Free Transactions How Would Work Example For Free

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Date added: 17-06-26


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Nowadays, interest -free banking transaction is started getting popular and popular among many countries. The concept of interest free banking is first derived from Islamic banking. People might think that how can a bank to be survive if it does not charge any interest on the loan? But yet, there are evidences show that bank still can operate successfully based on interest free transaction for example Islamic bank. At basic, "Muslims" in Islamic banking are omitted from receiving or paying any kind of interest. This does not mean that the bank does not encourage any business and revenue generating activities. Interest free banking has their own principle to deal with those revenue and profit as well as business prerequisites. For example, interest free banking works out as equity financing rather than deal with debt financing. The reason is that debt financing is mainly focus on the profit interest rate. When debt financing takes place, it means that the loan given by the bank is needed to pay back in a certain time together with interest charging but no ownership taken on business. In contrast, equity financing serves as the borrowers sell the business ownership proportion in convert for money. The main difference between debt financing and equity financing is the ownership of the lending parties towards the business. Equity financing lending parties gain ownerships while debt financing does not gain any ownership on the business. In other words, interest free bank is helping people to obtain debt in the early stage. This is the most prominent feature that interest free bank practice. The reason is because interest free bank work with their principle that the lender and borrower must engage in business relationship. Lender supposes to share the neither profit nor loss from the borrowers in business or enterprise since lender is like investors who invest money in the borrowers business according to the principle of interest free banking who share the profits and loses together. The lender and borrower are more like partner instead of debtors and creditors. By applying this principle, it can help reduce the moral hazard problems which the borrowers have incentives to engage in undesirable activities to not paying back the loan. In addition, it can also help to dilute discrimination between "rich" and "poor". Besides that, the depositors who seek to earn some compensation for their deposits other than saving accounts are available in interest free banking. There are short term and long term investment accounts provided by interest free banking. Depositors are required to hold minimum money that is set by interest free banking for minimum of three months in short term investment banking. For those who are seek for long term investment, the depositors are require to leave the resources for at least one year. In the end, depositors will gain a small percentage return on the deposits based on annual basis according to the bank's profits. Unlike commercial banks, they charge fixed interest rates on saving account. For a real case example, Swedish JAK Medlemsbank (Member's Bank) is applying interest free banking principle who had earned the name of safest bank in Sweden. JAK bank provided interest free charge loan for the members. In order to provide interest free loan, the bank must also have interest free savings so that there are enough money supply to the borrowers. Since there is no interest, people are not willing to deposits their money in the bank. In order to solve the problem, JAK bank is using a system called "Savings Points" to balance the saving and borrowing. By using this principle, every member is required to save approximately money as they will have borrowed in order to take out the loan. Since interest free banking is normally based on Islamic banking, what is Islamic banking? Islamic banking is a bank that operates by using the principles of Islamic law (Sharia) through the Islamic economics. In my opinion, I would say that we are really needed Islamic banks. The reason is because Islamic bank is not a bank who is just borrow the loan and throw the risk burden to the entrepreneur but they also share the actual net profit or loss. Since Islamic bank is more likely like investors instead of creditors, it will give some advice that could help the borrowers business. Unlike conventional bank, they are more focus on the ability of the borrowers to repay the loans with the interest charge no matter the borrowers are having profit or lose. Besides that, Islamic bank is also operated with the consolidation of moral and ethical values based on Islamic Shari'ah. Those unmoral activities like casinos, pornography, alcoholic or illegal activities are prohibited in Islamic banking although such activities or services are legal or proven in some country. Since interest free banking had been universally established long time ago, different types of interest free bank might differ from their benefits and services provided, but they all are basically being held in agreement with the essential values of Islamic banking. In others words, Islamic banking is the head central for all the interest free banking. The differences happen is because the variety of country regulations and the customized of bank's experiences and its aims as well as the needs of the residents.
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