Islamic Approach for the Financial Market

Like conventional markets, Islamic financial markets have two components: capital and money markets. The Islamic Financial Market (IFM) refers to the market where the financial instruments are traded in ways that do not conflict with the Shari’ah principles. In other words, the IFM represents an assertion of religious law in the financial market transactions where the market should be free from the involvement of prohibited activities by the Shari’ah.

Most of the financial instruments used in contemporary financial markets are based on interest, which is clearly prohibited in Islam. Hence, development of financial instruments whose provisions, terms and conditions do not violate Shari ‘ah principles, is the first and foremost stipulation towards the evolution of Islamic capital markets. Secondly, most of the practices of capital markets, in handling financial instruments might also be repugnant to both Islamic law as well as Islamic norms of morality. There is a need to review the present practices prevailing in the financial market to refer which of these practices needed to be reformed from an

Islamic point of view and which of them might be acceptable. Thirdly, institutions, which might be conducive to functioning of Islamic financial markets, need to be established.

Islam is not averse to the intent of financial intermediation. It is a fact, that whatever be the form of economic organisation, a society, might have surplus and deficit households in terms of possession of financial resources. Hence, efficient use of financial resources of the society would necessitate some form of cooperation between the surplus and deficit units.

Key features of Islamic capital market instruments

a) Instrument should represent share in equity, real assets, usufruct or a combination of some or all of these and should not acquire money on debt.

1) Instrument representing real physical assets and usufruct are negotiable market price.

2) Instrument representing debts in their negotiability are subject to rules of hawalah.

3) Instrument representing a combination of different categories are subject to rules relating to the dominating.

• If debt are relatively larger the portfolio’s negotiability will be subject to hawalah-al-dayn

• If currency component is larger to sarf and

• If real / physical assets and usufructs are overwhelming, to selling at market prices.

b) The Issuance of Islamic Financial Instruments based on mudarabah or musharakah is subject to following conditions:

i) The Principle and expected return on investment can't be guaranteed

ii) If the financial instrument were issued for specific purposes or projects, the prospectus should include full disclosure of the nature of the activities, contractual relationships and obligations between the celebrations involved and ratio of profit sharing; and

iii) The issuers of financial instruments should keep separate accounts for apiece project and must declare its profit and loss accounts at the date mentioned in the prospectus and equilibrise sheets.

c) Holder of Islamic financial instruments are the owners of whatever rights these instruments represent and bearers of all related risks, and

d) An Instrument the goal of which is debt should not be granted to acquire any return and that its negotiability/tradability must be in accordance with the shari’ah rules.

Objectives of Islamic Financial Market

In principle, the objectives of the Islamic financial market are again based on the Shari’ah, which in essence should be treated as an important and necessary car to transfer funds from surplus to deficit units. This is to ensure the equitable allocation of capital to sectors which would yield the ideal of returns to the owners of capital and hence contribute towards the overall growth and expansion of the economy.

It is also the neutral of the Islamic financial market to ensure that there exists a means of attracting surplus funds for worthwhile investments in accordance with the owners’ preferences in terms of the extent of risk involvement, rate of return as well as the period of investment preferred. Without the financial market, the fund owners could not find adequate opportunities to invest for either short term or long term. Most investments have gestation lags and of long term in character. Emergency needs might arise from time to time which can't be easily met. It is also un-Islamic to hoard wealth. It is therefore necessary for wealth owners to invest their funds in order not to grant their funds to be unnecessarily eroded by the mandatory zakat.

Limiting the Liability

There is no resistance in Shari’ah to setting up a company whose liability is limited to its capital and the company clientele knows this fact since awareness on their part precludes deception. Nor is there any resistance in Shari’ah to the fact that the liability of some shareholders is unlimited without compensation for such a commitment. A shareholder is responsible for the liability incurred by the company only to the extent of his share.

Limited companies issue shares to their subscribers, whose liability is limited to the extent of the shares held by them. This is the basic difference between a limited company and an unlimited company shareholder. In the latter, the shareholders liability to the creditors of the company is unlimited. Shareholders of the company can be physical persons, or legal persons or both. Shares of joint stock companies can be a major area for Islamic banks’ investments. The Company is deemed to have a separate entity distinct from its members. Therefore, the company has legal rights and bears liabilities. It can sue for its rights and can be sued for imperfectness to discharge its commitments.

Limited companies are of two types, namely, private or public. In a private limited company, the number of shareholders is usually small. In many countries, the law makes it mandatory for a limited company to invite the general public to subscribe to the company’s capital if the number of shareholders reaches a certain point, say, 50 shareholders. Then it becomes a public limited company. Whether its shares will be quoted on the Stock Exchange(s) or not is the company’s decision, subject to approval by the Stock Exchange authorities, if the share is to be quoted on Stock Exchange. 

 

Islamic Approach for the Financial Market

Like conventional markets, Islamic financial markets have two components: capital and money markets. The Islamic Financial Market (IFM) refers to the market where the financial instruments are traded in ways that do not conflict with the Shari’ah principles. In other words, the IFM represents an assertion of religious law in the financial market transactions where the market should be free from the involvement of prohibited activities by the Shari’ah.

Most of the financial instruments used in contemporary financial markets are based on interest, which is clearly prohibited in Islam. Hence, development of financial instruments whose provisions, terms and conditions do not violate Shari ‘ah principles, is the first and foremost stipulation towards the evolution of Islamic capital markets. Secondly, most of the practices of capital markets, in handling financial instruments might also be repugnant to both Islamic law as well as Islamic norms of morality. There is a need to review the present practices prevailing in the financial market to refer which of these practices needed to be reformed from an

Islamic point of view and which of them might be acceptable. Thirdly, institutions, which might be conducive to functioning of Islamic financial markets, need to be established.

Islam is not averse to the intent of financial intermediation. It is a fact, that whatever be the form of economic organisation, a society, might have surplus and deficit households in terms of possession of financial resources. Hence, efficient use of financial resources of the society would necessitate some form of cooperation between the surplus and deficit units.

Key features of Islamic capital market instruments

a) Instrument should represent share in equity, real assets, usufruct or a combination of some or all of these and should not acquire money on debt.

1) Instrument representing real physical assets and usufruct are negotiable market price.

2) Instrument representing debts in their negotiability are subject to rules of hawalah.

3) Instrument representing a combination of different categories are subject to rules relating to the dominating.

• If debt are relatively larger the portfolio’s negotiability will be subject to hawalah-al-dayn

• If currency component is larger to sarf and

• If real / physical assets and usufructs are overwhelming, to selling at market prices.

b) The Issuance of Islamic Financial Instruments based on mudarabah or musharakah is subject to following conditions:

i) The Principle and expected return on investment can't be guaranteed

ii) If the financial instrument were issued for specific purposes or projects, the prospectus should include full disclosure of the nature of the activities, contractual relationships and obligations between the celebrations involved and ratio of profit sharing; and

iii) The issuers of financial instruments should keep separate accounts for apiece project and must declare its profit and loss accounts at the date mentioned in the prospectus and equilibrise sheets.

c) Holder of Islamic financial instruments are the owners of whatever rights these instruments represent and bearers of all related risks, and

d) An Instrument the goal of which is debt should not be granted to acquire any return and that its negotiability/tradability must be in accordance with the shari’ah rules.

Objectives of Islamic Financial Market

In principle, the objectives of the Islamic financial market are again based on the Shari’ah, which in essence should be treated as an important and necessary car to transfer funds from surplus to deficit units. This is to ensure the equitable allocation of capital to sectors which would yield the ideal of returns to the owners of capital and hence contribute towards the overall growth and expansion of the economy.

It is also the neutral of the Islamic financial market to ensure that there exists a means of attracting surplus funds for worthwhile investments in accordance with the owners’ preferences in terms of the extent of risk involvement, rate of return as well as the period of investment preferred. Without the financial market, the fund owners could not find adequate opportunities to invest for either short term or long term. Most investments have gestation lags and of long term in character. Emergency needs might arise from time to time which can't be easily met. It is also un-Islamic to hoard wealth. It is therefore necessary for wealth owners to invest their funds in order not to grant their funds to be unnecessarily eroded by the mandatory zakat.

Limiting the Liability

There is no resistance in Shari’ah to setting up a company whose liability is limited to its capital and the company clientele knows this fact since awareness on their part precludes deception. Nor is there any resistance in Shari’ah to the fact that the liability of some shareholders is unlimited without compensation for such a commitment. A shareholder is responsible for the liability incurred by the company only to the extent of his share.

Limited companies issue shares to their subscribers, whose liability is limited to the extent of the shares held by them. This is the basic difference between a limited company and an unlimited company shareholder. In the latter, the shareholders liability to the creditors of the company is unlimited. Shareholders of the company can be physical persons, or legal persons or both. Shares of joint stock companies can be a major area for Islamic banks’ investments. The Company is deemed to have a separate entity distinct from its members. Therefore, the company has legal rights and bears liabilities. It can sue for its rights and can be sued for imperfectness to discharge its commitments.

Limited companies are of two types, namely, private or public. In a private limited company, the number of shareholders is usually small. In many countries, the law makes it mandatory for a limited company to invite the general public to subscribe to the company’s capital if the number of shareholders reaches a certain point, say, 50 shareholders. Then it becomes a public limited company. Whether its shares will be quoted on the Stock Exchange(s) or not is the company’s decision, subject to approval by the Stock Exchange authorities, if the share is to be quoted on Stock Exchange.

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The boom in the automobile income is taken to be an indicator of the increasing riches of the people. Besides the increasing economic prosperity of the people, the other most important reason for the increase in the understanding of automobiles is due to the simple availability of the automobile finance in very inexpensive monthly instalment. Even the down payment amounts might not be required or it might be quite less. The people, therefore, like taking the automobile loan rather than making the full payment in one go.

You are only required to carry some documents in support of your incomes and the indistinguishability and some amounts to make the down payment while taking the automobile loan. Each automobile manufacturer nowadays has arrangement with the automobile finance companies and banks to wage the loans to the prospective customers with ease.

The list of documents required for getting the loan are the following:

1. Income proof: It is quite natural to anticipate the automobile lease companies to ask for your income proof since they would like to know whether they will be healthy to pay the monthly instalment or not. This income proof can be furnished in the form of some salary slips, bank statements or the financial statements of the company.

2. Address Proof: The automobile lease company would like to know where it’ automobile is being taken or where the owner of the automobile resides. For that purpose some address proof is required as well. The driving license or the passport copy can be given as a proof of the address to the company.

3. Property ownership proof: This is required to be given only by those people who own a property of their own.

4. Insurance copy: The automobile finance company would be giving the automobile only if it is duly and comprehensively insured.

5. Roadworthiness certificate: This certificate tells whether the automobiles are fit for being on the roads on not.

6. Photographs of the automobile with the number plate and automobile body.

7. Proof of the bank statement details of the seller.

If you are an employed person, you can take the novated automobile lease wherein your instalment gets reduced from the salary that you are taking. On changing the employment, the mortal must check whether the new employer can wage the novated lease artefact or not. Similarly, there are a few other types of automobile leases.

With increasing income of cars, there have been problems of urbanization like jams, pollution in nearly all the major cities of the world. Some people have mooted the rise in the government taxes and insurance rates to make the automobile finance dearer and to maintain the income of the automobiles at sustainable levels. Some others are even calling for a putting a limit on the total automobile production and starting of a quota system of production for the cars. These recommendations have been discounted for one reason or the other, and the automobile loan companies have been doing brisk business.

The availability of simple automobile finance is one of the prime reasons for the booming income of the automobiles year after year. Even the most highly priced automobiles are acquirable on monthly finance options of different types. This is a global phenomenon. The automobile loan can be had after paying some sum as part down payment and the rest on monthly instalments.

Some of the most common types of automobile finance options are: automobile lease, commercial hire purchase, salary packaging, Low doc/no doc automobile finance, chattel mortgage, novated lease and even by taking individualized loan. The difference between these different methods lies in the title or ownership of the car, the liability to pay the sums to the automobile company and the tax treatment of the different finance options.

The automobile loan can be had in any of the different formats depending upon your nature of occupation. For the people employed with some organization, usually the most preferred way is to get the same within the salary package. This can take two forms. In one, called salary packaging, the monthly instalment is deducted from the salary of the employee and paid to the automobile finance company. The liability to pay lies with the employee and if he leaves the job, he will have to hold for the new employer to get it packaged in the salary.

For people who want the automobiles for their trading purpose, like the ones in the tour and travel business, the commercial hire buy option can be most suitable. With apiece successive payment, you are paying off money towards the ownership of the car. The money to be paid as instalment can be taken out from the incomes derived from using the automobiles in business. So, there is no extra burden on the owner. Even if the automobiles are taken away due to non payment of the instalment amounts, there is nothing to worry for the owner since he has not done any capital investment on it.

The individualized loan is taken, at high rates of interest, on the condition that at least half the sum is used for individualized purposes and the rest is applied for buying the car. The loan is secured by the financer who takes a charge for this service in the form of monthly instalments.

There are also the situations in which a self-employed mortal is not healthy to fetch any income proof of his own, be it salary slip or any other thing. For those people, the automobile finance can be had if some of the prescribed eligibility criteria are met. The most famous options for this stipulation are that of the low doc or no doc finance. This is the most common option of Automobile Loan acquirable fro people who have low-income self employment.

Each of the financing options has some benefit or the other. These have been designed in such a way as to meet the automobile stipulations of most of the deserving people.

Author:Madison Finance