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How do Islamic banks function?

Following are the way in which bank make an income from deposits :

1. Loans with a service charge

The problems of the Islamic banks occur from their need to acquire their assets under the PLS (Profit and Loss Sharing) scheme. A simple solution, already exist in the current theories of Islamic banking. It need only be pointed out and acted upon.

All three models such as Iranian, Pakistani and the Siddiqisss provide for loans with a service charge. Even though the specific rules are not identical, the principle is the same. So the funds in the deposit accounts (current and savings) are used to grant loans (short- and long-term) with a service charge. By doing this the Islamic banks will be able to give all the loan facilities that conventional banks provide while giving capital guarantee for depositors and earning an income for themselves. This would also remove the rest of the obstacles in opening and in service Islamic banks in non-Muslim countries.

The bonus for the borrowers is that the service charge levied by the Islamic banks will necessarily be not more than the interest charged by conventional banks.

2. Investment under PLS (Profit and Loss Sharing) scheme

The idea of participatory financing introduced by the Islamic banking movement is a exclusive and positive contribution to modern banking. By making the PLS mode of financing, the main mode of financing the Islamic banks have run into several difficulties. The Islamic banks would provide all the conventional financing through lending from their deposit accounts through current and savings deposits, it will leave their hands free to engage in this responsible form of financing innovatively, using the funds in their investment accounts. They could then engage in Mudaraba financing. Being partners in an enterprise they will have access to its accounts, and the troubles associated with the non-availability of accounts will not occur.

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