Recent Development in Banking and Bank Management: Electronic Banking and its

Management Its Objectives, Structure, Types, ATM, Debit Card, Credit Card, Internet Banking
and Risk in Electronic Banking, Islamic Banking and its Management - Meaning Definition,
Nature, Sources of Fund and Its Utilization and Separation from Traditional Banking

Electronic banking:
Electronic banking is a form of banking in which funds are transferred through an exchange of
electronic signals rather than through an exchange of cash, checks, or other types of paper
documents.
E-banking is a blanket term used to indicate a process through which a customer is allowed to
carry out, personal or commercial banking transactions using electronic and
telecommunication network.
Electronic banking systems are electronic systems where the transactions and relationships
between the bank and clients grow through electronic devices instead of paper documents. In
other words, E-banking means that kind of banking in which the bank uses electronic or
satellite-based computerized devices for ensuring promptness and accuracy in banking
transactions.

What is e-banking?
Electronic funds transfer means computer systems are used to perform financial transactions
electronically. The EFT is used for electronic payments and customer-initiated transactions
where the cardholder pays using credit or debit card.

The transaction types are, Withdrawal, deposit, inter account transfer , inquiry, administrative
transactions that covers non-financial transactions including PIN change. Electronic Fund
Transfer transactions needs authorization and a means to match the card and card holder. EFT
transactions require the cardholder’s PIN to sent online in encrypted form for validation by the
issuer of the card.Other information may include the card holders address or the CVV2 security
value printed on the card.

Electronic banking or E-banking is a broad category of accessing banking services via

electronic means, whereas Internet banking is a part or type of electronic banking. It is also
known as electronic funds transfer (EFT) and uses electronic means to transfer funds directly
from one account to another.
Internet Banking
Internet Banking, also known as net-banking or online banking, is an electronic payment
system that enables the customer of a bank or a financial institution to make financial or non-
financial transactions online via the internet. This service gives online access to almost every
banking service, traditionally available through a local branch including fund transfers,
deposits, and online bill payments to the customers.

Online Banking vs e-Banking

• Online banking and e-banking are modern ways to conduct banking transactions sitting in the
comfort of one’s own hoe without going to the bank physically.
• E-banking is broader in spectrum than online banking in the sense that it encompasses the use
of ATM cards for withdrawal of money and making payments to merchants even without going
online.

History of E-Banking
During the early 1990s, the FCBs took pioneering steps regarding cutting edge mechanization
in retail banking. Accordingly, other banks came forward to introduce a new e-banking system
as well as developing existing ones. Eastern Bank Limited is the first bank in Bangladesh to
initiate online banking. Dutch Bangla Bank Limited (DBBL) played the pioneering role in
launching Mobile banking on March 31, 2011. And Standard Chartered Bank launched
telebanking and ATM for the first time in the country. Nowadays, almost all the (SCBs),
(PCBs) and (FCBs) follow information technology and digital strategy for banking. Most
importantly, Dutch Bangla Bank Ltd., Standard Chartered Bank, BRAC Bank Limited, and
City Bank are remarkable.
Bangladesh Bank, the Central bank of Bangladesh which act as the regulator and protector of
the country's monetary and financial system, embraced advanced ICT to facilitate digital
operation in areas like monetary policy, banking supervision, and internal management. More
than 3500 PCs are installed with an active LAN/WAN network to create computerized banking
offices and branches, banking supervision, and internal management. To create computerized
banking offices, more than 3500 PCs installed with active LAN/WAN network.

Objectives of E-Banking
Here are a few objectives of E-Banking:
• Attract Customers- E-Banking provides customers with online services and makes the
banking system easier.
• Boosts Economy. Online Banking maintains cash-flow in the economy, which is the primary
source during the economic recession.
• Provides Liquidity. Due to increasing online transactions, Internet Banking provides
liquidity to the Banks.
•To Provide 24/7 Service:
• Acquiring data and information in time (Client Perspective)
• Lessening time and cost in transactions. (Client Perspective).
• Security of account the number of workers. (Client Perspective).

The world economy is growing, people are doing business globally. it requires 24*7 banking
service. E-banking doing the same, to provide 24*7 service. it is one of the important objectives
of e-banking.

Structure of E Banking

Gupta and Yadav (2017) categorized electronic banking into the following
categories:
Magnetic ink character recognition (MICR) technology: Cheques are coded with
magnetic ink so they can be easily sorted and cleared.

Electronic clearing services (ECS): This service is used for transferring funds from one
bank account to another and is used primarily for making payments such as salaries or bills. It
uses two types of clearing house known as Electronic Credit Clearing Services and Electronic
Debit Clearing Services to facilitate the fund transfer.

Automated teller machines (ATMs): This service provides plastic cards with magnetic
strips containing information about the client. The card can be used to withdraw money, check
account information, and, other services depending on the rules and regulation of the bank. It
enables the customer to use banking services anywhere and anytime.

Smartcard banking: Using electronic cards such as ATM cards; customers can get access
to cash and make transactions online or in local stores, restaurants or markets or even pay for
transport. A variety of smart cards available for customers such as debit cards and credit cards.

Debit cards are used in our day to day life so as to perform end number of transactions. Debit
cards are linked to the customer’s bank account and so the customer only needs to swipe the
card, in order to make payment at Point of Sale (POS) outlets, online shopping, ATM
withdrawal. In this way, the amount is deducted from the customer’s account directly.

Just like a debit card, a credit card is also a payment card which the banks issue to the
customers on their request, after checking their credit score and history. It enables the
cardholder to borrow funds up to the pre-approved limit and make payment. The limit is granted
by the banks which issue the card. The cardholder promises to repay the amount within a
stipulated time, with some charges, for the use of credit card.

National Payment Switch Bangladesh (NPSB) is an electronic platform, started its operation
on 27 December 2012 with a view to attain interoperability among schedule banks for card
based/online retail transactions. At present, NPSB is processing interbank Automated Teller
Machines (ATM), Point of Sales (POS), Internet Banking Fund Transfer (IBFT) transactions.
According to NPSB,

Core banking solutions (CBS): This enables centralization of all the data of the banks
allowing bringing all the information under one platform. This allows customers to get services
from any branch of the bank.

Mobile banking: Through the means of short message service through mobile phones, it is
possible to perform financial transactions by giving instructions through SMS. Almost all the
banks have designed their mobile applications with which you can perform transactions at your
fingertips. For this, four things are required – a smartphone, internet, mobile application, and
mobile banking service enabled in your bank account.
• BRAC Bank Limited - Bkash.
 • Dutch-Bangla Bank - Rocket (DBBL)
• Progoti Systems Ltd - SureCash.
• United Commercial Bank Limited (UCBL) - Ucash.
• Bangladesh Post Office - Nagad.
• ONE Bank Limited - Ok Wallet.
• Trust Bank Limited - T-Cash.
• Islami Bank Bangladesh Limited - mCash.

Telephone banking: Customers can now gain a variety of services such as acquiring their
balance or closing an account just by calling a representative of the bank.
Internet banking: By using the internet, it is viable for customers to conduct a variety of
financial transactions from anywhere in the world at any time. It is also known as virtual
banking and just needs access to a web page to buy products online, pay bills, to transfer money,
or to buy anything from anywhere in the world (Gupta and Yadav, 2017).

Here we will be sharing a list of 7 best mobile banking apps in Bangladesh.

1. Rocket: Rocket is a Dutch-Bangla Bank Mobile Banking Application.
2. Citytouch: Citytouch is the digital banking wallet of The City Bank Limited.
3. SC Mobile Bangladesh: SC Mobile Bangladesh is Standard Chartered Bank’s
internet banking app featuring easier banking solutions for their customers.
4. EBL Skybanking: Eastern Bank Limited is the bank that has introduced the app
EBL Skybanking for mobile phone-based service for their clients.
5. MTB Smart Banking: MTB Smart Baking is the online banking service for
Mutual Trust Bank customers.
6. mCash: mCash is the online banking service of Islamic Bank Bangladesh Limited.
7. Islamic Wallet: Islamic Wallet is the Shariah based Mobile Financial Services that
has been introduced by Al-Arafah Islami Bank Limited.

RISKS IN E-BANKING
Strategic Risk A financial institution’s board and management should understand the risks
associated with e-banking services and evaluate the resulting risk management costs against
the potential return on investment prior to offering e-banking services. Poor e-banking planning
and investment decisions can increase a financial institution’s strategic risk. On strategic risk
E-banking is relatively new and, as a result, there can be a lack of understanding among senior
management about its potential and implications. People with technological, but not banking,
skills can end up driving the initiatives Banks should respond to these risks by having a clear
strategy driven from the top and should ensure that this strategy takes account of the effects of
e-banking, wherever relevant. Such a strategy should be clearly disseminated across the
business, and supported by a clear business plan with an effective means of monitoring
performance against it.

2 Business risks Business risks are also significant. Given the newness of e-banking, nobody
knows much about whether e-banking customers will have different characteristics from the
traditional banking customers. They may well have different characteristics. This could render
existing score card models inappropriate, this resulting in either higher rejection rates or
inappropriate pricing to cover the risk

3 Transaction/operations risk
Transaction/Operations risk arises from fraud, processing errors, system disruptions, or other
unanticipated events resulting in the institution’s inability to deliver products or services. This
risk exists in each product and service offered. The level of transaction risk is affected by the
structure of the institution’s processing environment, including the types of services offered
and the complexity of the processes and supporting technology. In most instances, e-banking
activities will increase the complexity of the institution’s activities and the quantity of its
transaction/operations risk, especially if the institution is offering innovative services that have
not been standardized. Since customers expect e-banking services to be available 24 hours a
day, 7 days a week, financial institutions should ensure their e-banking infrastructures contain
sufficient capacity and redundancy to ensure reliable service availability

4 Credit risk Generally, a financial institution’s credit risk is not increased by the mere fact
that a loan is originated through an e-banking channel. However, management should consider
additional precautions when originating and approving loans electronically, including assuring
management information systems effectively track the performance of portfolios originated
through e-banking channels. The following aspects of on-line loan origination and approval
tend to make risk management of the lending process more challenging. If not properly
managed, these aspects can significantly increase credit risk.

• Verifying the customer’s identity for on-line credit applications and executing an enforceable
contract;
• Monitoring and controlling the growth, pricing, underwriting standards, and ongoing credit
quality of loans originated through e-banking channels;
• Monitoring and oversight of third-parties doing business as agents or on behalf of the financial
institution (for example, an Internet loan origination site or electronic payments processor);
• Valuing collateral and perfecting liens over a potentially wider geographic area;
5 Liquidity, interest rate, price/market risks Funding and investment-related risks could
increase with an institution’s e-banking initiatives depending on the volatility and pricing of
the acquired deposits. The Internet provides institutions with the ability to market their products
and services globally. Internet-based advertising programs can effectively match yield-focused
investors with potentially high-yielding deposits. But Internet-originated deposits have the
potential to attract customers who focus exclusively on rates and may provide a funding source
with risk characteristics similar to brokered deposits. An institution can control this potential
volatility and expanded geographic reach through its deposit contract and account opening
practices, which might involve face-to-face meetings or the exchange of paper correspondence.

6.Reputational risks This is considerably heightened for banks using the Internet. For
example, the Internet allows for the rapid dissemination of information which means that any
incident, either good or bad, is common knowledge within a short space of time. The speed of
the Internet considerably cuts the optimal response times for both banks and regulators to any
incident. Any problems encountered by one firm in this new environment may affect the
business of another, as it may affect confidence in the Internet as a whole. There is therefore a
risk that one rogue e-bank could cause significant problems for all banks providing services
via the Internet. This is a new type of systemic risk and is causing concern to e-banking
providers. Overall, the Internet puts an emphasis on reputational risks. Banks need to be sure
those customers’ rights and information needs are adequately safeguarded and provided for.

Necessary Steps to Enhance Customers Trust on E-Banking in

Bangladesh
a. Increasing E-Banking Practices: As state owned commercial banks are in backward
position in e-banking practices; so this type of banks should take initiative to increase its e-
banking service in all of their branches. Banks which are not providing e-banking services till
now should start immediately.

b. Providing More E-Banking Services: Some banks are providing e-banking services in
limited scale. These banks should increase their online banking services i.e. should add more
and more new e-banking services to their business. Domestic private commercial banks and
foreign commercial banks should introduce those services which are available in developed
countries in the world but not in Bangladesh.
c. Improving the Quality of E-Banking Services: Banks operating in Bangladesh should
improve their e-banking service quality. As e-service quality of state owned commercial banks
are not good, so this type of banks should be more conscious regarding service e-banking
quality.
d. Removing Insecurities of E-Banking in Bangladesh: In Bangladesh the security of e-
banking is not so good. Banks should be sincere on security issues of e-banking and remove
all the insecurities of e-banking in relation to social, software and other security.
e. Securing Password: Bankers should encourage customers to use highly secured passwords.
Strong passwords are mixed password which are more secured and difficult to hack.
f. Avoiding Sharing Password: Bank will provide the message to it’s customers not to share
password with any person. They will inform the customers about the bad impact of sharing
password.
g. Avoiding E-Mail Notification: Banks should not use email notifications to request
confirmation of personal information or to direct downloading of attachments. Hackers may
find out the confidential information from e-mail and hack the account and manipulate.
h. Using One Time Passwords (OTP): One-time passwords (OTPs) are used only once. This
type of password may be used by the users to protect cyber-crime in banking sector. A card
will keep many passwords. When any password is used that password cannot be used again.
Developed country has already introduced but till Bangladesh doesn’t implement this software
for better e-banking security. It will make e-banking activities more secured.
(i). Using Finger Print: Finger print may be used instead of digit or letter type password. It
will not be possible for any hacker to collect the finger print of account holder. So by using
finger print cybercrime in banking sector can be minimized.
(ii). Authenticating Cash Withdrawals: Bank should make the arrangement to authenticate
cash withdrawals from ATM booth. When any customer insert card to withdraw money ATM
booth bank’s server will seek confirmation through account holder’s cell phone. If account
holder confirms then the transaction will take place and cash will be delivered. Otherwise cash
will not deliver by the ATM booth. If any unexpected person tries to make any transaction,
account holder will inform the bank to take action against hacking.
(iii). Ensuring Continuous Power Supply: For the operation of e-banking continuous power
is a must. It can be made possible by generating power by own generator. Bank will provide
generator to each branch and ATM booth.
(iv). Ensuring Close Circuit Camera: Banks should ensure close circuit camera in every
branch and ATM. In addition, ATM boots stuff must request face covered man or women to
open face in ATM booth to authenticate the user.
(v). Resisting Hacker’s Hidden Camera: Hackers may set up any hidden-camera in side of
ATM Booths to collect password of account holders. Then they will use this for hacking. So
ATM booths should be careful to avoid these types of crime.
(vi). Reducing the Dependence of Customer on Bankers: To reduce the dependence of
customer on banker in the lowest level open discussion programs, workshops or seminar may
be arranged by the bank for e-banking customers and bankers to increase knowledge and
awareness about e-banking activities.
(vii). Using Digital Signature: In this process, bank should arrange digital signature of the
customer and ensure using it. So that signer cannot forge later and nobody can modify the
message while in transit. To ensure authenticity, receiver can verify the signature and
understand that the message really comes from sender. Hash algorithm and asymmetric
encryption is used to perform this operation.
(viii). Developing Integrated E-Banking Software: Banks should take initiatives to develop
integrated e-banking software. Preference should be given by the bank authority to use local
software over foreign software. Common gateway is required so that interbank transactions can
be feasible. In this regard banks can negotiate with central bank.
(ix). Increasing Speed Quality of Internet Service: Banks are required to develop personal
network to increase the speed quality of internet services and to facilitate their customers.
(x). Changing Attitude: Bankers are suggested to take initiative to change the attitude of
customers in favor of e-banking. Customer’s attitude is very important matter for various
application of e-banking. Bank may increase publicity, offer free services for the short period
and take other steps.

Bank Customers Should Take the Following Steps

(i). Using Protection: Password Customers should use protection password in their files of
important information, so that nobody can get access to those information’s. They should also
store the information on a CD that can be kept locked in a secure location.
(ii). Securing Online Shopping: Customer should select incepted and secured ordering site.
For that they should look for two critical things on the ordering page before placing any online
orders:
(1) a lock icon in the bottom-left or top-right corner, which indicates that the site uses
encryption when transferring your personal information and
(2) the letters "https" instead of just "http" in the URL, which also indicates that the ordering
site is secure.
(iii). Using Antivirus: Most viruses today are introduced into computers via internet
downloads and e-mail. Customers should use reputed anti-virus software and keep it updated.
They should run scans periodically and look for tell-tale signs of potential infection such as
general slowness or messages indicating unavailability of your financial website when trying
to log-in. They should remember that anti-virus protection is only as good as last update.
(iv). Storing Credit Card Information on a Website: While this may be more convenient
but it is much less secured. Customers should use one credit card exclusively for online
shopping. In case of an old computer the hard drive should be erased completely discarding or
selling. A tech-savvy thief can recover even deleted information.
(v). Choosing User Name and Password: Customers should choose user name and password
wisely. A combination of letters, numbers and special characters are to be used and password
is to be changed periodically. Obvious words or dates like a nickname or your birth date should
not be used. Customers should try to use mixed (number, letter, symbol) password as e-banking
password. Such as (e.g., a5n€ k*p7). This type of password is difficult to hack and more
secured.
(vi). Avoiding Sharing Personal Information: Account holders should not share personal
information via e-mail. Because the hackers can easily hack e-mail account. Normally people
use easy password and user ID for e-mail address and they do not keep too much privacy of e-
mail ID or password.
(vii). Changing Password: To increase online security account holders are requested not to
use the same password for a long time. Everyone should change his e-banking password at
least within one month. They will not use same password for online banking that is already
used for another purpose.
(viii). Logging Out from Bank Site: It is suggested to log out online banking session and
restart the personal computer when the transaction is completed.
(ix). Selecting Secured ATM Booths: Account holder should always try to withdraw money
from any secured ATM booth. All ATM booths of Bangladeshi banks are not placed in same
secured area.
(x). Avoiding Public Computer: Customers should not use public computer for online
banking activities. Suddenly electricity may disturb and connection will discontinue for some
time and the user will be unable to log out from his account. Later on anybody can enter into
that account and manipulate that.

Problems of E-banking in Bangladesh:

People have concern about security and privacy. They like to feel their money with their hand.
They actually don’t believe in virtual money transfer. In the field of IT new technology is
coming every day. The one which is very popular today might get obsolete tomorrow. So to
have a competitive edge over the competitors the banks must always update their services. The
movement towards online banking might marginalized the customers who do not have internet
access or who are not technologically sound.
1. Security breakdown, The system will have a problem with the identification of the
individual who is initiating the transaction. In Bangladesh, the identification of an individual
is not yet supported digitally. So, there will be a problem in moving to the Internet era for
banking purposes just now. First, we will have to develop a digital database of the users of the
internet banking services.
2. The transaction can be cancelled only via internet. The internet infrastructure of our country
is not that much supportive to provide all time access to the web. So there will be a problem in
executing the service with its full functionality.
3. Huge Number of branches all over the Bangladesh even outside the country and for the
purpose of automation huge investment is necessary.
4. Most of the branches are in the rural areas where there are no modern digital communication
facilities.
5. Most of the users or clients of the banks are poor and uneducated village people having no
knowledge about electronic banking and cannot afford it at the current cost level.
6. Most of the officials of these banks in the classical stage especially the state owned ones are
aggie and cannot understand and are reluctant to accept modern electronic banking. To turn
around these banks at first the outdated mentality of these officials of the classical banks.
7. In spite of these shortcomings all these banks in the classical stage are trying to convert
themselves into the modern electronic banks and make them able to compete with other
commercial banks

What is Islamic Banking?

Islamic banking, also known as non-interest banking, is a banking system that is based on the
principles of Islamic or Sharia law and guided by Islamic economics. Two fundamental
principles of Islamic banking are the sharing of profit and loss, and the prohibition of the
collection and payment of interest by lenders and investors. Islamic law prohibits collecting
interest or "riba."

An Islamic Banking system refers such banking activities that are approved by Islamic Shariah.
It is defined by OIC (Organization of Islamic Conference) as “Islamic Bank is a financial
Institution, whose statutes, rules and procedures expressly state its commitment to the
Principles of Islamic Shari’ah and to the banning of the receipt and payment of interest on any
of its operation. “The purpose of introducing Islamic banking was to provide with financial
services that abide by the rules of Islamic Shari’ah and to contribute towards economic
development conforming Islamic Principles.

History in Islamic Banking in Bangladesh:

The first Islamic bank in Bangladesh, Islamic Bank Bangladesh Ltd, was launched in 1983 as
a private commercial bank through the initiative of some Muslim business entrepreneurs with
the assistance of the government of Bangladesh and some international Islamic financial
institutions. From its inception, Islamic banking in Bangladesh has steadily developed due to
the overwhelming response of the Muslim public in Bangladesh. Following the success of the
Islamic Bank Bangladesh, the second Islamic bank in Bangladesh—Al-Baraka Bank
Bangladesh Ltd—was founded in 1987. This bank was recently renamed ICB Islamic Bank
Ltd. A number of conventional banks started to open Islamic banking “windows” from 1995.
Prime Bank Ltd was the first conventional bank to do so (Islam, 2010; Mohon, 2011; Mannan,
2010; Sarker, 2005; BMB Islamic, 2011). In 2017, out of the 47 banks in Bangladesh, eight are
fully fledged Islamic banks with more than 750 branches throughout the country. In addition,
16 conventional banks provide Islamic banking branches (Yousuf et al., 2014; Khan, 2014;
Akbar, 2014).
7 Major Principles of Islamic Banking

1. Profit and Loss Sharing:

It is one of the best principles of Islamic finance where the partners will share their profit and
loss according to the part they played in the business. There will be no guarantee on the rate of
the returns that the Muslims will play the part of a partner and not a creditor.

2. Shared Risk:
In the economic transactions, the risk sharing is promoted by the Islamic banking. When two
or more parties will share the risk following the principles of Islamic banking the burden of the
risk will be divided and reduced in the parties. So it will improve the economic activity of the
state.
3. Riba:
It can be regarded as the prohibition of interest:
• The wealth will get the return without any risk or effort.
• Regardless of the outcome of economic activity the person who gets the loan has to
return the money and Riba to the lender.
• In principles of Islamic banking, taking advantages of the issues that other are facing is
unjust.

4. Gharar:
According to the Islamic finance principles, Muslims are not allowed to participate in the
ambiguous and uncertain transactions. According to Islamic rules, both parties should have a
proper control over the business. As well as the complete information should be shared with
both parties so that the profit and loss will be equally shared.

5. Gambling:
In Islam, the acquisition of wealth through evil means or participation in gambling is
prohibited. It will protect the Muslims from the conventional insurance products because that
is a type of gambling. On the other hand, Islamic banking works in Takaful that involves mutual
responsibility and shared risks.
6. No Investment In Prohibited Industries:
The industries that are harmful to society or have a threat to the social responsibilities are
prohibited in Islam. They include:
• Pornography.
• Prostitution.
• Alcohol.
• Pork.
• Drug.
According to the Islamic finance principles, you are not allowed to invest in such industries.
You cannot even participate in the mutual funds that will help the industry to flourish.

7. Zakat:
There is a property tax included in the rules of Islam that it known as Zakat, which allows the
balanced distribution of wealth. According to the Islamic banking principles the fair amount of
Zakat is deducted from the accounts of Muslim in the holy month of Ramadan. Islamic banks
promote this social responsibility and distribute the amount among the needy.

SOURCES OF FUNDS

Islamic banks rely on the following sources of funds:

1. Capital & Equity;
2. Transaction deposits that are risk free and yield no return; and
3. Investment deposits that carry the risks of capital loss for the promise of variable
returns.
Capital & Equity
▪ Capital is the amount injected into the Islamic bank during the setting-up stages i.e. the
paid-up capital of the Islamic bank.
▪ Equity is usually the retained earning of the Islamic bank that accumulated during its
operational period.

Transaction Deposits
▪ Current accounts
Current accounts are based on the principle of Wadiah, whereby the depositors are guaranteed
repayment of their funds. At the same time, the depositor does not receive remuneration for
depositing funds in a current account, because the guaranteed funds will not be used for PLS
ventures. Rather, the funds accumulating in these accounts can only be used to balance the
liquidity needs of the bank and for short-term transactions on the bank’s responsibility.
 ▪ Savings accounts
Savings accounts also operate under the Wadiah principle. Savings accounts differ from
current deposits in that they earn the depositors income: depending upon financial results, the
Islamic bank may decide to pay a premium, hiba, at its discretion, to the holders of savings
accounts.

Investment Deposits
▪ Investment accounts
An investment account operates under the Mudaraba al-mutlaqa principle, in which
the Mudarib (active partner) must have absolute freedom in the management of the investment
of the subscribed capital. The conditions of this account differ from those of the savings
accounts by virtue of:
1. a higher fixed minimum amount,
2. a longer duration of deposits, and
3. most importantly, the depositor may lose some of or all his funds in the event of the bank
making losses.
▪ Special investment accounts
Special investment accounts also operate under the Mudaraba principle, and usually are
directed towards larger investors and institutions. The difference between these accounts and
the investment account is that the special investment account is related to a specified project,
and the investor has the choice to invest directly in a preferred project carried out by the bank.

UTILISATION OF FUNDS
To generate revenue, Islamic banks utilized the funds by giving out financing facilities. The
financing facilities are done based on the Islamic concepts accepted by the Islamic bank
Shariah Council / Committee.

The concepts usually applied by the Islamic bank are as follows.

▪ Murabaha (cost plus / mark up)
This is the most commonly used mode of financing device. In a Murabaha transactions, the
bank finances the purchase of a good or assets by buying it on behalf of its client and adding a
mark-up before reselling it to the client on a cost-plus basis profit contract.
▪ Bai’ muajjal (deferred payment)
Islamic banks have also been resorting to purchase and resale of properties on a deferred
payment basis. It is considered lawful in Fiqh (jurisprudence) to charge a higher price for a
good if payments are to be made at a later date. According to Fiqh this does not amount to
charging interest, since it is not a lending transaction but a trading one.
▪ Bai’ salam (prepaid purchase)
This method is really the opposite of the Murabaha. There the bank gives the commodity first,
and receives the money later. Here the bank pays the money first and receives the commodity
later, and is normally used to finance agricultural products.
▪ Istisna’a (manufacturing)
This is a contract to acquire goods on behalf of a third party where the price is paid to the
manufacturer in advance and the goods produced and delivered at a later date.
▪ Ijarah and Ijara Wa Iqtina (leasing)
Under this mode, the banks buy the equipment or machinery and lease it out to their clients
who may opt to buy the items eventually, in which case the monthly payments will consist of
two components, i.e. rental for the use of the equipment and installment towards the purchase
price.
▪ Qard Hasan (benevolent loans)
This is the zero return type of loan that the Holy Quran urges Muslims to make available to
those who need them. The borrower is obliged to repay only the principal amount of the loan,
but is permitted to add a margin at his own discretion.

Islamic banking vs Conventional banking

Islamic banks (IB) offer products similar to conventional banks (CB), but with a slightly
different concept. These are prohibited from charging interest (riba) since in Islam money
cannot be treated as a commodity and hence, profits aren’t made through lending money. On
the other hand, conventional banks make profits through higher interests on loans than they
pay on deposits. Islamic banking system employs three major principles:

1. Risk and reward sharing.

2. No interest is charged. They charge fees and rentals for the services offered.

3. Strict adherence to investments in Sharia-compliant products. These cannot invest in

businesses involving tobacco, gambling, etc. All investments and loans are backed by assets.

Thus, Islamic banks invest in real assets and can be directly correlated with the real GDP
growth of an economy. The below table points out few differences among conventional and
Islamic banks through certain products.

Conventional Banking System Islamic Banking System

Money is a product besides medium of Real Asset is a product. Money is just a
exchange and store of value medium of exchange

Time value is the basis for charging Profit on exchange of goods & services
interest on capital is the basis for earning profit

The expanded money in the money

Balance budget is the outcome of no
market without backing the real assets,
expansion of money
results deficit financing

Interest is charged even in case, the

Loss is shared when the organization
organization suffers losses. Thus no
suffers loss
concept of sharing loss

While disbursing cash finance, running The execution of agreements for the
finance or working capital finance, no exchange of goods & services is must,
agreement for exchange of goods & while disbursing funds under Murabaha,
services is made Salam & Istisna contracts

Due to nonexistence of goods & services

Due to existence of goods & services no
behind the money while disbursing
expansion of money takes place and thus
funds, the expansion of money takes
no inflation is created
place, which creates inflation

Due to inflation the entrepreneur

increases prices of his goods & services, Due to control over inflation, no extra
due to incorporating inflationary effect price is charged by the entrepreneur
into cost of product

Musharakah & Diminishing Musharakah

Bridge financing and long-term loans
agreements are made after making sure
lending is not made on the basis of
the existence of capital good before
existence of capital goods
disbursing funds for a capital project

Government very easily obtains loans Government cannot obtain loans from
from Central Bank through Money the Monetary Agency without making
Market Operations without initiating sure the delivery of goods to National
capital development expenditure Investment fund
 Real growth in the wealth of the people
Real growth of wealth does not take of the society takes place, due to
place, as the money remains in few hands multiplier effect and real wealth goes
into the ownership of lot of hands

Due to failure of the project, the

Due to failure of the projects the loan is
management of the organization can be
written off as it becomes non performing
taken over to hand over to a better
loan
management

Sharing profits in case of Mudarabah and

Debts financing gets the advantage of
sharing in the organization of business
leverage for an enterprise, due to interest
venture in case of Musharakah, provides
expense as deductible item form taxable
extra tax to Federal Government. This
profits. This causes huge burden of taxes
leads to minimize the tax burden over
on salaried persons. Thus the saving and
salaried persons. Due to which savings &
disposable income of the people is
disposable income of the people is
effected badly. This results decrease in
increased, which results the increase in
the real gross domestic product
the real gross domestic product

Due to decrease in the real GDP, the net Due to increase in the real GDP, the net
exports amount becomes negative. This exports amount becomes positive, this
invites further foreign debts and the reduces foreign debts burden and local-
local-currency becomes weaker currency becomes stronger