The primary function of banks is to accept deposits and use it to dispense financial support. Every time a bank finances a customer, it is creating an asset in its books. The profit a bank earns from financing contributes substantially to its bottom line. Financing itself stimulates business activity in the economy. Finance products offered by banks can be of various tenors, rates of profit, repayment schedules and complexity. Thus, you can have short or long term finances; finances at fixed or floating rates or a combination of the two; finances disbursed and repaid as a bullet or in instalments and so on.
A finance transaction passes through various stages or events from the moment it is given till the time it is repaid. The process begins with a finance application form in which the borrower is asked to furnish their details and the kind of facility requested. The bank’s finances or credit department appraises the application and takes a decision whether the applicant is eligible for the finance asked and whether finance can be extended to that customer. The bank will apply its own parameters in arriving at this decision. The factors which will go into this include the standing, character, track record and the collaterals (securities) offered to secure the finance. Assuming that the finance is sanctioned, the bank gives a commitment and stipulates terms and conditions governing the same. The bank may levy a processing charge at this stage. The finance amount is then disbursed and credited to the settlement account of the borrower who draws the amount, uses it for the purpose for which it was taken. Profit accrues on the account which has to be serviced by the borrower besides repaying the principal amount as per the repayment schedule. If the finance is not repaid or there is a delay, the finance asset’s status will be changed to reflect its deterioration. The bank may also levy compensation profit in such a scenario. Moreover then bank may have to make provisions from its profits for such sub-standard finances. On the other hand if the finance account is conducted well, it will close on the date the last instalment is due and paid. On closure, the bank will return or lift the collaterals which it had taken. The finance cycle is now complete.
The Islamic Financing module in Oracle FLEXCUBE captures and maintains the parameters with respect to the life cycle of the finance contract (outlined above) once the application moves to the account processing stage.
A finance application moves to the account processing stage when the applicant becomes a customer of your bank. The customer’s record will now be available in the bank’s customer database. A finance account is then created to service the customer. The account creation involves capturing the details of the final finance application into the features of the contract. Accounts in Oracle FLEXCUBE will be created under Account Templates called ‘Products’. The system resolves the product category and product on the basis of the application details.
The account thus created, reports to the Asset GL of the bank. Disbursements will debit the finance account and hence a finance with outstanding balances will be in debit. Payments are credited to the finance account. At the end of complete re-payment, the account becomes zero balanced and is closed.
Product categories are a logical grouping of certain products such as Vehicle finances, Housing finance etc. The banks/ FIs can set up different products based on services they offer. When a customer finance is sanctioned, a finance account is created under a specific product. Hence, its features default from the product. The account so created is used for further servicing such as disbursements. The account balance represents the outstanding Principal that was advanced to the Customer. Profit is calculated on this balance based on the schedule and pricing set-up. The account processing stage involves the following:
This chapter contains the following section:
The Islamic Financing module interfaces with the following sub-systems/modules of Oracle FLEXCUBE: