Question: How do participation banks work?
Answer: Participation banks are the institutions that operate in the financial sector, finance the reel economy and provide banking services. Participation banks put the funds that they collect from savers to good use in projects within the scope of the principles of interest-free finance (making funds available for consumers and enterprises) and share with savers the profit or loss generated.
Pursuant to the principles of interest-free banking, no fixed yield is guaranteed to savers in the funds collected.
Question: What are the methods by which participation banks make funds available?
Answer: The methods by which participation banks make funds available are consumer finance, enterprise finance, financial leasing and profit-loss partnership. Unlike conventional banks, participations banks do not grant cash credit but they buy goods for cash and sell them on timed.
Question: What is the operational difference between participation banks and conventional banks in making funds available?
Answer: The methods of finance in participation banks are based on buying goods for cash and selling them on timed to customers. For this reason, real economic activities finance buying and selling goods.
In the sale of goods, the profit that participation banks shall receive, the amount of installments that the borrower shall pay, and the dates when the borrower shall pay installments are predetermined. No change is made to the rates of profit until maturity and, in contrast to conventional banks, receivables are not reclaimed before maturity.
Question: How do participation banks set the rate of profit they apply in fund transactions?
Answer:The cost of the funds held by participation banks, the profit margin in the market of the work or the goods, the rate of inflation, the cost of alternative finance methods and the economic expectations are taken into account in the determination of the rates of profit to be applied in projects. As actors of the real economy, participation banks can not set a rate of profit that is considerably below or above the rates that emerge depending upon the supply and demand in the market.