Banking Facilities

Banking Facilities

“Facilities” refers to formal financial assistance programs offered by banks and financial institutions to support companies that require working capital. Such facilities may be granted to natural persons or legal entities that, in connection with a particular activity or transaction, cooperate with a bank to implement a project or a specific commercial operation.

Banks generate profit through the creation of income-producing assets at the end of each financial period and expand their operations by reinvesting accumulated profits and new financial resources. These activities are generally referred to as banking facilities.

Profit Rates of Banking Facilities and Influencing Factors

Categories of Banking Facilities

Banking facilities often operate through contractual frameworks commonly referred to as partnership-based contracts under the Islamic banking system.

Definition of a Bank Loan

Among the principal services provided by banks and credit institutions is the payment of funds with short-term or long-term repayment obligations. These payments are granted to applicants subject to defined terms and conditions.

In general, a loan is an asset, including money, property, or goods, granted by banks or other credit institutions to applicants. A fundamental condition for receiving such services is that the applicant must repay the principal amount together with an agreed profit within the specified period.

Within the Iranian banking sector, bank loans have become a significant tool for addressing financial needs across different segments of society, and demand for such services remains high.

Difference Between a Loan and Banking Facilities

In Islamic banking, the term “loan” is primarily used in reference to Qard al Hasanah, or benevolent loans. The term “facilities,” however, has a broader meaning and includes various forms of financial support extended to industrial and production units.

While every loan may be considered a form of facility, not every facility is technically classified as a loan. The key distinction lies in participation. In a traditional loan arrangement, the provider does not participate in the profit generated by the recipient’s activities. In contrast, many forms of facilities involve profit sharing or structured participation in commercial outcomes.

Funds granted for purposes such as housing, medical expenses, vehicle purchase, education, or similar needs, often with a defined profit rate, may fall under loan arrangements depending on the contractual structure. By comparison, facilities designed to finance industrial or production activities frequently involve participation mechanisms.

Types of Banking Facilities

Mudarabah

Mudarabah refers to commercial activity conducted with another party’s capital. It is a contract under which one party provides capital to another for the purpose of engaging in trade, with the profits divided according to a pre-agreed ratio, such as 1:2 or 1:3.

Mudarabah is generally a revocable contract, and either party may terminate it unless otherwise stipulated in the agreement. It is typically considered a short-term facility, often lasting no more than one year. In this arrangement, the bank, acting as the capital provider, supplies the necessary cash for a commercial transaction to an individual or legal entity acting as the managing agent, and profits are shared in accordance with the agreed proportion.

Muzara’ah and Istisna

Under relevant legal provisions, banks may grant agricultural lands or orchards under their control for cultivation through contracts such as Muzara’ah or Musaqat. Muzara’ah is a binding contract enforceable against both parties, so unilateral termination is not permitted.

Istisna, meaning a manufacturing or construction order, refers to a contract between two parties, whether individuals or entities, for the production of a specified good or the execution of a defined project in the future. The manufacturer undertakes to produce and deliver the agreed item within a specified timeframe, in return for payment structured as a mix of cash and installments, possibly linked to stages of project progress.

Ju’alah

Ju’alah refers to a contract for payment of remuneration in exchange for the performance of a specified task. Under this structure, a person receives compensation for carrying out a defined activity, and banks may structure facilities on this contractual basis.

Salam

Salam is an advance purchase in which products from production units are bought in advance at a specified price and paid for in cash. This mechanism is commonly used to provide working capital to production units.

Qard al Hasanah

Qard al Hasanah is a contract under which a bank grants a specified sum to natural or legal persons as a benevolent loan in accordance with applicable regulations. The borrower is required to repay the principal amount within the agreed period, without profit.

Civil Partnership

Civil partnership refers to the pooling of cash or non-cash contributions by individuals or legal entities together with the bank’s capital on a joint ownership basis for the purpose of generating profit. Profits are distributed in accordance with the contractual agreement between the parties.

Frequently Asked Questions About Banking Facilities