4 Islamic Finance Products You Can Offer for Customers
The increasing awareness of the Indonesian people about the Sharia economy has made Islamic finance institutions an increasingly popular choice. Islamic finance institutions also offer benefits that make it easier for customers to meet their financial needs. You can present various Islamic finance products that suit the needs of the community through available financial institutions.
Financing in financial institutions covers three types of needs, namely working capital, non-business consumption, and business capital investment. Interestingly, Islamic finance also offers debt transfer from debts that are not covered by Sharia principles.
Definition of Islamic Finance
Islamic finance is financing that is conducted based on Islamic principles. In Islamic finance, there are several types of contracts used as the basis for transactions, such as mudharabah (partnership) contracts, murabahah (sale and purchase) contracts, and many more. In practice, Islamic finance follows the regulations set by the National Sharia Council – Indonesian Ulema Council (DSN – MUI) and the Financial Services Authority (OJK).
One of the most important characteristics of Islamic finance is that it requires the parties involved to avoid usury (the addition of a nominal amount in the return of borrowed funds or interest), gharar (uncertainty in the transaction), and maysir (only one party benefits).
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Here are the Islamic finance products that you can offer to your customers.
1. Working Capital Financing
Islamic working capital financing is a type of funding provided to entrepreneurs for both short (less than 1 year) and long (1-5 years) periods. This funding is provided under Sharia principles and is used for operational purposes such as paying production costs, purchasing raw materials, trading goods and services, and development projects.
Islamic working capital financing is provided to entrepreneurs who have good business prospects following the principles of Islamic law and do not violate the laws of the country.
There are two types of contracts commonly used in Islamic working capital financing. The first is murabahah (sale and purchase) financing. In this scheme, Islamic finance institutions finance the purchase of goods needed by entrepreneurs by setting the base price plus an agreed profit margin.
Second is the mudharabah (profit-sharing partnership) scheme. In this scheme, the financing institution and the entrepreneur work together to increase the value of the asset. The profit from the increase in asset value is shared according to the agreement in the agreement.
2. Consumer Financing
Consumptive financing is financing provided to fulfill consumption needs outside of running a business, such as buying electronics, cars, or houses. There are two common types of contracts in Islamic consumptive financing, namely murabahah and ijarah.
The process of choosing the type of financing contract that suits the customer’s needs involves the following steps:
- For consumptive financing, financial institutions should consider if the purchase is of goods or services.
- If the customer is purchasing goods, the financial institution needs to determine if the goods are readily available or still in the production process. If the goods are ready, then a murabahah contract is used. Meanwhile, if the goods are still in the production process for less than 6 months, a salam contract is used.
- If the product purchased is a service, the financial institution will use an ijarah contract.
3. Investment Financing
Investment financing is provided to finance investment projects. Usually, investment financing is carried out by business entities for capital goods to start a new business, project relocation, expansion, or replacement of factory machinery. It is not uncommon for the government to also use investment financing for development purposes, such as toll roads or other public facilities. The term of financing is usually longer than consumptive financing, which is between 5-10 years.
There are two types of contracts commonly used, namely murabahah and ijarah muntahia bit tamlik (IMBT). In deciding which type of contract to use, financing institutions conduct various kinds of analysis, namely ratio analysis, project comparison, risk analysis, and break-even analysis. Investment financing decisions take into account several factors, including project appraisal, financial feasibility, authorities’ recommendations, and consultant involvement.
4. Debt Takeover Financing
Debt takeover financing is a type of financing used to transfer debt originating from transactions that are not in accordance with Sharia principles. Two types of debt that can be taken over by Islamic financial institutions are principal debt plus interest or only principal debt.
In handling principal debt plus interest, Islamic financial institutions offer qardh contract services. Meanwhile, to overcome the principal debt, customers can use hawalah services.
Islamic finance products provide significant benefits to many parties, from customers to society as a whole. The following are the benefits obtained from Islamic finance products.
1. For Customers
Customers can experience the impactful convenience of Islamic finance. They can get flexible terms and lower fees than conventional financing. Islamic finance also minimizes risk for customers because there is no interest to pay. In addition, customers also get certainty because Islamic finance avoids the principle of gharar.
2. For Financing Companies
Financing institutions also benefit from the Islamic finance products they offer. The main benefit is the increased trust of customers and the public towards financing institutions. Financing institutions also get the opportunity to develop more innovative and creative financing products. Finally, financing institutions can also increase public awareness of Sharia principles in financing.
3. For the Government
Islamic finance can help the government in improving the economy and creating jobs. In addition, Islamic finance products can also help the government in expanding the tax base and improving the welfare of the community by helping small and medium enterprises.
4. For Society
Finally, the community also benefits significantly from the presence of Islamic finance products. Self-employed people can expand their businesses so that their welfare and that of their neighbors can improve. Islamic finance also helps to reduce poverty and improve social justice.
The benefits of Islamic finance products have been significant and thus should be promoted more to society. By using the products above, you can offer more convenience and willingness from customers to use your services.
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