From today I am starting to publish for the public interest a Guide to Financial Planning. I request you to share, like and write your commands. A GUIDE TO FINANCIAL PLANNING ISLAMIC FINANCE Familiarity with Arabic words describing financial activity can impress business friends and even, perhaps, spark a desire to find out a little more about the benefits of the Islamic way of investing. Financial services rarely, if ever, come free. If you are dealing with a financial adviser-be sure to ask about Al-ajr which refers to commission, fees or wages charged for services. If the word gharar is mentioned, then someone is being less than honest. Bay al-gharar is an exchange in which there is an element of deception. This might be through ignorance of the goods or the price or through faulty description of the goods. Gambling is a form of gharar because the gambler is ignorant of the result of his gamble. Futures and options are forms of investment which can fall foul of this prohibition in Islam. Many investment funds are based on two concepts described by words, which sound similar to western ears. Murabaha (cost-plus financing) and Mudaraba (trust financing) are pillars of Islamic-style agreements. Murabaha is a contract sale between a bank and a client for the sale of goods at a price, which includes a profit margin agreed by both parties. As a financing technique it involves the purchase of goods by the bank as requested by its client. The goods are sold to the client with a mark-up. Repayment, usually in installments, is specified in the contract. Investment can involve the sale of debt which has to be securitized Debt can arise out of contract of exchanges (aqad al muawadhat) such as trade financing based on the underlying contracts of murabaha. It can be based on asset sale. These securities are traded in the secondary market under the concept of bai al dayn. Maturities of these securities range from as little as one month. Mudaraha (trust financing) is an agreement between two parties. Qne party provides 100 per cent of the capital for a project. This might be a group of investors in a Islamic fund. The other party, the mudarib, provides entrepreneurial skills. This could be an investment fund manager. One of the most important agreements is Musharaka (partnership financing). This Islamic financing technique involves a partnership between two parties who both provide capital towards the financing of a project. This might be a bank and investors putting money into an infrastructure project. Both parties share profits on a pre-agreed. Ratio, but losses are shared on the basis of equity participation. Management of the project may be carried out by both parties or just one party. The western business investor who understands shared risks and shared rewards will readily emphasize with Musharaka. Leasing is another cornerstone of Islamic financial activity. It has become a core service or product for most Islamic banks and is still probably the most popular despite the growth of interest in Islamic equities. Total investment involved could be $5-billion and Islamic leasing has a significant role in the development of Islamic financial markets. It provides a direct link into the business or project being financed which, although it-may not lead to the spectacular gains available to a pure equity investor, is usually considerably more secure and more likely to give a—good predictable profit. In most Islamic banks profit-sharing accounts (PSIA) usually constitute the largest source of funds. PSIA are financial instruments, which give Islamic banks the right to invest funds deposited in these accounts on behalf of their holders on the basis of profit sharing. PSIA do not get a predetermined rate of return and are serviced only if the bank is profitable. This means they do not constitute a financial risk to the bank. Holders of equity shares are not guaranteed dividends and payments are made according to factors including the companys profit and revenue. However, Islamic banks do offer restricted PSIA to investors targeting certain projects specified in advance. PSIA are redeemable at maturity or at the initiative of their holders but not without the prior consent of the bank. Islamic banks can refuse to pay PSIA holders until the results of the investment financed by their funds are determined. Holders of PSIA bear the full risk of loss from normal business or natural causes but only to the amount of cash deposited. At the end of the financial year, the value of the PSIA can be reduced by its appropriate share of loss as reflected in the value of related assets. This is similar to a fall in the value of equity shares. However, some Islamic banks have established investment risk allowance funds to act as an initial buffer against losses. Most Islamic banks invest PSIA in the same investment portfolio as shareholders. Pooling or separation can be used in profit sharing. In Islam, money is potential capital. But money becomes capital only when it can be put to productive use and profit is derived from such activity; Profit is a reward for putting money to productive use and the provider of the capital will have shares in this reward. For years Muslims refrained from dealing with conventional banks for religious reasons but found in the emerging Islamic banks Halal (permitted) investment opportunities. Then conventional banks recognized the growth potential of Islamic banking, developed Islamic “windows”and then established Islamic banking Subsidiaries. But it need not be one-way traffic. Westerners, too, can access the growing number of investments governed by Islam which involve conventional Banks. Western involvement in Islamic funds includes names such as UBS, Roll & Ross, Wellington, Indosuez, Wellington and Flemings. Such involvement is building growing awareness among western investors although expatriates in the Arab Gulf region are not generally aware of how Islamic investments operate or what returns can be expected. But many analysts believe there are Islamic investments that should interest all investors. Zamir Iqbal an official with the World Bank says: My personal view is that emerging markets such as Malaysia and Indonesia offer great opportunities for Islamic funds to capitalise on rapid economic growth, especially in Malaysia where demand for Islamic products is high and both the primary and secondary markets are well-developed compared to other Islamic countries. He believes ongoing privatisation in developing Islamic countries like Egypt, Jordan and Pakistan offer tremendous potential to participate in the ownership of newly-privatised enterprises through f establishing Islamic funds. Islamic finance is wellsuited to infrastructure and project finance -activities that can carry high risk but could form a small part of the more adventurous part of a western investors portfolio. In return, countries in the west, like the United States can-offer-similar higher risk-higher reward areas for diversification. Vision Capitals DyIan Ray says: Venture capital is by nature a near-ideal Islamic investment. There is almost always pure equity investment in young, innovative companies. Venture-backed companies usually have little or no debt on their balance sheets. They are also concentrated in Islamically-permissible industries -20 percent software, 20 percent healthcare and 15 per cent telecom. In the United States $4.4 billion of venture capital was raised in 1995 and, over the past 20 years, returns have beaten nearly all other asset classes. The flow of investor funds between conventional and Islamic products will grow as appreciation of the risks and rewards deepens.
Posted on: Fri, 25 Apr 2014 06:43:07 +0000
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