Islamic finance
Islamic finance controls how Muslim multinationals raise cash or funds under sharia laws to fund their operations. Islamic finance funding instruments consist of equity and debt-like instruments. An equity instrument is a document that provides proof of a company’s rights while a debt-like device is an asset that allows a fixed payment of interest to the owner (Bidabad & Allahyarifard, 2019). A preferred stock is an example of an equity-like device. With the small number of financial instruments available in Islamic finance, preferred stock can be modified to be sharia-compliant. This paper highlights how preferred stock can be improved to be used as a new financial instrument in Islamic finance.
Preferred stock surpasses the common stock as a form of equity-like finance instrument. The new financial instrument will be modified into assets between stocks and bonds to make them more attractive to investors. Besides, the improved preferred stocks will precede common stockholders because of profits that will create more returns than traditional stocks (Bidabad & Allahyarifard, 2019). Like regular investors, preferred shareholders will have limited rights that do not usually entail voting. The financial instrument will be beneficial to institutions due to its tax benefits, which will enable them to raise vast amounts of capital. Improved preferred stock as a financial instrument will only be used in Islamic financing if some adjustments are made to make it sharia-compliant.
How the system will be sharia-compliant
As a new financial instrument, it will adopt the concept of corporation, which is mandatory in sharia laws. Besides, the improved preferred stock will qualify as an Islamic finance instrument if at least a group of leaders are elected from amongst the shareholders (Bidabad & Allahyarifard, 2019). Primarily, preferred shares have priority over common shares. Therefore, the new instrument will be sharia-compliant if all equity suppliers share capital in proportion to each other’s assets.