The major sources of funds include trading, leasing and sharing of the risk and rewards. Most contracts entered are on profit and sharing since they are in tandem with the sharia laws. For instance, banks may sell their assets to customers through installments or lease their property for the duration of time and attract fixed returns. The Islamic banking does not carry out or allow fractional reserve banking. This arrangement allows charge of interest of loans given out, a practice that is not allowed by the Muslim sharia laws.
The sources of funds of the Islamic banks are from deposits. These deposits do not attract interest. The sources of funds include savings accounts, shareholders’ investments, investments accounts and current accounts. Investment accounts are classified as either general or special and may include statutory funds such as treasury bonds. All these deposits attract profit, which is not a mandatory. The profit distribution is dependent on the performance of the financial institution.
Funds for these banks are used in meeting or financing shorter as well as long-term needs of the members. The banks provide profit sharing and equity financing. This ensures that funds are channeled to individuals or schemes to steer economic growth. In equity financing, the bank is allowed to participate in the enterprise’s decision-making process, while under profit sharing scheme the bank participates in the management decisions when borrowing takes effect.