Understanding Islamic Finance - Doha Academy of Tertiary Studies

386 Understanding Islamic Financethe Islamic banks, foreign banks have been accepting dealing on the basis of mutualagreements by simple exchange of letters, to enable Islamic banks to avail confirmationfacilities up to an agreed ceiling without charging interest if the accounts are overdrawn.In consideration, Islamic banks undertake to abide by the following:— to keep a reasonable amount of cash in their current accounts with the confirmingbanks;— to endeavour to cover any debit as soon as possible (it is part of the understandingthat the Islamic bank does not ask for any return on any balance due to it, shouldthe other bank utilize these funds profitably. Therefore, there is no condition set bythe other party if the Islamic bank’s account remains overdrawn for some time).As partial security, the correspondent bank will, on adding its confirmation, debit theIslamic bank with a certain “cash margin”, which it will transfer immediately to its ownaccount. Thus, Islamic banks need, in fact, only to keep sufficient balances in their correspondentbank’s account to cover the cash margins on the letters of credit.Transfer of funds in a specific currency to be paid in the same currency is allowed withor without a fee. In traditional Islamic finance literature, we come across the instrument of“Suftajah” for cash transfer/payment, which involved the act of depositing a certain amountof money with someone for settlement to the benefit of the depositor or his representative atanother place or in another country. If the transfer involves payment in any other currency,the exchange operation at the agreed rate is carried out before the transfer.14.7 SUMMARY AND CONCLUSIONIFIs are capable of covering almost all types of financial services being provided by theconventional financial institutions, with the exception of conventional derivatives and someForex-related dealings. This exception may be rather good for them as it makes themavoid overexposure and could save them from financial crises. Through indirect or directintermediation by commercial banking and investment banking institutions respectively, theycan effectively facilitate investment of funds profitably, remaining within the rules prescribedby the Sharī´ah. Solid conceptual bases have been provided and now the practitioners needto be innovative in the development of products, services and the financial business as awhole, with commitment and Sharī´ah inspiration. Practice with Sharī´ah inspiration is morelikely to help enhance the credibility of the Islamic financial system and develop it on asustainable basis.ForR&D,Sharī´ah scholars and finance experts need to collaborate more frequently.Support at the regulators’ level is necessary, and this should be eagerly provided, as IFIsare capable of deepening the financial markets and providing healthy financial services toinvestors and the business community by enhancing the ambit of banks’ clientele.IFIs may mobilize funds on the basis of Mudarabah and Wakalatul Istismār by offeringgeneral or specific pools to individuals and the corporate sector. They may invest the fundsto facilitate business and industry, both through Shirkah-based and debt-creating modes,keeping in mind the risk profile of the investors and the profitability and cash flow ofthe fund users. They can provide working capital finance, trade finance, consumer financeand project finance to public and private sector entities through individual or syndicatearrangements.