Modern Islamic banking was introduced in problem facing Islamic countries in early 1980’ modern Islamic banking was need of the hours and it was strongly desired because people have reject the idea of modern banking but for economic growth the use of commercial banks become a need without it no trading and other business activity was possible . The Islamic banking system was designed on profit and loss sharing ratio several modes of financing has been introduced by Islamic banking in the area of investment lending and trade
Financing is done in three forms Musharaka which is similar to joint venture .Bank is directly engaged in this activity and share the profit and loss with client terms and conditions are agreed before Mudarabha in this activity. Bank only do financing and the expertise provided by the patron, profit and loss shared by both partners on already agreed terms .Investment on the basis of estimated rate of return the bank evaluate the rate of return on a forthcoming project and provides finance on the basis of the least rate of return should be paid to bank if the venture is finished with profit more than estimation the profit is given to client if there is any loss the bank has to bear such loss.
Islamic banks also offers services in trade financing such as hire purchase, mark up, selling and buy back, letter of credit respectively .These Islamic banks playing great role now a days to finance industry by introducing lending on a moderate ways such as by providing the facilities of overdrafts, lending them loans with a service charge low cost loans which are provided to deserving persons.
Islamic banks facing difficulties in financing the business under the scheme of profit and loss sharing as there is great risk first they are hesitating to financing in long terms business project with less earning financing the small scale business bank hesitate to finance loans to such projects on which it is not directly involved the fourth one is financing on Government borrowing why bank hesitate on such criteria the question should be answered justifiably why it is so?. The thing is this detailed assessment and evaluation is required for any project which is under consideration in order to estimate the rate of return and its future reliability which requires specialization and expertise within the specific field actually the PLS scheme is totally based on risk so the expertise and advices of consultants is required for which finance is needed
Moreover existing banking law does not allow banks to use the funds of clients directly but the banks only depend on the deposits which can be considered it’s assets for this purpose amendment in legislation is necessary so that banks can enjoy the support of public as well as of Government. So there is always risk in lending money to industrial sector. But now a day’s some international Islamic banks such as Dubai Islamic banks are providing such financial assistance to mega projects and monetary aid but it is encouraging that investment and financing by the Islamic banks in industrial sector is increasing day by day. In Pakistan the investment in industrial sector by Islamic banks has increased from 4.2%to 6.2 % surprisingly the largest share of investment went to textile sector. So it can be said without any doubt that Islamic bank can play their vital role in the growth of economy by using proper techniques to meet the demands of the industry.
-- Al Arabiya Digital