which resides on a user’s computer that generates a form which requests the account holder for personal details.

The problem being faced is as follows: Trojan horses enter as attachments in the inbox of a user but once they are opened, they secretly install programs which cause great danger. The Trojan horse virus plants malicious codes on computers and a keyboard scanner is made use of to record the sequence of the numbers and letters that are typed in. A Trojan is a program that appears to be legitimate but is designed to have destructive effects on the data residing in the computer onto which it is loaded.

It is a nonreplicating computer program planted illegally in another program to do damage locally when the software is activated. [ ownee. com] When a Trojan detects a particular sequence of numbers and letters like the address of a banking website it creates a fake web page in which users enter data and when they send the mail. , the data directly goes reaches the criminals. [theage. com] ANZ warned its customers about the hacking of the online banking portal by a virus that saves personal details and sends them to the hackers.

Customers who accessed the banking portal lost important data. The Trojan horse stores personal data by planting malicious codes and scanning sequences of letters and numbers with a keyboard scanner. The data reaches the place where the hackers are operating from and they gain easy access to such private and confidential data. The Trojan horse also known as Trojan is a virus that appears to perform a desirable function but in fact performs secretive malicious functions which enable unauthorized access to the user’s machine. [answers. com]

This issue is not related specifically to ANZ Bank. It is related to all banks in general and this problem of hacking by Trojan horses can occur in various other banks as well. Customers will face severe losses if personal and sensitive information falls in the hands of hackers and this may eventually affect thousands of customers and the entire bank may shutdown due to disappointment of customers and loss of trust in the bank. If customers are disappointed they will close their accounts in the bank and on seeing this other customers will also lose trust and do the same.

The banks reputation will face a severe blow. It will run of business and be forced to shutdown. The virus requests users to fill in their personal details by generating a fake page and transfers the data to the place where the hackers are operating. A fake page is created which requests the account holders to fill in their personal details; the data is stored and automatically sent to the hackers. This has been described as a very advanced way of stealing information. Trojan horses are planted illegally to cause damage and have destructive effects on their activation.

1. The current liability section of the company’s Balance Sheet on 30 June 2011 should show: a. Bank Loan $100,000. b. Bank Loan $500,000. c. Bank Loan $500,000, Interest Payable $50,000. d. Bank Loan $1 00,000; Interest Payable $50,000. e. Bank Loan $1 00,000; Interest Payable $20,000.
2. Ham Ltd is about to issue $30 Million of debentures with a 7% coupon rate in the public debt market. On the date of issue the market rate of interest is 6%. How much should Ham expect to receive for the issue of debentures (excluding any transaction cost). a. $30 million b. More than $30 million c. Less than $30 million d. $31 million e. The answer cannot be determined from the information given.
3. Segregation of duties involves: a. Ensuring that only employees with appropriate accounting qualifications work in the accounting department. b. Physically protecting sensitive assets. c. Providing each staff member with an individual password. d. Ensuring payments are only made when accompanied by appropriate authorized documentation. e. Separating record-keeping from handling of assets.
4. When pperforming bank reconciliation, the ending balance on the Bank Statement should be adjusted for which of the following items to obtain the correct Cash at Bank balance? a. Dishonoured (NSF) cheques. b. Unpresented cheques. c. Errors made by the accountant. d. Interest received by the bank. e. All of the above.
5. Truckie Ltd uses the perpetual inventory system. inventory? b. Dr Accounts Receivable, Cr Sales revenue. How should it record a credit sale of a. Dr COGS, Cr Inventory; Dr Accounts Receivable, Cr Sales revenue. c. Dr Inventory, Cr COGS; Dr Accounts Receivable, Cr Sales revenue

This move will certainly reduce the Naps and in turn improve the asset quality of the banks. ; Till recent past, corporate borrowers even after defaulting continuously never had the fear of bank safeguard the real interest of banks. ; However with the introduction of CARFARES ACT banks can issue notices to defaulters to repay their loans. Also, the Supreme Court has recently given the banks the freedom to sell mortgage assets of the borrowers, if they do not respond to the legal proceedings initiated by lender.

This enables banks to get rid of sticky loans thereby improving their bottom lines. Axis Bank, the third largest private sector lender in the country, today said it has classified its loans to Decca Chronicle Holdings as non-performing assets (Naps). “We have made provisions proactively. We have declared (the loans to) Decca Chronicle as NAP. We provided adequately against this exposure,” Assonant Sanguine, executive director at Axis Bank, told reporters. He declined to offer further details. L cannot comment on specific accounts and discuss details in public,” Sanguine said. It is believed the private lender has lent close to RSI 400 core to the many, which owns Decca Chronicle newspaper and the Indian Premier League (PILL) cricket team Decca Chargers. The Hydrated-based company has borrowed around over RSI 3,200 core loans from banks and financial institutions. The bank’s total provision during July-September period almost doubled from a quarter ago to RSI 509. 4 core.

Sanguine said the bank has made RSI 115 core excess NAP provisions than it was required to because of the current uncertain economic environment. Axis Bank held a provision coverage ratio of 80 per cent as proportion to its gross bad assets including prudential write-offs at the end of September, 2012. The provision coverage ratio before accumulated write-offs was estimated at 90 per cent. The private lender closed the quarter with a restructured loan portfolio of RSI 4,068 core, representing 2. 04 per cent of gross customer assets. “There is no particular trend.

We continue to maintain our guidance (on restructured loans) at RSI 4,000 core,” Sanguine said. “While the gross and net Naps at RSI 2,200 core and RSI 650 core, respectively were lower than consensus estimates, the overall provision expenses have dramatically shot up. With restructuring during the second quarter at RSI 320 core, the slippage umber may have remained high,” Shape Shavers, analyst with brokerage McKay Global Financial Services, said in his note to clients after the bank announced its second quarter earnings yesterday.

The brokerage noted that the proportion of the borrowers among the large and medium corporate with A and above rating has gone down in July-September period to 62 per cent. “Over last four quarters, Axis Bank has seen migration of up to 11 per cent of loans from A and above rated category to lower categories,” Shavers said. Increased by 22 per cent to RSI 1,124 core aided by higher interest and fee income, and lower expenses.

Islamic banking gets its name from its compliance to Islamic laws (also known as Shariah laws) governing financial transactions. Islamic law prohibits charging of rent on money that in conventional words means interest and is termed Riba in Islamic laws. The rationale behind not charging interest comes from the Islamic finance concept, which states that interest or riba encourages circulation of wealth in the hands of a few rich entities and limits prosperity to reach to the masses in the society.

However, Islamic banking is not limited to interest-free banking alone but adhering to all Islamic values such as charity, profit sharing, zakat (or Islamic tax collected for the destitute) and not doing business in things classified as haram (or forbidden under injunctions of Islam).

As stated in State Bank of Pakistan’s website that allows Islamic banking practices in that country; “Islamic banking, the more general term is expected not only to avoid interest-based transactions, prohibited in the Islamic Shariah, but also to avoid unethical practices and participate actively in achieving the goals and objectives of an Islamic economy”(faq Islamic banks). The first modern experiment of Islamic banking was carried out in Egypt. This experiment was not labeled as an initiative to establish Islamic banking because the idea holders feared to be labeled as Islamic fundamentalists.

The initiative became a savings back working on profit sharing in the town Mit Ghamr, year 1963( Zaman & Movassaghi 38). Ariff (1988) stated that “These banks neither charged nor paid interest, invested mostly in trade and industry, directly or in partnership with others, and shared profits with depositors” (qtd. in Zaman & Movassaghi 38). It was after the 1970s that Islamic banks saw mushroom growth internationally as stated by Zaman & Movassaghi.

The following banks were opened up; Nasr Social Bank in 1971,Amanah Bank in 1973, the Dubai Islamic Bank in 1975, the Kuwait Finance House in 1977, the Faisal Islamic Bank of Sudan in 1977, Faisal Islamic Bank of Egypt in 1997, the Bahrain Islamic Bank 1979, and the Qatar Islamic Bank 1981. (38). However, it is only in the last few years that Islamic banking and finance has picked up pace and Islamic economists have come up with innovative financial products that are also Shariah compliant. Islamic finance believes that interest on consumer as well as investment or corporate loans is forbidden.

It devises its rulings out of the events of Islamic history and financial transactions there in. Some salient foundations of these rulings are; the concept of profit as well as loss sharing with entities the loans are advanced to. There is no such thing as a confirmed profit in form of interest in Islamic finance. (M. I. Usmani 63). If a custodian is handed money for safekeeping he does not have limited liability but a complete liability towards the clients that handed the money or assets for safe keeping.

The custodian is allowed to invest these amounts in trade and business to earn profits on it. However, is liable to share the profits with the clients according to the ratio of the share of their capital in the entire invested capital (M. I. Usmani 62). Islamic financial practices believe only in asset backed financing and not in money as it does not have any intrinsic value. Therefore, many Islamic banks believe in entering a valid contract with the clients and engage in actual purchase of things such as houses, automobiles or consumer goods and later sell it out to client.

It is imperative to understand the nature of Islamic financial terms of contract and sales too. Under these rulings a contract is void if it violates the Islamic principles governing economics, is not formed through mutual agreement and negotiation, is not part of the normal market transactions and benefits one party over another. Whereas, M. I. Usmani describes sales in Islamic banking are considered void if they do not fulfill these conditions; have a right contract, subject matter, price and possession or delivery promise at the time of transaction (71).

The Islamic modes of financing widely used are namely Musharakah, Mudarabah, Diminshing Mushaharakah, Murabaha, Salam, Istisna, Istijrar, Ijarah and Ijarah Wa Iqtina. Musharakah is a kind of partnership where in profits are shared according to a specified ratio decided upon by the partners in a mutual contract (M. T. Usmani 35). The profit sharing terms of the contract should be mutually agreed to by the partners but should not allocate a fixed return to either of the partners because that is classified as interest. On the other hand, losses are to be shared according to the initial capital invested in the venture.

If compared to the conventional American banks a fixed rate of return is charged termed as interest or markup rate on any capital lent out. Furthermore, American banks do not share liability or losses if the venture that borrowed money accrued losses. However, in Musharakah it is responsibility of bank to share the losses as well. The return of the bank is linked with the profits generated by the venture, if profits are more it will get more profits but the Islamic bank cannot impound these profits but has to share it justly with all the depositors of the bank.

This is not applicable to conventional American banks because they allocate a fixed markup return on loans and cannot therefore also take advantage of sharing profitability of the venture they finance. Mudarabah is closely related to Musharakah but is another form of partnership wherein one partner provides the capital to invest and the other utilizes the capital in business. This is somewhat like the sleeping partner and the working partner concept in conventional banking and financial partnerships. The profit and loss sharing under this mode of finance is left upon the mutual consent of the two partners i.

e. bank and client. However, a fixed lump sum amount irrespective of profits or losses is not allowed. Diminishing musharaka is referred to the mode in which the financer and client have joint ownership of an asset. The financer has a majority stake and the minority stake is with the bank’s client. As the client keeps paying off the parts of payment of the original capital investment his ownership of the asset keeps increasing and the bank’s ownership keeps decreasing. Apart from that the client is supposed to pay a rent on asset to the bank on basis of percentage ownership in the asset. M. I.

Usmani defines murabaha as “a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred and sells it to another person by adding some profit there on” (125). Salam is generally used for Islamic banks to finance agricultural ventures where in a seller agrees to supply particular goods or services to a buyer at a future date of delivery (i. e. mutually consented upon), however, the buyer the price of the transaction is completely paid at spot. (M. I. Usmani 133). In Istisnah, it is a sale transaction where a commodity is transacted before it comes into existence.

It is necessarily for manufactured goods, part or whole of payment is made in advance the bank has right to cancel the contract before manufacturer starts the work. Istijrar involves two parties, a buyer which could be a company seeking financing to purchase the underlying asset and a financial institution. It has two forms; first where the price is determined after all transactions of purchase are complete and second where the price is determined in advance but the purchase is executed from time to time. ( M. I. Usmani 143).

Ijarah (Islamic leasing) is where in the leaser who also is the owner of things transfers the use of thing to another person or the lessee for a mutually agreed time period and on a mutually agreed consideration. Ijarah wa Iqtina (leasing and promise to gift) is a form of leasing agreement in which at the end of the entire payment of lease the object of lease is gifted to the lessee i. e. the ownership is completely transferred. Islamic banks differ from conventional American banks in many ways. Islamic banks design instruments and financing modes in the boundaries prescribed by Islamic law.

Conventional American banks are not subjected to any religious pretexts that define the code of financial ethics but the laws ascertained by financial regulators of the country. American banks are promised a fixed markup rate from the loan that they lend but Islamic bank share both the profit and loss from the forwarded loan. American banks do not encompass any religious taxes to support the community but just the state taxes apply. However, Islamic banks collect the zakat (Islamic tax for benefitting community) and disperse it among the needy segments of the society.

Conventional Islamic banks simply lend the money and are concerned about the principal as well as compound interest payments they receive. However, Islamic banks engage partnerships with clients and partner in the losses or profits of clients. Therefore, they work on understanding the nature of client’s business inside out to monitor their performance. In addition, American banks do not concern the project evaluation or appraisal of their client’s business. This is because they are receiving a designated amount of interest and client’s business proceedings does not affect them.

However, Islamic banks carry out project evaluation of their client because they are a partner in losses as well. In American banking system if an installment is not paid on time or defaulted a compounded interest charge is levied on it. However, in Islamic banking it is prohibited to charge any such late surcharges and care is taken to assess the actual problems faced by the defaulter. If payment was defaulted due to genuine reasons no penalty is imposed but if it was done deliberately then a small compensation is charged. This compensation is not added to the bank’s revenue but is dispersed to charity causes.

American banks may focus only their personal growth targets and revenue growths. However, Islamic banks are required to focus on growth of their partners in business i. e. clients and keeping public interest at heart of future objectives. American banks can borrow money from money markets easily. However, Islamic banks face constraints towards such actions because any borrowings they make have to be Shariah compliant. American banks give greater weightage to the credit ratings of their clients to assess the advancement of loans.

Whereas, Islamic banks emphasize the project viability while deciding upon advancing loans. A typical American bank while financing projects mainly functions as a creditor to its clients (or debtors). On the other hand, Islamic banks become partners, investors, and sellers to their clients which depend upon the modes of finance taken up. Conventional American banks need to guarantee all the deposits they accept. However, Islamic banks only guarantee saving deposit accounts in their portfolio. Their clients have to share the losses as well depending upon the nature of the contract (Rahman).

Securitization is “the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security (i. e. bond issue, share certificate etc) (investopedia. com). Islamic banks have now ventured in securitization of Musharkah, Murabaha, Mudarabah and Ijarah. Many countries now have Mudarbahs listed at stock exchanges to be traded in. Islamic bankers are also bringing investment funds that are compliant with Shariah laws to the financial services market. Some of the funds established include equity fund, commodity fund, ijarah fund, murabaha fund, Bai-Al-Dain, and Mixed fund.

Therefore, it can be seen that Islamic banking sets its foundations in Islamic laws governing financial transparency. These are very different from conventional American banks in their economic concepts, financial products and services offered to clients. Furthermore, Islamic banking is relatively a new concept as compared to the conventional banking and economic concepts that have developed over ages. Islamic bankers and scholars are working upon deriving more products and services based upon Shariah to offer a greater range of financial products in the financial industry.

It holds appeals in its concept of community care and client care. However, the complete implementation of this form of banking on a large scale seems a questionable and daunting task. Works Cited “FAQs”. Sbp. org. pk. Retrieved 28th April from www. sbp. org. pk/ibd/faqs. pdf Rahman, Zaharuddin A. “Differences Between Islamic Bank and Conventional Bank” Zaharuddin. net . Retrieved 28th April 2009 from <http://www. zaharuddin. net/ index. php? option=com_content&task=view&id=297&Itemid=72> Usmani, Muhammad I. Meezanbank’s guide to Islamic Banking. Karachi Pakistan :Darul-Ishaat 2008

The history of Islamic Banking also known as Islamic Finance dates back to the 70s, with the establishment of Dubai Islamic Bank. Since then the Islamic Financial system has prevailed in the Islamic World, and even it has started attracting non-Muslims also. Since Europe comprises of a significant number of Muslim population it was the next stage of Islamic Financial Institutions expansion. This paper will give a detail analysis of the establishment and expansion of Islamic Banking system in the Europe.

Islamic Banking In Europe: The first encounter of the European banks with the Islamic ideology of Finance could be dated back to the early 20th century when some European banks were asked to provide Sharia compliant financial services in Jeddah and Bahrain. In the 70s the Middle East emerged as the center of Islamic Banking with the establishment of the first Islamic Banks in the region like the Dubai Islamic Bank, Kuwait Finance House and Bahrain Islamic Bank. This changed the European bankers’ perception a lot.

The European Banks involved with trade and commerce with these banks started learning about Islamic Finance. (Wilson, 2007) Since there has been a general negative perception of Islam in Europe and even more because of the secular nature of most European countries the Islamic Finance and Banking was viewed more skeptically than enthusiastically in the beginning. Soon the European bankers realized that Islamic Banking is really going to be a lucrative market in the near future with really high prospects of growth.

United Kingdom was among the first of the European countries to respond to the emerging Islamic Banking market positively. Since the 80s London has established herself as the leading center of Islamic Finance. Various banks in London not only offered Sharia compliant liquidity management services to Islamic banks in Gulf region since the 80s, but also was the first to host retail Islamic bank, the Islamic Bank of Britain, established in 2004. London also took the lead in establishing first Islamic Investment bank in Europe, the European Islamic Investment Bank in 2006.

Moreover many conventional banks also recognized the opportunity of this lucrative and burgeoning business and started providing Islamic Financial services in the local retail market. HSBC and Lloyds TSB are the major players in the market and provide Islamic deposit facilities and housing finance using Sharia compliant structures. Barclays Capital partnered with Dubai Islamic Bank for Sukuk issuances, while Standard Chartered started providing Islamic Finance services in the Gulf region. (Wilson, 2007) Germany is another major player in the Islamic Banking sector.

Since the country hosts significantly larger number of Muslim population as compare to United Kingdom, it felt itself in a dire need to establish this market. The Deutsche was the first to establish capital protected funds in the Gulf region, while German Federal State of Saxony-Anhalt issued sukuk worth €100 million in 2004, which was listed in Luxembourg. (Wilson, 2007) Moreover many insurance companies like Hannover Re Group are offering full Takaful insurance, but these companies are not working inside Germany. (Al Nasser, 2008)

France a country with the largest Muslim population in Europe lags behind other western European countries in this competition. The country has yet to establish a true Islamic Bank for its more than 6 million Muslim population. The French Senate is looking for ways to remove legal hurdles and obstacles for Islamic Finance services, while the French government seemed committed to make Paris the capital of Islamic finance. (Tiberge, 2009) It seems quite probable that by the end of 2009 Islamic banks will set their foothold in Paris and other commercial centers in the country.

Three major Islamic Banks, Qatar Islamic Bank, Kuwait Finance House and Al-Luck Islamic Bank have applied for operating in France. (Lomazzi, 2008) At present there are few Islamic Finance service providers like Algerian Saudi Leasing Holding Company, Socieite General, Capital Guidance and BNP Paribas. (Islamic Financial Institutions, 2009) UBS has played a major role in providing Islamic Banking services among the Swiss banks. Inside Switzerland there are certain organizations that provide Islamic finance services. These include Dar Al Mal Al Islami Trust, Cupola Asset Management, Faisal Finance, and Pictet and Cie.

(Islamic Financial Institutions, 2009) The above-mentioned organizations primarily deals in assets management services. Islamic banking at retail level is yet to be established in Switzerland. The Netherlands is another European country keen to get involved in the Islamic banking sectors. Faisal Finance is currently the primary Islamic Finance services provider in the country. (Islamic Financial Institutions, 2009) Islamic banking is also well established in Luxembourg as there are a number of banks and organizations providing Islamic finance services.

These companies deal in takaful and holding primary, while Faisal Finance is the retail banking services provider. (Islamic Financial Institutions, 2009) Conclusion: The above-mentioned analysis of the establishment and growth of Islamic banking and finance in Europe clearly indicates that Europe is willing to take the advantage of the lucrative market of Islamic banking, but also to facilitate the services to the Muslim population residing in Europe. The recent financial crisis has forced many Europeans to perceive Islamic Banking system as a viable alternative to the conventional banking system.

References: Al Nasser, Lahem. (2008). Germany: Fertile Grounds for Islamic Banking. Asharq Alawsat. Retrieved from the World Wide Web on 20 April, 2009. http://www. aawsat. com/english/news. asp? section=6&id=15131 Islamic Financial Institutions. (2009) Institute of Islamic Banking and Insurance. Retrieved from the World Wide Web on 20 April 2009. http://www. islamic-banking. com/ibanking/ifi_list. php Lomazzi, Marc. (2008). Les banques islamiques arrivent en France. LeParisian. Fr. Retrieved from the World Wide Web on 19 April, 2009.

http://www. leparisien. fr/economie/les-banques-islamiques-arrivent-en-france-27-11-2008-323377. php Tiberge. (2009) Vatican Paper Supports Islamic Finance. France Wants Its Share of Sharia Banking. The Brussels Journal. Retrieved from the World Wide Web on 20 April 2009. http://www. brusselsjournal. com/node/3819 Wilson, Rodney. (2007). Islamic Finance in Europe. European University Institute. Retrieved from the World Wide Web on 19 April, 2009. http://www. eui. eu/RSCAS/WP-Texts/07_02p. pdf