Modes of Financing are discussed here.Financing refers to the process of obtaining funds or capital to start, operate, or grow a business or organization. There are several modes of financing available for businesses and organizations, including:
Modes of Financing You Must Know.
TRADE RELATED MODES OF FINANCING
Markup:
The mark up or BaiMuajjal is a purchase of goods by banks and iheir sale to clients at an appropriate mark up in price on deferred payment basis. The system of financing on the basis of mark up in price of deferred basis is as follows:
- The customer contacts the bank for financing the purchase of goods.
- The bank purchases the required goods and sells to him on the price mutually agreed between the bank and customer.
- The agreed price of goods is to be paid in future on a specified date by the customer to the financer or bank.
- The agreed price, which is based on the bank’s cost plus a profit margin (mark up) of the bank.
Mark Down:
- It is a purchase of moveable or immovable property by the bank with Buy Back Agreement or otherwise.
Under this mode of financing, the customer sells the movable or immovable property to the bank with a promise to buy back the same from the bank on a future date.
- Leasing (Ijra):
- Leasing is a medium or long term financing instrument.
- In this trade mode of financing, the lessee (Mustagir) acquires the rights for the use of an asset from the lesser (Aajir) for a fixed agreed period of time, on the payment of a fixed amounL_which may be on yearly, half-yearly or on monthly basis.
- The title of the property remains with the lesser.
- Hire Purchase (Ijrah-Wa-Iqtina):
► In a hire purchase deal, the bank purchases the specified goods at the request of the customer and hires them to the clients on the payment of periodical installments.
► The agreed periodical installments are worked out in such a manner that the bank covers a fair return as well as the actual cost of the goods on full payments.
The rights of ownership are handed over to client on the payment of full amount.
- Development Charges:
- It is also, called “Diminishing Musharaka”.
- In this mode of trade financing, the bank makes advances to the customers for the development of land and property.
- The bank takes a share in the value added to the property.
- This share in the value added to the developed property is named as development charges.
- Salam:
► Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at future date in exchange of Advance payment of price.
Salam is allowed by the Holy Prophet (PBUH) subject to certain conditions.
► The basic purpose of this trade was to meet the need of the small farmers who required money to grow their crops and feed their family upto the time of harvest.
- INVESTMENT MODES OF FINANCING
- Musharaka:
- It is an agreement between the bank and its client to participate in a business as temporary partners by providing agreed amount of funds for sharing profits or losses during a specified period of time.
- The client runs business under Musharika.
- The bank examines the feasibility and profit projection so as to monitor or supervise business transactions.
- The proportion of profit to be distributed between the participants must be agreed at the time of contract. If no proportion is decided then the contract is not valid.
- The loss is shared in the ratio of capitals provided by the participants.
- Modaraba:
Modaraba means the business in which the subscriber (Bank- Zarib) participates with the money and the manager (Client-Modarib) with the knowledge and skill. The chief features of Modoraba are:
- Modaraba must be registered under Modaraba (Floatation and control) ordinance, 1980.
- Profit is shared in agreed ratio.
- Loss is suffered, being the investor, only by Zarib.
- Modaraba certificates are transferable.
- Modaraba may be for “Specific purpose” or for “Multiple purpose
- It may be perpetual or for a specified period.
- Participation Term Certificates (PTC’s):
Participation term certificate is an instrument of finance issued by company for meeting its medium and long- term capital needs. The salient features of PTC’s are:
- PTC is an instrument of medium and long-term financing which has been evolved to replace debenture financing.
The instrument is transferable.
- Profits are shared in agreed ratio while losses arc shared in the ratio of bank’s and company’s investments.
- Only (JSC) Joint Stock Companies can raise funds for by issuing PTC’s.
- Equity Participation:
- Equity participation means sharing risks and rewards ol ownership.
- Under this scheme, the bank or financier purchases the shares of the company at market price or at an agreed price.
- Profit will be shared in the form of interim or annual dividend.
- Loss will be borne in the form of reduction in the market price of the shares purchased.
- Rent Sharing:
- Rent sharing is generally applicable to financing for the purchase or construction of house.
- The bank and the client will contribute funds, as agreed, to purchase or construct the house.
- Rent of the building will be estimated area wise, and will be shared in the ratio of their investments or as agreed upon.
- Rent may be revised after every three years.
Final Recommendation About Modes of Financing
- Equity financing: This involves raising capital by selling ownership shares in a company to investors. The investors become shareholders and have a stake in the company’s profits, as well as the potential for capital gains if the company’s value increases.
- Debt financing: This involves borrowing money from lenders or financial institutions and paying it back with interest over a specified period. Debt financing includes options such as bank loans, bonds, and lines of credit.
- Crowdfunding: This involves raising funds through a large number of individuals who contribute small amounts of money. Crowdfunding can be done through online platforms and can be used for a variety of purposes, such as product development, business expansion, and charitable causes.
- Grants: Grants are non-repayable funds given by governments, non-profit organizations, or private entities to businesses or organizations for specific purposes, such as research and development, environmental projects, or social initiatives.
- Bootstrapping: This involves starting a business with personal savings or revenue generated from the business itself. This method is popular among small business owners who want to maintain full control over their business and avoid taking on debt or giving up equity.
- Venture capital: This involves raising capital from specialized investors who provide funding to early-stage companies with high growth potential. Venture capitalists typically take an equity stake in the company in exchange for their investment.
- Angel investing: This involves raising capital from high-net-worth individuals who invest in early-stage companies in exchange for equity. Angel investors often provide mentorship and guidance to the companies they invest in.
Each mode of financing has its advantages and disadvantages, and the choice of financing method depends on factors such as the stage of the business, the amount of capital required, and the company’s growth potential.
