Permissible Mainstream Financial Solutions


Dr. Abdus Sattar Abbasi

It was January 2007 when we checked in at Dushanbe International Airport (DYU) Tajikistan, passengers were asked to proceed to the departure lounge according to the schedule but later flight departure was announced delayed. DYU was a moderate airport in terms of facilities; initially it was fine but with the passage of time people started to pick refreshments from a tiny snack shop in the departure lounge, which I couldn’t because I was not expecting that much delay in the departure. It was bit tense to bear with hunger after more than six hours of delay, when one of my acquaintances from Indian pharmaceutical company came to me and said that he has enough rajma which he can share with us. We knew each other well so I instantly replied that I eat Halal, he responded don’t you remember I am staunch vegetarian; thus I agreed to join him and to my surprise rajma turned to be red kidney beans with gravy which we used to call surkhlobia(red beans), we enjoyed the feast to the fullest. Anyhow, the purpose of sharing this incidence is that there are several permissible solutions in the mainstream of the life which comply with Shariah requirements and finance is not an exception.

We are developing a parallel system of Islamic financial institutions with a framework which is still not acceptable to all schools of thoughts. It is indeed remarkable to endeavour for a complete separate structure of Islamic banking and finance, which is growing slowly but surely. However, in this quest we are probably ignoring some quite potential opportunities to broaden the horizon of Shariah compliant financial solutions. Clutches of interest have deprived millions from their fair right of progress and prosperity. Every wave of depression indicates that it is interest based financial system which squeezes opportunities of equitable and sustainable human prosperity. Movements such as socially responsible investing, environmental, social and governance (ESG) models and ethical finance share several fundamental values with Islamic finance, only little adjustments can make these initiatives Shariah compliant.

Current framework for Shariah compliant business operations allows 37% interest bearing debt to asset ratio, 33% non-Shariah compliant investments to total asset ratio and 5% non-Shariah compliant income to total revenue along-with scheme of purifying through charity. Fundamental condition remains that core business should not violate any principle of Shariah. The ratio of illiquid assets to total assets should be at least 25% while market price per share should be at least equal to or greater than net liquid assets per share. This 37, 33, 5 and 25 provide a huge window to accommodate conventional modes of financing and investment for business organizations ignoring some promising mainstream permissible financial solutions.

In finance leverage means the amount of debt a firm uses; zero-leverage means zero long-term debt while almost zero-leverage means less than 5% book leverage. There is abundance of such firms working in the mainstream with zero or almost zero-leverage. A study found more than 32% large public nonfinancial firms in America with zero or almost zero-leverage from 1962 to 2009. According to the same study, “Zero-leverage behaviour is a persistent phenomenon. Dividend-paying zero-leverage firms pay substantially higher dividends, are more profitable, pay higher taxes, issue less equity, and have higher cash balances.” Promoting zero-leverage behaviour among business organizations is one of the options as a permissible financial strategy.

In the aftermath of World War II when global financial health was facing challenges, venture capital emerged as a viable financing solution for budding entrepreneurs with strong potential of growth. Startups generally face difficulties in finding monetary resources due to their neonatal operating history. Therefore, to realise their dreams they usually rely on venture capital, in exchange of equity in the firm, both in terms of monetary and non-monetary resources including technical &/ managerial expertise. This whole concept is close to the concept of Mudarabah, a Shariah compliant financial contract, in which one party contributes financial resources and called as ‘rabal-maal’ and the other an entrepreneur. Mudarabah provides both options to the rabal-maal as absolutely silent contributor of finance for the business enterprise and also the combination of finance and technical &/ managerial contributions; contract is customised according to the nature of the agreement. Over the years venture capital gained huge significance in the business world; in 2021 venture capital contributed 330 billion dollars of financing in United States of America alone. Venture capital is already shaping up as an institution with number of firms operating around the globe with more than a dozen in Pakistan. These firms have scientifically developed a mechanism of due diligence of business proposals before investing in the business. Opting venture capital as an investment option certainly has a bright track record such as sparkling success stories of Intel and Apple; however around 30-40% startups fail completely while 10-20% witness substantial success.

High net worth individuals (HNWIs) usually seek opportunities for investment in small but promising businesses to expand their hard-earned fortune. These HNWIs are known as ‘angel investors’. These self-made angel investors bring wealth of knowledge and expertise, along with liquid money, out of their successful careers. Therefore, angel investors prefer to invest in businesses with which they are either familiar or had first-hand experience in the past or they might had academic training in the particular sector. Angel investors prefer to invest through their acquaintances to provide cushion to the associated risk with the investment. Angel investors are becoming important part of overall emerging permissible mainstream financing and investment ecosystem in existing economic landscape.

Crowdfunding is another mainstream permissible financial solution for startups in particular and growing businesses in general, besides, crowdfunding also provides an opportunity for altruistic initiatives for those segments of the society which are deeply linked with the folk culture of a society but usually face financial challenges such as artists and writers. Crowdfunding is also a very good tool to assist serious illnesses of disadvantaged segment of the society. However, it is equally an effective financial solution for new business ventures. There are some popular crowdfunding platforms which facilitate new ventures where they pitch their idea or business plan in front of large and diverse group of investors to collect small amounts from every participating investor/supporter to accumulate hundreds and millions of dollars of funding with different modes of return from equity participation to complimentary advance units of the product or service. Although crowdfunding is not legal in Pakistan but it has been regulated and legally allowed in many advanced countries because of its usefulness in establishing new businesses.

It will be an added advantage if an individual or an organization aspiring to utilise these financial solutions can manage to sign the contract as mudarbah, musharkah, murabaha or tabarru according to the nature of the deal.

The writer is the Associate Professor Management Sciences

Head, Center of Islamic Finance

COMSATS University (CUI) Lahore Campus

[email protected]