Understanding Islamic Finance - Doha Academy of Tertiary Studies

Overview of Financial Institutions and Products 181finance institutions (DFIs) operating both as banking and non-banking institutions and providingfinance to industry, agriculture and other sectors or subsectors for developmentalactivities.Commercial banks undertake the intermediation function between the saving surplus andthe fund user units and entities and provide checking facilities to the savers/investors. NBFIsnormally do not provide checking facilities to the savers and facilitate the raising of funds forbusiness and industry directly from the saving surplus units/households. Investment banksare included in the NBFIs. Investment banks derive their income primarily from fee-basedactivities or profits from trading in securities rather than from a margin between the borrowingand lending costs. The services provided by these banks take many forms, including securitiesunderwriting, stock and bond trading, facilitating mergers and acquisitions, arranging andfunding syndicated loans and providing financial advice to companies needing funds.The above types of institution are regulated by central banks or monetary authoritiesand the securities and exchange commissions in respective countries. Regulators’ objectiveseverywhere are said to be efficiency in mobilizing resources from the surplus units andoptimum allocation of these resources along with stability of prices, payment systems andthe economy as a whole. In addition, there are some international financial institutionsthat coordinate the services of banks and financial institutions at a global level. The mostimportant of these institutions is the Bank for International Settlements (BIS), which performsthe function of coordination and standardization of the services of the financial institutionsin various parts of the world.8.4 CATEGORIES OF CONVENTIONAL FINANCIAL BUSINESS8.4.1 Commercial BankingThe main functions of a modern commercial bank include receiving deposits of variousnatures, granting short- and medium-term loans by way of overdrafts, discounting of billsand commercial papers, advances against securities for business and households, long-termmortgage financing and investments in capital markets. In some markets, commercial banksare also undertaking merchant banking. All this fund-based business is conducted on thebasis of interest that is charged from the fund users and paid to the depositors/investors.Commercial banks also deal in foreign currencies, money changing and perform a numberof services like issuing letters of credit (L/C) and letters of guarantee (L/G), paymentsmade/received on behalf of their clients, safe custody of valuables and a number of advisoryservices against service charges or commission.However, all commercial banks might not be undertaking all of the above functions,and the majority of them undertake the business of deposit-taking with an open checkingfacility and lending for short periods for providing running finance to business and industry.Medium- and long-term financing is mostly arranged by investment banks by way of directintermediation between the investors and industry/business.The Deposits/Liability Side of Commercial BanksAll deposits in conventional commercial banks are the liability of the banks, because theamount of deposits has to be paid back with or without a return. Current accounts thatare normally maintained by the business and corporate sectors carry no return and are