Objectives of Lending
In the modem economics, more than 90% business concern raises their funds from various financial institutions to meet their multifold transaction. Actually it is very difficult for the modem businessman to run his business on a huge scale solely. He has to float his shares to the public or knock the doors of financial institutions, for example Bank. The most easy way to make fund available to seek assistance by such agencies including Banks which have got surplus funds and will to come to the assistance of producing units, and distributing units, and exchanging units. This is the primary factor which toads towards lending of money by Banks. No doubt, we cannot neglect the second factor profit orientation while running the credit business, the single way for the bank to earn profit lies in lending money to the customer on comparatively higher rate to mark-up that it gives to the depositors.
Principles of Lending
Apart from the instructions and directives sent by the state Bank of Pakistan, Muslim commercial Bank, Ltd. Guided by three basic principles of profitability, safety, and dispersal.
1. Profitability
The management of Muslim Commercial Bank, ltd. Is very careful to seek advances where advances can generate a higher return. Bank has to spend huge amounts on establishment, payment of profit to depositors, salaries of the staff, other variable expenditure and to provide a fair return to the share holders, it must therefore, earn profit.
2. Safety
Safety principle is very important. No one will take a risk of losing the principle in order to earn profit. So bank will prefer to lend at lower rates than to risk his money for higher rates. For making his advances safe, a bank select his borrowers cautiously. Safety does not necessarily means the taking of security. It would be wise, not to lend however, good the security be if it is clear that it will have to be realized for clearance the debt. Safety also employs the borrower's ability to reply without difficulty. Another aspect of safety is the lenders legal right to claim repayment from the borrower.
3. Liquidity and Disposal
In its simple definition liquidity means the easy convertibility of an asset into cash. But when we speak of liquidity in relation to advances, it is rather different, It means the adjustment of advances at a short notices. Bank advances are made in such a manner that they are repaid in reasonable period so that the bank can make new advances. Dispersing the advances in reasonable amount over a large number and types of borrower is necessary to avoid bid debt, stick up by single or few borrowers. It is therefore, necessary to advance moderate sums to a large number of customer engaged in different types of industries.
