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under
Islamic Financial
System
• Equity financing (Working
Capital) for indefinite period like
financing in stock of the joint
stock companies or on a definite
(short, medium or long) period
like investment in Term Financing
Certificates.
• Equity Financing must be on the
basis of profit-and-loss sharing for
temporary period that mature on
the expiry date.
• It is financing similar to equity
of capital but unlike Qard al-
Hashanah that do not need lien
on the assets of the firm.
• It is without any lien on the
business assets like lending on
interest, financiers are careful in
evaluating the prospects of the
business.
• To find medium or long term financing in
Islamic Finance without sharing in the
ownership and control of the business.
• Business expansion closely related to
distribution of ownership and control.
• It is not possible earning on savings without
willing to share risks of business as
ownership, risks and rewards of business
which is more widely practice in Islamic
Finance rather than in Conventional
System.
There are three types of
borrowers who seek funds to
satisfy their financing needs.
2. Private sector looking for finance for
expanding business.
3. Private sector seeking finance for
consumption needs.
4. Governments seeking funds to
finance budgetary deficits.
Can the needs of all three
categories of borrowers be
satisfied within the framework
of equity financing?
Answer
Participation as define in the three modes of
financing are the solution with the concept of
participation provided the Modarib,
Musharik and Morahib agree to the terms of
Islamic Financial System.
Channels of Equity in an
Islamic Society
• Islamic Finance is equity-oriented and
Islamic instruments of financing are based
on profit and loss sharing that bring a
fundamental change in the role of Islamic
Financial Institutions that convert them
from creditors to partners.
• The channels of equity investment in an
Islamic society are same as elsewhere.
• Sole proprietorship & partnership,
include both Modaraba and
Musharakah and also in joint stock
companies.
• Cooperation can also play an
important role in an Islamic economy
because of its harmony with the value
system of Islam and the valuable
contribution it can make to the
realization of its goals.
Steps to be taken to convert to an
Equity Financing System
Number of steps need to bring
transformation an equity-based
financing system in the Islamization
of the economy.
Islamic Financial System is a
predicted Revolution by Western
Economist
Firstly
• Projects should be selected for funding
through partnerships primarily on the basis
of their expected profitability rather than the
creditworthiness or solvency of the
borrower.