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.
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