Home Insurance A Must Have? Home Is The Shelter From Storms

         One Lives in a World Of Tragedy. One clearly remembers the flood that took place in Uttarakhand. The loss of life and property was immense. Earthquakes across the World and in India remind one of how fickle life on this planet can be. Tsunami’s and the terrible damage followed in their aftermath are still fresh in one’s mind. One still remembers clearly the tsunami that struck the Chennai coast and the Island nation of Sri Lanka almost a decade ago. In this year due to the excess monsoons flooding took place in a  great measure across our nation. The terrible loss of life and limb due to natural calamities cannot be prevented as they are ”Acts Of God”. However the massive damage and destruction caused by these natural calamities can be mitigated to some extent by the taking of insurance. Taken in this context Home Insurance plays a very important role in preserving our peace of mind and provides one with a sense of security in these terrible times. Think One Doesn’t Need Home Insurance? Think Again.

So What Is Home Insurance?

 Home insurance is basically a protection cover taken on one’s home. This helps to protect ones home against damage caused due to fire, riots, lightning, flood, burglary, earthquake, tsunami, terrorism and storms. One can take the building insurance policy where compensation is provided for the damage to the property and its reconstruction due to riots, natural calamities like flood and cyclone, landslide, damage due to aircraft, fires and lightning and exploding of domestic cylinders. One can also opt for a basic fire protection policy or a house holder’s package policy. A basic fire policy might cover one for loss caused due to riots, lightning, storms and flooding. On payment of an additional premium, cover is provided from earthquake, landslide and in some cases terrorism. In a householders package policy protection is provided to the basic structure against damage from fire, domestic cylinder explosions and so on. Another comprehensive cover provided by the householder’s package policy is the insurance of the contents of the house. The contents of the house can be insured against theft of valuables such as jewelry, electronic items, costly crockery, electrical appliances, paintings and damage to windows and doors. For those who live in rented houses only the contents of the house can be insured.                                                                                                                                                                               

What Is The Ideal Coverage To Be Taken To Insure One’s Home?

 So how does one decide the amount of coverage one needs to take in order to insure one’s home?A house basically consists of land on which the house is built on, the actual structure of the house and the locality in which the house is built in. If the market value of the house is INR 70 Lakhs the building cost might be only INR 25 Lakhs. The rest of the cost is due to the locality and the market value of the land. The home insurance covers only the cost of the structure and is concerned mainly with the cost of rebuilding the structure. This cost mainly depends on the city in which one resides in. If one is staying in a Metro the costs of construction are relatively higher. The locality might not have too much of a role to play as far as cost of construction is concerned. A house valued at INR 60 Lakhs might have a premium of around INR 1800-2000 for a home insurance policy taken to protect the basic structure and an additional amount of around INR 500 for the protection of the contents of the house up to an amount of INR 10 Lakhs. A premium of INR 1000-1500 is paid as additional coverage for the protection against burglary and damage to doors and windows up to an amount of INR 10 Lakhs. On a payment of additional premium of around INR 5000-6000 per annum one can obtain protection against damage due to terrorism up to an amount of INR 50 Lakhs and the insurance of the contents of the house up to 10 Lakhs, death of a domestic worker due to an accident, Loss of rent due to damage of the house for a period of around 6 months, and the damage caused to the house given for rent for a period of 6 months .                                                                                                                             

So How Does The Insurer Assess The Value Of Ones House ?

 One has to consider the market value of the house when one takes that home insurance policy. Market value is often mistaken as resale value where the land as well as the construction and the locality are factored in. In the case of a home insurance policy one has the market value minus the depreciation at the rate of 2% per annum. After a period of 50 years the market value minus the depreciation will be zero. Hence houses over 50 Years of age are not insured. Under a reinstatement policy the cost of rebuilding the house structure is considered. No depreciation is deducted in this case. Let us consider ones house is destroyed due to a flood. The land remains in ones name and the new structure can be built at the same location as home protection cover is a basic structure replacement cover. The reconstruction costs are reimbursed after the house has been reconstructed and in some cases the money is reimbursed in installments. One of the most important factors to be noted is one does not need to consider the value of the property but only the cost of reconstruction or structural protection. If a 1000 Square Foot apartment in Bangalore costs INR 80 Lakhs one has to bear only the reconstruction costs of the structure and the land price is not factored in .One can purchase home insurance protection against structural damage for as low as INR 50 per Lakh and for a sum of INR 2000 premium paid per annum protection of about INR 40 Lakhs on the structure can be obtained .Do You Think This Is An Amount Too High To Bear For The Protection Of Your Home And Its Belongings?

What Happens If Your Home Is Underinsured?

 Mr Ravi had purchased a house of INR 50 Lakhs. He took a basic home insurance cover against structural damage for an amount of INR 10 Lakhs. Mr Ravi’s house was badly damaged in a fire and rebuilding was necessary. As five years had past Mr Ravi discovered to his dismay that the reconstruction costs would now cost around INR 18 Lakhs. The severe shortage of sand had led to a massive price hike in the reconstruction costs. What advice would one give Mr Ravi?                                                                                                                                                 After assessing the damage the Insurance Company stated that Mr Ravi would be compensated only an amount of up to INR 10 Lakh. Insurance Companies give a leeway of up to 10-15% owing to the change in prices of the construction. If one is underinsured it means that he has to bear the expenses up to the cost underinsured from one’s own pocket. Mr Ravi had to bear a cost of INR 8 Lakhs from his own pocket. Surely a lesson for one to learn from this example .It is also important to note that if one stays in an apartment and if a flood were to destroy it then one cannot reinstate the apartment by oneself. Hence the whole society needs to get the apartment insured. Surely A Stitch In Time Saves Nine.

What You Should Note While Making That Claim:

 When home insurance cover is taken the insurer does not survey the contents of the house or assess the structure. The deal is made in good faith .However were to fall a if the structure through damage assessment is done .It is up to the individual to make the right declaration and have proof to back it. The insurer can refuse the damage claims on the grounds that the building was poorly maintained or an unauthorized construction was done .It is in one’s own interests to see that the claim is done in a hassle free manner. One has to show and maintain bills to prove that one owns the goods that one is claiming damages for .Always maintain an inventory of the goods and contents of one’s house in an orderly manner with necessary billing and proof of purchase which will help one make a hassle free claim .Always take the help of a local real estate agent or a builder to estimate the cost of rebuilding the structure. Once one knows the cost of rebuilding the structure one can estimate the coverage required. If the coverage is not sufficient then hike the coverage. Take note of the additional features that one’s house might incorporate such as marble tiles, ceramics, and costly woodwork. Another common practice followed is having the insurer estimate the costs of rebuilding and mark the contents of the house before a tragedy occurs. This is a Prevention Is Better Than Cure Approach”.                                             

The Role Of The Indian Government In Home Insurance:

 The Indian Government plays on important role in the promotion of home insurance. The Government is planning to make it mandatory for all developers to ensure that buildings are structurally sound to withstand fire and earthquakes. A spate of tragedies such as the fire accidents in garment factories in neighboring Bangladesh, collapse of buildings in Mumbai and Bangalore due to faulty construction has led the Government to put its foot down and make home insurance mandatory for developers. This will soon be passed in the Real estate Bill. The home insurance premiums will be lower if the building adheres to the necessary norms, Is earthquake resistant, Is of a good design and makes use of good technology. The onus is on the developer and builder to follow the seismic code and use earthquake proof technology, better design in projects, and follow the best practices in urban development and planning. Since the developer has to compulsorily take home insurance he is forced to adhere to the set norms and bears liability for the structure he will follow good construction principles leading to the growth of quality constructions and save the hassle for the customer to go for individual home insurance.                                                                                               

Either You Run The Day Or The Day Runs You:

  If one were asked the question “Which Is Ones Most Prized Possession What Would The Answer Be?”. Ones Home And Its Contents Would Be The Obvious Answer”.IndianMoney.com strongly believes that each and every homeowner of this Nation should take a home insurance policy to protect ones house against structural damage as well as insure the contents of ones house. A house is a Once In a lifetime asset for most of the citizens of our country. Gross neglect is noticed  in the rural areas as well as highly literate urban areas while taking that home insurance policy which is often ignored .If one were to observe the statistics of the insurance Companies mainly the home insurance policies one would notice about 35-40 Lakh policies sold combined. Considering the basic structure protection costs about INR 50 per Lakh insured per annum this is a must have policy in ones portfolio. Always take a reinstatement policy rather than a market value policy which subtracts the depreciation. A reinstatement policy would compensate you the actual rebuilding cost of your home. No depreciation is deducted. If one leaves in a rented apartment one cannot insure the basic structure and a house content insurance policy is a must have. Imagine returning from a vacation and finding ones house completely robbed and lakhs of Rupees worth of goods stolen? A miniscule amount of INR 500-1000 per annum can provide a coverage of INR 10 Lakhs.IndianMoney.com firmly advocates the coverage of ones jewelry, furniture or electronic items which can be a severe loss to replace. Never be “Penny Wise Pound Foolish”. A simple household content insurance policy can go a long way in preventing severe heartburn in the future..I would like to remind you that the team of Financial Planners at IndianMoney.com are always there for you to plan your insurance needs in a most effective and efficient manner. You can explore this unique Free Advisory Service just by giving a missed call on 02261816111.

            I would like to end this article with the famous phrase” Happiness Is Not Something Readymade. It Comes From Ones Actions”. One should always plan for the best but prepare for the worst. A small deed done at the right time can go a long way in ensuring success in the long run.

               

Tags: Either You Run The Day Or The Day Runs You: The Role Of The Indian Government In Home Insurance: What You Should Note While Making That Claim: What Happens If Your Home Is Underinsured? So How Does The Insurer Assess The Value Of Ones House? What Is The Ideal Coverage To Be Taken To Insure One’s Home? So What Is Home Insurance? What are Acts Of God?The team of financial planners at IndianMoney.com are ready to help you with your insurance needs,Follow a prevention is better than cure approach, Never be pennywise pound foolish.                                                        

Why Buy That Online Term Insurance Plan-The Internet Has Become The Town Square For The Global Village Of  Tomorrow 

          Where does one look for a solution to a problem these days. Chances are “The Internet”. Internet has become a source of knowledge like a well whose water never dries up. Ever wondered what are the practical applications of the internet to the financial services industry. A decade ago when one went to the bank one had to stand in a queue for simple branch banking operations. Today the use of National Electronic Fund Transfer and Real Time Gross Settlement enables fund transfers in seconds. Mobile banking using smart phones and the use of near field communications has revolutionized the banking industry. It is a small matter that the insurance sector too has benefited heavily from the internet and insurance policies especially term insurance policies can easily be purchased online. The payment of the premiums can also be done online. Internet has surely changed the world of banking and insurance for the better. Remember “The Best Way To Predict The Future Is To Invent It”.     

What Is The Cost Of That Online Term Policy?                                                                                                                                    

          Online term insurance policies are cheaper than their offline counterparts by a percentage which may be as high as 50%.Wondering Why This Is So? The online term insurance policy doesn't have an intermediatory or an agent who tries to push this product in exchange for a commission. As one deals directly with the Company the costs for the Company are lesser. This serves as an incentive for the Company to give its customers what is known as a “Good Deal” One can purchase a term insurance policy of a Crore for as less an INR 30 per day. Death doesn't make any distinctions and knocks on the doors of both the rich and the poor. If one is a HNI and in good physical health he should pick up an online term policy of a Crore paying a ridiculously small amount of INR 30 a day. The online policy has a through medical checkup. The lesser premiums   and the easy method of purchase has made these policies a hit among the youth of our nation who are internet savvy. A number of websites are available today with a wide variety of online term insurance plans and choosing the best plan is up to the individual. The coverage of the online term plan is also higher than the offline term plan as it is perceived that those who purchase online term polices are rich. One of the main grouses widely heard is that I purchased an online term insurance policy a couple of years ago and now similar policies are available for a lesser amount. So What Should I Do? Many a time individuals discontinue such policies and take up newer policies. However one needs to make a note of all the factors involved before discontinuing the current policy.                                                                                                                  

What Is The Cost Of That Online Term Policy?

                                                                    

          The process of taking up an online term insurance policy is a recent trend. Insurance Companies tend to thoroughly investigate claims made within a couple of years of taking up an insurance policy .Insurers have to settle these claims within a period of six months. In the case of claims made after a period of three years from taking these policies the claim settlement period is three months. Even though it is too early to predict how claim settlement will pan out there is no reason to believe that it will not be a success. People tend to be more open online and since no agent or third party is involved important details are rarely hidden. The agents might fill the forms themselves and certain important information might be misrepresented. This might lead to that claim being rejected. In the online policy since one fills the form himself, submits the relevant documents and goes through a detailed medical checkup the chances of claims being rejected are slim. The online term insurance policies tend to have a higher coverage amount while compared to an offline policy. This calls for a through medical checkup as insurance firms are not in the business of charity. This means that online insurance companies do pay up their claims but one needs to study the claim repudiation ratio. This is basically the percentage of claims rejected by the insurance agencies and is a better ratio to measure the claim settlement of the insurance company. This is because of wrong or incorrect information filled up in the term policy, hiding and failure to disclose certain relevant facts as well as mis selling of these policies by insurance agents who just fill up anything in order that one takes up the insurance policy. This results in a higher claim repudiation ratio in an offline policy than in an online policy. This means that genuine claims are very rarely rejected in an online policy.

Will That Online Policy Pay Up My Claim?                                                                                                                              

          One must always keep a note of the riders available in that online term insurance policy. An accidental rider benefit can be of immense use in that online term insurance policy. If the cover is INR 25 Lakhs and one takes an additional cover of INR 15 Lakhs through an accidental rider by paying a slightly higher premium and one were to die in an accident then the mortality cover is INR 40 Lakhs. Certainly  Food For Thought. A critical Illness rider is another addition one can think of which provides payments as soon as a critical illness is detected. It is very necessary that the online term insurance policy provides a cover across your working life. If one  takes an online term insurance policy at the age of 30 years it should last him till the age of 60 Years if one plans to retire at the age of 60.The coverage amount should be at least 10 times ones annual income.                                                                                                                                                                                   

I Want To Die Rich:

          One has surely heard the phrase “Early Bird Gets The Best Worm” .If one has to die rich then one needs to pick that online term plan early. If one picks up a term plan at the age of 25 Years for a tenure that covers his working life mainly 35 Years assuming he works till 60 Years the premium would be INR 6000-9000 per annum for a Crore. The premium subsequently goes up as a person reaches the age of 30.The premiums are in a range of INR 9000-13000 per annum for a Crore and the tenure would be of 30 Years. Similarly if a person picks up a term plan at the age of 40 Years the tenure is 20 Years and the premiums are in the range of INR 15000-22000 per annum for a Crore. What Do You Learn From This? Buck Up. Take That Online Term Policy Now.

Factors One Should Take Note Of When Purchasing That Online Term Insurance Policy:                          

      

Old Is Gold:                                                                                                                                                                                                     

          Many a time one purchases an online term insurance policy owing to low premium costs. Do these premiums remain constant? No There Is A Race To The Bottom. This results in a reduction in the value of premiums with time. After a couple of years one finds the premiums are even lower than what they were when one had purchased that online term policy .So What Should One Do ? Should One Surrender This Policy And Pick Up A New Policy? One needs to remember that any claim that is made within a period of 2 Years from purchasing an online term insurance policy is considered as an “Early Claim”. An early claim is naturally thoroughly investigated and the claim settlement can be a time consuming process. If one were to swap ones online term policy just by looking at the price factor then one would certainly be making a mistake. If one made a claim after swapping the older policy for a newer policy and had a claim a year later this would come under the “Early Claim” category. One has to note that in the race to procure the lowest premiums insurance Companies have certain costs such as administration costs and so on which are fixed. This means that at a certain point of time premiums are forced to rise again. Clearly there is a threshold point in the race to the bottom. 

                                                                                                                                                                                           

The Good The Bad And The Ugly:                                                                                                                                                                       

  

          One knows that any product has its pros and its cons. The same applies to an online term insurance policy. Most of the insurance products are simple vanilla products or what are known as the basic models in the case of term insurance. It is not easy to customize  these products or their premiums to suit all our needs .One of the most important factors needed to be taken into consideration is the rider benefits Riders are not as easily available in an online policy as when compared to an offline policy and rider benefits have to be purchased paying an additional premium. Even though the basic online term policy may be stated to have a low premium the addition of riders to compensate these plans may push up their costs when compared to their offline variants where riders are readily available. Another important point to be noted is the premium of an online policy might increase by as high as 25% after medical tests are taken. Currently a number of online term insurance policies have done away with the practice of raising the premiums after conducting medicals. A person taking up these policies needs to be financially aware or has to have knowledge of insurance when purchasing such policies .If one is not well versed with insurance products taking the help of an insurance agent is advised. Of course the claim filing process involves directly meeting up face to face with ones insurer and the online process cannot be followed .One has to study the insurance products as well as verify the authenticity of the website as well as the product being displayed on the website. One has to check the features of the products as well as their compatibility to ones needs and see if all the features displayed are actually available. Always maintain a copy of the e-transactions pertaining to payments as proof that the premiums have been payed. This helps to solve a lot of heartburn at a later stage.                                         

          I would like to end this article with a famous saying” Success Is The Sum  Of Small Efforts Repeated Day In And Day Out”. Remember that “Time And Tide Waits For No Man”. So do not unnecessarily postpone the purchase of that term insurance policy. Procrastination has never helped anyone. If one has to purchase a term insurance plan it is best purchased today. I would like to remind you that the team of Financial Planners at IndianMoney.com are always there for you to plan your insurance needs in a most effective and efficient manner. You can explore this unique Free Advisory Service just by giving a missed call on 02261816111.

Tags: Time And Tide Waits For No Man, Success Is The Sum Of Small Efforts Repeated Day In And Day Out. The team of financial planners at IndianMoney.com are ready to help you with your insurance needs, The Good The Bad And The Ugly , Remember old is gold, Should One Surrender This Policy And Pick Up A New Policy? Factors One Should Take Note Of When Purchasing That Online Term Insurance Policy: I Want To Die Rich: Study Those Additional Benefits Obtained In A Term Insurance Policy: Buck Up. Take That Online Term Policy Now. Will That Online Policy Pay Up My Claim? What Is The Cost Of That Online Term Policy? What Is The Cost Of That Online Term Policy? Early Bird Gets The Best Worm

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What Is Islamic Banking? Eat And Drink But Waste Not By Extravagance

                                 Today’s world abounds in banking and financial scandals. The banks of today have redefined the art of money laundering. Some of the biggest banks in the United Kingdom were charged billions of dollars in fines by the US authorities for indulging in money laundering practices which could put US citizens at a risk of terrorism. One has surely heard of the LIBOR rate rigging scandal and the record trading losses suffered by investment banks in the US and other parts of the world. A major ethical issue was the huge salaries drawn by the top management of the Too Big To Fail banks in the Western world inspite of the US Government bailing out these banks using tax savers funds. One has surely heard of the US Subprime Mortgage Crisis which shook the entire western and world banking system and necessitated the bailout of top banking and insurance institutions which were regarded as Too Big To Fail. Who can forget the recent Cyprus Financial Crisis? Closer home the bad loans in our public and private sector banks have reached great heights. Some of the reputed industries in the gold and diamond business, infrastructure, airlines and other industries have defaulted on their loan repayments and raised the non performing assets of Indian banks to very high levels. Problems Galore? Is there a viable solution to all these problems that plague the banking and financial sector. Is There Something One Can Learn From Islamic Banking To Solve The Problems That Plague The Western Financial And Banking Institutions? I would like to remind you that the team of Financial Planners at IndianMoney.com are always there for you to plan your financial needs in a most effective and efficient manner. You can explore this unique Free Advisory Service just by giving a missed call on 02261816111.                                    

So What Is Islamic Banking All About?  

                                           Let us first understand that the Shariah law is a moral code and a religious law of Islam. The Shariah law is against the concept of both charging and receiving interest which is strictly forbidden. This is known as Riba or Usury. The Shariah law strictly forbids investing in companies that provide goods and services contrary to the basic tenets of Islam. These include alcohol (Haram), tobacco, arms, pork, cigarettes and gambling (Maysir). When one compares modern banking systems one notes the collection of Usury or Interest. So Why Do Banks Charge Interest? Interest is basically paid by the borrower to the lender as the lender would lose the use of the capital lent or the liquidity that cash provides for a certain period or a measure of time. The borrower compensates this loss to the lender by paying interest. Another reason for collecting interest is the change in the value of money due to inflation or the change in the purchasing power of money. Inflation needs to be factored in and the lender needs to be compensated for this loss.                                                                                                                         

How Does Islamic Banking Work?

                           Let us consider a bank lends capital for a businessman to start a business. The businessman then invests these amounts in his business and works to get a profit. The bank loses liquidity for a fixed period of time and the borrower has to compensate for this by paying the bank an interest compenent as well as return the capital within a certain time frame. This has to be done irrespective of whether the business is running at a profit or a loss. If the businessman suffers a loss he has to pay back the amount from his own resources. This might even lead to a seizure of assets in extreme cases. The bank or the lender suffers no loss in this entire transaction. According to Islam this is an injustice to the borrower and Riba is strictly forbidden.                                                                                                                                                        Let us consider the owner of a large amount of capital does not know what to do with these funds as he does not possess any managerial skills or the necessary business skills needed to run a business. At the other extreme is a person who has managerial and business skills but no capital to start and run the business .Let us call him a manager. Both the party’s co-operate with each other and run the business. The capital owner provides the capital but is not involved in the day to day operation of the business and is free to stipulate certain terms and conditions to ensure the best use of his funds. At the end of the agreed period the capital owner gets back his principle along with a share of the profits as per a mutually agreed ratio at the start of the contract. The manager who runs the business gets a share in the profits and this serves as an incentive for him to run the business. In case of a loss in the business the capital owner bears the brunt of the loss. As the capital owner bears a loss in case the business fails this serves as a justifiable cause for him to provide capital to run the business. The manager bears no financial loss except the loss of his time and his work and effort. If the manager does not run the business in a professional manner and the business suffers heavy losses due to negligence of the manager he has to return the full capital back to the capital owner. In case the capital owner withdraws monetary support then he has to reward and compensate the manager for his time and efforts in a suitable manner as per compensation he would have earned elsewhere. This is surely a win-win situation for both. This is the principle of Mudarabah.                                                         

What Is Mudarabah?   

                                                 Under the principles of Islamic banking the clients or customers who deposit money in the bank are the owners of the capital. The bank functions as the manager of the funds. This is a Tier-1 system. Under the Tier-2 system one has an entrepreneur who functions as the manager of the business and the Islamic bank is the capital owner. Under Islam the capital owner and the manager or the labour are viewed on an equal pedestal. The capital owner bears a risk mainly a loss if the business fails. This entitles the capital owner to a stake in the profits of the business. In the Western system of banking the interest component involves a risk free element which is viewed as unjust according to Islam. The entrepreneur through his labour and effort is also entitled to a share in the profits. The capital owner is whole heartedly immersed in the business and as a stakeholder is interested in the growth and development of the business unlike a bank which cares a damn about the business but only in the interest and the return of the capital. One needs to remember that you can transfer funds from a Shariah complaint bank account to a conventional account but if you want to transfer funds from a conventional bank account to an Islamic bank account  you can transfer only the principle amounts and not the interest component. This profit sharing model followed in Islamic banking has proved to be highly successful and the assets under management under the Islamic banking model are expected to touch a Trillion US dollars by the end of the Year 2013.      

Types Of Services Provided In Islamic Banking:  

                                                    One must be knowing about the Current account deposits which are same in the case of Islamic banking as in conventional banking. One has the deposit amounts guaranteed. Savings bank accounts have less stringent norms and conditions and are lenient with respect to maintenance of minimum balance as well as huge amount of funds are set aside for withdrawals. The funds are invested in short term risk free projects with an emphasis to meet the withdrawal demands. The full amount is returned with no promise of profit sharing. Investment banking under the Islamic banking lays emphasis on the profit sharing model and the depositors share the profits with the bank.

How Do These Islamic Banks Raise Deposits From The Public And What Is Their Source Of Funding?

                                                  One must have heard of Musharaka where the Islamic bank joins up with a business organisation in order to run a project on a profit sharing model. This is basically a joint venture. The bank gradually withdraws from the project after the passing of a certain time period. Profits. are shared according to a pre defined ratio but losses are strictly based on the capital contribution. Another common method of financing followed is the bank estimates the rate of return it should earn from a project. The bank then enters into an agreement with the business institution to procure the estimated rate of return the bank believes the project would yield. If the project profits to an extent greater than estimated by the bank it takes only the agreed rate of return. In case of a loss in the project the bank shares the burden of the loss .If the profit is less than the banks estimated amount the bank accepts a lower amount. The Islamic banking also runs a profitable Trade Financing venture. The bank purchases say a car in the name of the client and the client agrees to repay the bank the paid amounts as well as a measure of profits at a later period of time. The Islamic banking model follows a system of leasing where the bank would buy a car used by the client as a cab leased to the client for an agreed price and time period. At the end of the time frame the lessee becomes the owner of the car after paying a balance amount as agreed as per the agreement. Under a Hire-Purchase agreement the bank buys an item say a car and hires it to a client for an agreed rent and time period. At the end of the time period the client automatically becomes the owner of the item or the car. Under a buy-back system the client sells a property or an item to the bank with an agreement to purchase it back at a later time at a fixed or an agreed price. Under the Letter Of Credit the bank imports an item say a costly car or a hi-fi electronic gadget and shares in the profit of the sale of that item.  

                                                  

Use Of Exotic Investment Such As Derivatives In Islamic Banking:                                                                                                                      

                                                 One must have heard of a forward contract which is a non standardised contract between two parties to buy or sell an underlying asset at a time specified in the future but the price is agreed today.This is an Obligatory contract. Let us consider the Kharif season in India where cotton is grown which is a commercial crop. A cotton farmer can enter into an agreement with a cotton merchant before the Kharif season begins in September where both parties hit upon an agreed price for the bales of cotton at a future date say the end of the Kharif season in March of the following year. This removes speculation (Qimar) from the deal as both parties are familiar with the future price of the product which is cotton in this case. The cotton farmer knows what price he will get for the cotton in the following year and he can set aside funds for certain other important priorities. The merchant also has an idea of the future price of the product which is cotton in this case and can hit upon a proper selling price. This is known as hedging with a forward contract. Under a spot transaction both money and commodities are exchanged simultaneously at the same time (t). Under a deferred system the commodity is delivered immediately (t) but the amounts are paid later (t+1). Under the Salam system money is paid immediately (t) but the commodity is delivered at a later date (t+1). All these transactions namely Spot, Deferred, and Salam are valid as per Shariah scholars. A speculator thrives on volatility which is mainly profiting from the sudden upward and downward movements in the prices of a commodity at a future dare. This Qimar is forbidden according to Islamic traditions. However since hedging takes an offsetting position from the investors current position this protects the investor from uncertainity and volatility and hedging with a forward contract is permissible according to Shariah law.                                                                I would like to end this article on an important note stating that Islamic banking also concentrates on moral values and social norms. It has an obligation to deal with the poor and the destitute .It focuses on development projects and charitable causes. It has Quard Al Hasan where if an individual needs hospitalisation or a good university education amounts are lent for a short duration of a year and there are no charges for these amounts.”Follow Up A Bad Deed With A Good Deed To Cancel It Out”.