Head-Module Title: Participation Bank in Turkey
III.Fund Utilization Methods
Banking activity is mainly not a sector of trade of goods and service. This sector is a service sector. With its operations, it is a sector aiming to utilize fund surplus – collected from entities which have no opportunity or ability to use funds in their hands – for paving the way for operations based on commercial activities, and to take a share from the added value created. Therefore funds collected in order to create added value have surely to be used for production of goods and service. Otherwise, it is obvious that money etc. held in lockboxes would not increase where they stay, and not create added value. The most important difference of participation banks is that they prohibit for themselves certain methods of fund utilization and certain sectors used by other banks when utilizing collected funds.
Fund Utilization Methods based on Commerce. The main fund utilization methods of participation banks can be listed under two titles: The first of them is Fund Utilization Methods based on Commerce. Also deposit banks can use these types of financing. However there are some points in certain procedures such as handover of money which participation banks pay more attention. The important points here are that it has to be an operation necessarily based on trade of goods or service, and that payment to be made has to be delivered to the firm which sells the goods.
Private Funding Support.Participation bank pays the price of goods or services – bought by real entities directly from sellers for personal needs such as vehicle and apartment – in the name of the customer to the seller, with the condition of not to be used in funding of commercial activities, and in return the buyer is charged with a debt (The Participation Banks Association of Turkey, 2008).
Financial Rent.In the operation which is called “leasing” today, the person who wants to buy a good demands that this good is bought by the participation bank and rent to this person after the agreement between this person and the participation bank. However it is decided the customer of the participation bank will be the owner of that good after a certain period of rent and of paying rents. In this way, the good with financial renting is used by the customer demanding financial renting, and is owned by the bank. At the end of rent period, the ownership is handed over. As investment banks, also participation banks can realize financial renting operations without founding a separate company.
Murabaha: (Installment Sale).Murabaha used in banking is sale of goods with an order of sale in which payment is made some time after delivery of the goods transacted. A customer and a bank sign a pre-contract which proposes that the customer buys a good from the bank. After the contract, upon the customer’s written demand, the bank buys the mentioned good in cash from the seller, and sells it to its customer in accordance with the conditions agreed upon before (Akın, 1986, p. 159). So, participation bank mediates trade, buys the good from the seller in cash, and sells to its customer for the account.
Fund Utilization through Profit and Loss Partnership Method
Mudaraba: (Venture Capital)
Mudaraba is a method of fund utilization used by interest free banks very commonly. One party gives its labor, know-how and experience (entrepreneur), and the other party gives capital (interest free bank). In this method, real and legal entities present their applicable projects to the bank. The manager accepted and funded by the bank is called “mudarib”, and the person or institution funding or supporting the project is called “Rabbul-mal”. After signing a contract with the mudarib, Rabbul-mal (interest free bank) has to keep ready the amount of capital mentioned in the contract, in accordance with mudarib’s demand. Other than conditions mentioned in the contract, bank has no authority to interfere in transactions realized by the project owner. However in case of emergence of danger of loss because of unplanned and irregular work, the bank can make some initiatives in order to prevent loss. Normally, it can control accounts every time, and demand all formal and informal bookings. Profit obtained at the end of mudaraba operation is shared among Rabbul-Mal guaranteeing funding and mudarib using fund according to the proportion determined before. In case of any loss, this loss is met by Rabbul-mal (Küçükkocaoğlu, 2010, p. 8).
Muşareke: (Joint Capital Partnership or Capital Invesment)
Muşareke is called “şirketu’l-İnan” in the Islamic Law. While One party, i.e. bank, gives capital, and the other party, i.e. real or legal body demanding fund, gives labor in the mudaraba contract, both of these two parties put forward both their labor and capital in muşareke contract. One or more of participants of partnership realize the work, and every partner included ones which does not take part in the work too deserves a certain right according to the rate agreed before. Even if capitals are the same, profit shares can be different, or vice versa. The finance method called muşareke is applied in following manner: Islam Bank takes the responsibility to provide a part of the capital which is demanded by its customer as its partner. And the customer provides the rest of project capital due to its own financial opportunities and the qualification of the project. The customer takes the responsibility of management, control and monitoring of the financial aid because of its expertise. Taking these responsibilities, the customer deserves to take a bigger share of the profit (Küçükkocaoğlu, 2010, p. 10).
Selem Sale: (Current Sale of Future Delivery Goods or Future Markets and Sales)
“Selem sale” means buying a good on account with another good bought or sold in cash. The bank buys a good by paying its price in cash which is going to be delivered to the bank in a future date agreed upon in the contract between the bank and the seller. A different style of selem sale, as in funding purchase of building, machinery and equipment, can be used also in purchase of consumer durables in case of that conditions are proper in terms of economy. In other words, this finance technique can be used in order to fund industry, trade and agriculture (Akın, 1986, p. 163).
According to another definition, selem is the sale activity which is made with money in cash and goods on account. In selem, type, quality, amount, price, delivery place and date of the product have to be determined in the contract. With the help of selem, goods which will be produced in a future date are sold, and the needed money is obtained. On the other hand, customer buys a good which it will need in a future date. So, both parties meet their needs without using interest (Yılmaz, 2010, p. 14). For example, a farmer which needs money is supported by the bank in terms of capital, and the bank sells the yield in the market.
Documents Against Payment
This type of fund utilization method is used for funding of foreign trade. According to the contract signed between participation bank and the party using fund, the participation banks buy documents against payment in cash, and sells to one using fund on account with a higher price. This type of finance technique is mainly based on the method of murabaha (forward sale) (Akın, 1986, p. 290). However, methods and documents used in foreign trade gain importance at that point. Documents are used in foreign trade especially in operations of documented credit. They are documents which assure importer’s custom clearance of goods sent by exporter. Therefore, these documents which make possible that goods entering in customs in the country of exporter are delivered by customs authorities are undertake the ownership of goods as documents with status of valuable papers.
It means that a participation bank buys goods abroad in the name of its customer who gave him order, and sells them to its customer.
