International Conference on Economic and Social Studies, 10-11 May, 2013, International Burch University, Sarajevo

Methods of Fund Collection

These organizations collect funds in the form of sharing accounts or current accounts to operate independently within each maturity group (Parasız, 2009, p. 251). Main items of liability side in the balance sheet of all firms consist of equity capital and loan capital. Equities are funds given by partners as capital or profit which is not distributed etc. These express resources belonging to the capital owners. However the share of equity item within the total capital is not so high in finance institutions and especially in banks in comparison to other businesses. It can be read as follows: An important part of resources of banks consist of loan capital. Because of the banking system is based on this. Bank or participation bank transforms funds collected from real or legal entities to loan. And the collected funds are naturally loan capital. Therefore, the growth of a bank depends on that it collects funds as much as possible in order to be able to give loan as much as possible. In deposit banks, fund collection is mostly realized through promise of interest. However participation banks cannot promise any future interest which would mean a predefined return.

Participation banks collect funds mainly through three ways below. In addition to them, there are also investment accounts based on gold or precious metals.
Current Account

Current accounts are funds which belong to physical or legal entities, money in which can be withdrawn every time partly or totally, and which don’t pay any interest or profit to their holders. These accounts are similar to checking accounts in interest banks. Account holders open current account to be free of trouble to protect their money against theft, loss etc., and have opportunity to keep their money in a safe place. They also use services provided by their bank such as use of commercial check book, Money transfer, collection of check and bills. With the help of these accounts, services are provided such as payment and so on, parallel to needs of commercial and daily life. Therefore, these accounts which are mostly dynamic are not proper to bring return and to promise interest. However banks can use these capitals as equity capital after determining average amounts held in these accounts and keeping the needed reserves.

Participation Accounts

Participation accounts are funds of interest free banks which belong to physical or legal entities, money in which is deposited as Turkish Lira or foreign currency against contract of profit/loss participation account, and which result in profit/loss participation. Interest free banks pay amount of balance equivalent to unit account value to the account holder according to the state of profit/loss. Payees of interest free banks have no right to demand anything from funds accumulated in these funds (Akın, 1986, pp. 288-299). Returns remaining back from the funds deposited by participation account holders are distributed to account holders after deduction of losses stemming from returns obtained from funds utilized in pools constituted after certain criteria are handled such as their fixed terms and deposit date. When these returns are distributed, certain shares of these returns are hold by participation banks as management share.

Special Fund Pools

Participation Banks, according to the 60th article 7th paragraph of the Banking Act, can create special fund account pools for 3 or more months by collecting funds in private accounts in order to be utilized for financing planned projects or other investments, without the necessity of adhering time or types determined by the Central Bank of the Republic of Turkey. Participation accounts belonging to funds collected in this manner are operated in different accounts independent from other accounts and with different time. No transfer is allowed from the collected funds to other period groups. The related authority or institution has to be informed in 15 days after opening or closing dates, regarding special fund pools. At the end of the period of funding, special fund pools get closed*^*.

3. 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.