Microfinance

Microfinance

Microfinance is a key concern for Muslims states and recently Islamic banks also. Islamic microfinance tools can enhance security of tenure and contribute to transformation of lives of the poor. [24]

Controversy

In Islamabad, Pakistan, on June 16, 2004: Members of leading Islamist political party in Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a protest walkout from the National Assembly of Pakistan against what they termed derogatory remarks by a minority member on interest banking:

Taking part in the budget debate, M.P. Bhindara, a minority MNA [Member of the National Assembly]...referred to a decree by an Al-Azhar University's scholar that bank interest was not un- Islamic. He said without interest the country could not get foreign loans and could not achieve the desired progress. A pandemonium broke out in the house over his remarks as a number of MMA members...rose from their seats in protest and tried to respond to Mr Bhindara's observations. However, they were not allowed to speak on a point of order that led to their walkout.... Later, the opposition members were persuaded by a team of ministers...to return to the house...the government team accepted the right of the MMA to respond to the minority member's remarks.... Sahibzada Fazal Karim said the Council of Islamic ideology had decreed that interest in all its forms was haram in anIslamic society. Hence, he said, no member had the right to negate this settled issue. [25]

Some Islamic banks generate loss by charging for the time value of money, the common economic definition of Interest ( Riba). These institutions are criticized in some quarters of the Muslim community for their lack of strict adherence to Sharia.

The concept of Ijarah is used by some Islamic Banks (the Islami Bank in Bangladesh, for example) to apply to the use of money instead of the more accepted application of supplying goods or services using money as a vehicle. A fixed fee is added to the amount of the loan that must be paid to the bank regardless if the loan generates a return on investment or not. The reasoning is that if the amount owed does not change over time, it is profit and not interest and therefore acceptable under Sharia.

Islamic banks are also criticized by some for not applying the principle of Mudarabah in an acceptable manner. Where Mudarabah stresses the sharing of risk, critics point out that these banks are eager to take part in profit-sharing but they have little tolerance for risk. To some in the Muslim community, these banks may be conforming to the strict legal interpretations of Sharia but avoid recognizing the intent that made the law necessary in the first place. [ citation neede

d

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Free Banking, History of Free Banking,

Free Banking, History of Free Banking, 

Free banking is a theory of banking in which commercial banks and market forces control the provision of banking services. Under free banking, government central banks and currency boards do not exist, and banking-specific government regulations are either non-existent or not as strict. Banking services may include bank note issue by private institutions, cheque accounts, deposit acceptance, and/or money lending.

Institutions of Free Banking:

Free banking includes: [

* Freedom to form banks

* Freedom to issue banknotes (promissory notes issued by a bank payable to bearer on demand).

* Freedom to accept money on deposit to current account, and to pay and collect cheques for customers

* Freedom to borrow money on term deposit and other forms of secured and unsecured borrowing

* Freedom to lend money and otherwise invest the bank's assets

* Freedom to provide guarantees, documentary letters of credit, performance bonds and to incur other off balance sheet exposures.

Vera Smith's classic definition of free banking is:

"A régime where note-issuing banks are allowed to set up in the same way as any other type of business enterprise, so long as they comply with the general company law. The requirement for their establishment is not special conditional authorisation from a Government authority, but the ability to raise sufficient capital, and public confidence, to gain acceptance for their notes and ensure the profitability of the undertaking. Under such a system all banks would not only be allowed the same rights, but would also be subjected to the same responsibilities as other business enterprises. If they failed to meet their obligations they would be declared bankrupt and put into liquidation, and their assets used to meet the claims of their creditors, in which case the shareholders would lose the whole or part of their capital, and the penalty for failure would be paid, at least for the most part, by those responsible for the policy of the bank. . . . No bank would have the right to call on the Government or on any other institution for special help in time of need. No bank would be able to give its notes forced currency by declaring them to be legal tender for all payments. . . . A central bank, on the other hand, being founded with the aid either direct or indirect of the Government, is able to fall back on the Government for protection from the disagreeable consequences of its acts. The central bank, which cannot meet its obligations, is allowed to suspend payment . . . while its notes are given forced currency." (Smith, Vera. [1936] 1990. The Rationale of Central Banking and the Free Banking Alternative. Minneapolis, Minn.: Liberty Fund., pp. 169–70)

Characteristics of Free Banking

Free banking theorists consider that free banking is characterized by:

* Competitive issue of redeemable bearer currency instead of central bank notes monopoly. Historically this meant banknotes (promissory notes issued by a bank payable to bearer on demand) issued in the form of paper or metal tokens, but cryptography and modern communications technology mean that it can now take the form of electronic tokens, too.

* Mutual acceptance by banks of each other's notes at par [ citation needed], and indirect redemption of notes by banks through note exchanges.

* In the same way competitive provision of current account services, but cooperation, too, in clearing of inter-bank payments between such accounts through clearing houses and settlement banks.

* Development of short term credit markets to allow banks with excess reserves to invest them at interest, and banks in need of reserves to borrow funds short term.

* Development of, and bank investment in, marketable debt securities, providing investment opportunities that can be liquidated at short notice, and acting as collateral for short term inter-bank borrowing and lending.

* There's no legal tender, that is, no legally enforced currency. Everybody is free to accept or refuse a trade in the currency they choose. A government central bank can still exist and can issue currency but its currency can only be mandatory for Government-related payments, like taxes.

* No enforced Fractional reserve ratio. Banks are free to float their fractional reserve ratio, or even sell financial products with differing fractional reserves, and differing restrictions on withdrawal rules, adjusting the interest offered on the account in response.

History of Free Banking

Banking has been more regulated in some times and places than others, and some times and places it has hardly been regulated at all, giving some experiences of more or less free banking.

* Australia. In the late 19th century, banking in Australia was subject to little regulation. There were four large banks with over 100 branches each, that together had about half of the banking business, and branch banking and deposit banking were much more advanced than other more regulated countries such as the UK and USA. Banks accepted each other's notes at par. Interest margins were about 4% p.a. In the 1890s a land price crash caused the failure of many smaller banks and building societies. Bankruptcy legislation put in place at the time gave bank debtors generous terms they could restructure under, and most of the banks used this as a means to restructure their debts in their favor, even though they didn't really need to.

* Switzerland. [1] In the 19th Century several Swiss cantons deregulated banking, allowing free entry and issue of notes. Cantons retained jurisdiction over banking until the enactment of the Federal Banking Law of 1881. The centralisation of note issue reduced the problem of the existence of "a bewildering variety of notes of varying qualities ... at fluctuating exchange rates." [2]

* Scottish Free Banking. [3] This period lasted between 1716 and 1845. The Bank of Scotland, the original Scottish bank charter and The Royal Bank of Scotland, chartered by England, issued competitive currencies. This resulted in a "currency war" in 1727. The result was a cooperative equilibrium, where both banks agreed to redeem. This area of study has been developed further by Lawrence H. White, in books such as Free Banking in Britain: Theory, Experience and Debate 1800-1845.

* United States. [4] Between 1837 and 1862, known as the Free Banking Era, only state-chartered banks existed. They could issue bank notes against specie ( gold and silver coins) and the states regulated their reserve requirements, interest rates for loans and deposits, the necessary capital ratio. The banking system during this period was notoriously unstable, with many bank failures, and bank notes were discounted depending on the perceived creditworthiness of the issuing bank, that is, there was no single, broadly accepted currency or unit of account [ citation needed]. Then, from 1863 to 1913, known as the National Banks Era, state-chartered banks were still operating under a free banking system. Some scholars have found that the system was mostly stable [5].

* Sweden. [6] Sweden had two periods of free banking, 1830-60 and 1860-1902. Following a bank crisis in 1857, there was a rise in popular support for private banks and private money issuers (especially Stockholms Enskilda Bank, founded in 1856). A new bank law was adopted by parliament in 1864, deregulating the interest rate. The following decades marked the height of the Swedish free banking era. After 1874, no new private banks were founded. In 1901, issuing of private money was prohibited. Work on the Swedish free banking era has been done by Per Hortlund and Erik Lakomaa. Erik Lakomaa (The Quarterly Journal of Austrian Economics, Summer 2007), has demonstrated that the Swedish experiment in free banking was successful. It reduced booms and busts. Only one bank went bankrupt for 70 years, an event related to fraud and not to excessive lending as has happened wherever central banking has been practiced.

There is speculation that with electronic currencies free banking can evolve into Anonymous internet banking. The implications of this for the monetary system are unknown, and much of the rigorous theory in this area has been abandoned for a "wait and see" attitude

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Social capital

Social capital

Social capital is often hard to define, but to one textbook it is:

the stock of trust, mutual understanding, shared values, and socially held knowledge that facilitates the social coordination of economic activity. [9]

Knowledge, ideas, and values, and human relationships are transmitted as part of the culture. This type of capital cannot be owned by individuals and is instead part of the common stock owned by humanity. But they often crucial to maintaining a peaceful society in which normal economictransactions and production can occur.

Another kind of social capital can be owned individually. [10] This kind of individual asset involves reputation, what accountants call " goodwill," and/or what others call "street cred," along with fame, honor, and prestige. It fits with Pierre Bourdieu’s definition of "social capital" as:

an attribute of an individual in a social context. One can acquire social capital through purposeful actions and can transform social capital into conventional economic gains. The ability to do so, however, depends on the nature of the social obligations, connections, and networks, available to you. [11]

This means that the value of individual social assets that Bourdeiu points to depend on the current "social capital" as defined above.

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Fiqh

Fiqh

Fiqh ( Arabic: فقه ‎, IPA: [f ɪ qəh] ) is Islamic jurisprudence. Fiqh is an expansion of the Sharia Islamic law—based directly on the Quran and Sunnah—that complements Shariah with evolving rulings/interpretations of Islamic jurists.

Fiqh deals with the observance of rituals, morals and social legislation. There are four prominent Sunni schools of Fiqh ( Madh'hab) and two schools for the Shi'a. A person trained in fiqh is known as a Faqih (plural Fuqaha).

Etymology

The word fiqh is an Arabic term meaning "deep understanding" or "full comprehension". Technically it refers to the science of Islamic law extracted from detailed Islamic sources (which are studied in the principles of Islamic jurisprudence)--the process of gaining knowledge of Islam throughjurisprudence, and the body of legal advisements so derived, is known as fiqh.

The historian Ibn Khaldun describes fiqh as "knowledge of the rules of God which concern the actions of persons who own themselves bound to obey the law respecting what is required ( wajib), forbidden ( haraam), recommended ( mandūb), disapproved ( makruh) or merely permitted ( mubah)". [2]

This definition is consistent amongst the jurists.

Introduction

There are cases where the Qur'an gives a clearly defined and concrete answer on how to deal with different issues. This includes how to perform the ritual purification ( Arabic: wudu) before the obligatory daily prayers ( Arabic: salat). On other issues, the Qur'an alone is not enough to make things clear. For example, the Qur'an states one needs to engage in daily prayers ( Arabic: salat) and fast ( Arabic: sawm) during the month of Ramadan, however, it does not define how to perform these duties. The details about these issues can be found in the traditions of Muhammad ( Arabic: Sunnah). This is true for most detailed issues, thus the Qur'an and Sunnah are the basis for the Islamic Divine Law ( Arabic: Shariah).

With regard to some topics, the Qur'an and Sunnah are simply silent. In those cases, the Muslim jurists ( Arabic: Fuqaha) try to arrive at conclusions using other tools. Sunni jurists use analogy ( Arabic: Qiyas) and historical consensus of the community ( Arabic: Ijma). The conclusions arrived at with the aid of these additional tools constitute a wider array of laws than the Sharia constitutes of, and is called fiqh. Thus, in contrast to the sharia, fiqh is not regarded as sacred, and the schools of thought have differing views on its details, without viewing other conclusions as sacrilegious. This division of interpretation in more detailed issues has resulted in different schools of thought ( Arabic: madh'hab).

This wider concept of Islamic jurisprudence is the source of a range of laws in different topics that govern the lives of the Muslims in all facets of everyday life

.

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Islamic Law

slamic Law

Islamic law (fiqh) covers two main areas, rules in relation to actions and rules in relation to circumstances surrounding actions.

Rules in relation to actions ('amaliyya—عملية) comprise:

* Obligation (fardh)

* Recommendation (Mostahab)

* Permissibility (mubah)

* Disrecommendation (makrooh)

* Prohibition (haram)

Rules in relation to circumstances (wadia') comprise:

* Condition (shart)

* Cause (sabab)

* Preventor (mani)

* Permit/Enforce (rukhsah, azeemah)

* Valid/Corrupt/Invalid (sahih, faasid, batil)

* In time/Debt/Repeat (adaa, al-qadaa, i'ada)

Fiqh is grouped into two parts:

1. Ibadaat (worship) 2. Mua'malaat (dealings & transactions)

Fields of jurisprudence

* Islamic economical jurisprudence

* Islamic political jurisprudence

* Islamic marital jurisprudence

* Islamic criminal jurisprudence

* Islamic etiquettical jurisprudence

* Islamic theological jurisprudence

* Islamic hygienical jurisprudence

* Islamic military jurisprudence

Methodologies of jurisprudence usul al-fiqh

The Modus operandi of the Muslim jurist is known as usul al-fiqh (principles of jurisprudence).

There are different approaches to the methodology used in fiqh to derive sharia from the Islamic sources. The main methodologies are:

* The four classical Sunni schools are, in chronological order: the Hanafi school, the Maliki school, the Shafi'i school and the Hanbali school. They represent the generally accepted Sunni authority for Islamic jurisprudence. The four most famous schools mentioned go back to the schools as Sufian Bin Oyayna. [ citation needed]

Other schools are the Zaidi, Jafari, Zahiri, Sufian Al'thawree, Sufian bin O'yayna, Layth bin Sa'ad, Tabari and Qurtubi.

* Jafari fiqh , or the Shi'a fiqh

* Qur'an alonefiqh

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The four schools of Sunni Islam

The four schools of Sunni Islam

The four schools (or Madh'hab) of Sunni Islam are each named by students of the classical jurist who taught them. The Sunni schools (and where they are commonly found) are

* Hanafi ( Turkey, Pakistan, the Balkans, Central Asia, Indian subcontinent, Afghanistan, China and Egypt)
* Maliki ( North Africa, the Muslim areas of West Africa, and several of the Arab states of the Persian Gulf)
* Shafi'i ( Arabia, Indonesia, Malaysia, Maldives, Egypt, Somalia, Eritrea, Ethiopia, Yemen and southern parts of India)
* Hanbali ( Arabia).

These four schools share most of their rulings, but differ on the particular hadiths they accept as authentic and the weight they give to analogy or reason ( qiyas) in deciding difficulties.

The Hanafi school was the earliest established under the jurist Imam Abu Hanifa, who was born and taught in Iraq. Imam Abu Hanifa (80 A.H.–150A.H.), whose real name was Nu'man ibn Thabit, was born in the city of Kufa (modern day Iraq) in the year 80 A.H (689 A.D). Born into a family of tradesmen, the Imam's family were of Persian origin. Under Imam Abu Hanifa, the witr prayer was considered to be compulsory and the Hanafis also differed with other sects in relation to methods of taking ablution, prayers and payment of tithe or zakat. Imam Abu Hanifa also differed with the other three schools in many areas including the type of punishments meted out for various crimes in Islam. On the whole, the Hanafi school of jurisprudence could be said to have the most differences with other three schools.

Students of Imam Malik established the Maliki school of which a majority now can be found in North Africa and some Persian gulf states . Imam Malik, whose real name was Abu Abdullah, Malik bin Anas, was born in Medina in the year 715 AD. His ancestral home was in Yemen, but his grandfather settled in Medina after embracing Islam. He received his education in Medina, which was the most important seat of Islamic learning, and where the immediate descendants of the Muhammad's followers lived. Imam Malik was attracted to the study of law, and devoted himself to the study of fiqh. His principal book, the Kitab al-Muwatta, is one of the earliest surviving books on hadith and fiqh. Differences under the Maliki school included the fact that those following the Maliki school could state their purpose (or niat) once only for compulsory fasting which is valid for the whole month of Ramadhan whilst for the Shafi'ie school (see below), one would have to state his purpose every day of the month of Ramadhan for his fast to be valid the next day.
Ja'fari jurisprudence

The Jaferi or Ja'fari school ( Iran, Iraq, Azerbaijan, Lebanon, Bahrain, Pakistan, India and parts of Afghanistan and Saudi Arabia) is associated with Shia Islam. The fatwas, or time and space bound rulings of early jurists, are taken rather more seriously in this school, due to the more hierarchical structure of Shia Islam, which is ruled by the Imams. But they are also more flexible, in that every jurist has considerable power to alter a decision according to his opinion.

The Jafari school uses 'aql "intellect" instead of qiyas in the Sunni schools, when establishing Islamic laws.

Each school reflects a unique al-urf or culture, that the classical jurists themselves lived in, when rulings were made. Some suggest that the discipline of isnad which developed to validate hadith made it relatively easy to record and validate also the rulings of jurists, making them far easier to imitate ( taqlid) than to challenge in new contexts. The effect is, the schools have been more or less frozen for centuries, and reflect a culture that simply no longer exists.

Early shariah had a much more flexible character, and many modern Muslim scholars believe that it should be renewed, and that the classical jurists should lose special status. This would require formulating a new fiqh suitable for the modern world, e.g. as proposed by advocates of the Islamization of knowledge, and would deal with the modern context. This modernization is opposed by most conservative
Early history

The formative period of Islamic jurisprudence stretches back to the time of the early Muslim communities. In this period, jurists were more concerned with pragmatic issues of authority and teaching than with theory. [3] Progress in theory happened with the coming of the early Muslim jurist Muhammad ibn Idris ash-Shafi`i (767–820), who codified the basic principles of Islamic jurisprudence in his book ar-Risālah. The book details the four roots of law (Qur'an, Sunnah, ijma, and qiyas) while specifying that the primary Islamic texts (the Qur'an and the hadith) be understood according to objective rules of interpretation derived from scientific study of the Arabic language. [4]

A number of important legal institutions were developed by Muslim jurists during the classical period of Islam, known as the Islamic Golden Age. One such institution was the Hawala, an early informal value transfer system, which is mentioned in texts of Islamic jurisprudence as early as the 8th century. Hawala itself later influenced the development of the agency in common law and in civil laws such as the aval in French law and the avallo in Italian law. [5] The "European commenda" (Islamic Qirad) used in European civil law may have also originated from Islamic law. [6]

The earliest known lawsuits were described in the Ethics of the Physician by Ishaq bin Ali al-Rahwi (854–931) of al-Raha, Syria, who describes it as part of an early medical peer review process, where the notes of a practicing Islamic physician were reviewed by peers and he/she could face a lawsuit from a maltreated patient if the reviews were negative. [7] The Waqf in Islamic law, which developed during the 7th–9th centuries, bears a notable resemblance to the trusts in the English trust law. [8] For example, every Waqf was required to have a waqif (founder), mutawillis (trustee), qadi (judge) and beneficiaries. [9] The trust law developed in England at the time of the Crusades, during the 12th and 13th centuries, was introduced by Crusaders who may have been influenced by the Waqf institutions they came across in the Middle East. [10] [11]

The Islamic Lafif was a body of twelve members drawn from the neighbourhood and sworn to tell the truth, who were bound to give a unanimous verdict, about matters "which they had personally seen or heard, binding on the judge, to settle the truth concerning facts in a case, between ordinary people, and obtained as of right by the plaintiff." The only characteristic of the English jury which the Islamic Lafif lacked was the "judicial writ directing the jury to be summoned and directing the bailiff to hear its recognition." According to Professor John Makdisi, "no other institution in any legal institution studied to date shares all of these characteristics with the English jury." It is thus likely that the concept of the Lafif may have been introduced to England by the Normans, who conquered both England and the Emirate of Sicily, and then evolved into the modern English jury. [6]

Several other fundamental common law institutions may have been adapted from similar legal institutions in Islamic law and jurisprudence, and introduced to England by the Normans after the Norman conquest of England and the Emirate of Sicily, and by Crusaders during the Crusades. In particular, the "royal English contract protected by the action of debt is identified with the Islamic Aqd, the English assize of novel disseisin is identified with the Islamic Istihqaq, and the English jury is identified with the Islamic Lafif." Other English legal institutions such as "the scholastic method, the license to teach," the " law schools known as Inns of Court in England and Madrasas in Islam" and the "European commenda" (Islamic Qirad) may have also originated from Islamic law. [6] The methodology of legal precedence and reasoning by analogy ( Qiyas) are also similar in both the Islamic and common law systems. [12] These influences have led some scholars to suggest that Islamic law may have laid the foundations for "the common law as an integrated whole"

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Financial capital

Financial capital:

Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc.
Financial capital vs. real capital

Financial capital refers to the funds provided by lenders (and investors) to businesses to purchase real capital equipment for producing goods/services. Real capital comprises physical goods that assist in the production of other goods and services, eg. shovels for gravediggers, sewing machines for tailors, or machinery and tooling for factories.

Financial capital is provided by lenders for a price: interest. Also see time value of money for a more detailed description of how financial capital may be analyzed.

Furthermore, financial capital, or economic capital, is any liquid medium or mechanism that represents wealth, or other styles of capital. It is, however, usually purchasing power in the form of money available for the production or purchasing of goods, etcetera. Capital can also be obtained by producing more than what is immediately required and saving the surplus.

Financial capital has been subcategorized by some academics as economic or productive capital necessary for operations, signaling capital which signals a company's financial strength to shareholders, and regulatory capital which fulfills capital requirements. [1]
Sources of capital

* Long Term - usually above 7 years
o Share Capital
o Mortgage
o Retained Profit
o Venture Capital
o Debenture
o Project Finance

* Medium Term - usually between 2 and 7 years
o Term Loans
o Leasing
o Hire Purchase

* Short Term - usually under 2 years
o Bank Overdraft
o Trade Credit
o Deferred Expenses
o Factoring

Capital market

* Long-term funds are bought and sold:
o Shares
o Debentures
o Long-term loans, often with a mortgage bond as security
o Reserve funds
o Euro Bonds

Money market

* Financial institutions can use short-term savings to lend out in the form of short-term loans:
o Credit on open account
o Bank overdraft
o Short-term loans
o Bills of exchange
o Factoring of debtors

Differences between shares and debentures

* Shareholders are effectively owners; debenture-holders are creditors.
* Shareholders may vote at AGMs and be elected as directors; debenture-holders may not vote at AGMs or be elected as directors.
* Shareholders receive profit in the form of dividends; debenture-holders receive a fixed rate of interest.
* If there is no profit, the shareholder does not receive a dividend; interest is paid to debenture-holders regardless of whether or not a profit has been made.
* In case of dissolution of firms debenture holders are paid first as compared to shareholder.

Fixed capital

This is money which is used to purchase assets that will remain permanently in the business and help it to make a profit.
Factors determining fixed capital requirements

* Nature of business
* Size of business
* Stage of development
* Capital invested by the owners
* location of that area

Working capital

This is money which is used to buy stock, pay expenses and finance credit.
Factors determining working capital requirements

* Size of business
* Stage of development
* Time of production
* Rate of stock turnover ratio
* Buying and selling terms
* Seasonal consumption
* Seasonal production
* Seasonal cost

Instruments

A contract regarding any combination of capital assets is called a financial instrument, and may serve as a

* medium of exchange,
* standard of deferred payment,
* unit of account, or
* store of value

Most indigeneous forms of money (wampum, shells, tally sticks and such) and the modern fiat money is only a "symbolic" storage of value and not a real storage of value like commodity money.
Capital vs. money

Liquidity requirements of these vary significantly — leading to a diversity of contracts and financial markets to trade them on. When all four functions are served by one instrument, this is called money, which does not need to be traded on financial markets since the risk of loss of value of money is uniform across the whole society. Where no one form of money is agreed to have reliable value, and barter is undesirable, less liquid or more diverse instruments have served the four functions. This article focuses mostly on financial instruments which are not uniformly affected by native currency inflation and which are not guaranteed by a state.
Own and borrowed capital

Capital contributed by the owner or entrepreneur of a business, and obtained, for example, by means of savings or inheritance, is known as own capital or equity, whereas that which is granted by another person or institution is called borrowed capital, and this must usually be paid back with interest. The ratio between debt and equity is named leverage. It has to be optimized as a high leverage can bring a higher profit but create solvency risk.
Borrowed capital

This is capital which the business borrows from institutions or people, and includes debentures:

* Redeemable debentures
* Irredeemable debentures
* Debentures to bearer
* Ordinary debentures

Own capital

This is capital that owners of a business (shareholders and partners, for example) provide:

* Preference shares/hybrid source of finance
o Ordinary preference shares
o Cumulative preference shares
o Participating preference shares
* Ordinary shares
* Bonus shares
* Founders' shares

These have preference over the equity shares. This means the payments made to the shareholders are first paid to the preference shareholder(s) and then to the equity shareholders.
Issuing and trading

Like money, financial instruments may be "backed" by state military fiat, credit (i.e. social capital held by banks and their depositors), or commodity resources. Governments generally closely control the supply of it and usually require some "reserve" be held by institutions granting credit. Trading between various national currency instruments is conducted on a money market. Such trading reveals differences in probability of debt collection or store of value function of that currency, as assigned by traders.

When in forms other than money, financial capital may be traded on bond markets or reinsurance markets with varying degrees of trust in the social capital (not just credits) of bond-issuers, insurers, and others who issue and trade in financial instruments. When payment is deferred on any such instrument, typically an interest rate is higher than the standard interest rates paid by banks, or charged by the central bank on its money. Often such instruments are called fixed-income instruments if they have reliable payment schedules associated with the uniform rate of interest. A variable-rate instrument, such as many consumer mortgages, will reflect the standard rate for deferred payment set by the central bank prime rate, increasing it by some fixed percentage. Other instruments, such as citizen entitlements, e.g. " U.S. Social Security", or other pensions, may be indexed to the rate of inflation, to provide a reliable value stream.

Trading in stock markets or commodity markets is actually trade in underlying assets which are not wholly financial in themselves, although they often move up and down in value in direct response to the trading in more purely financial derivatives. Typically commodity markets depend on politics that affect international trade, e.g. boycotts and embargoes, or factors that influence natural capital, e.g. weather that affects food crops. Meanwhile, stock markets are more influenced by trust in corporateleaders, i.e. individual capital, by consumers, i.e. social capital or "brand capital" (in some analyses), and internal organizational efficiency, i.e. instructional capital and infrastructural capital. Some enterprises issue instruments to specifically track one limited division or brand. " Financial futures", " Short selling" and " financial options" apply to these markets, and are typically pure financial bets on outcomes, rather than being a direct representation of any underlying asset.
Broadening the notion

The relationship between financial capital, money, and all other styles of capital, especially human capital or labor, is assumed in central bank policy and regulations regarding instruments as above.

Such relationships and policies are characterized by a political economy - feudalist, socialist, capitalist, green, anarchist or otherwise. In effect, the means of money supply and other regulations on financial capital represent the economic sense of the value system of the society itself, as they determine the allocation of labor in that society.

So, for instance, rules for increasing or reducing the money supply based on perceived inflation, or on measuring well-being, reflect some such values, reflect the importance of using (all forms of) financial capital as a stable store of value. If this is very important, inflation control is key - any amount of money inflation reduces the value of financial capital with respect to all other types.

If, however, the medium of exchange function is more critical, new money may be more freely issued regardless of impact on either inflation or well-being.

It is common in Marxist theory and ideology to refer to the role of " Finance Capital" as the determining and ruling class interest in capitalist society, particularly in the latter stages. [2]
Valuation

Normally, a financial instrument is priced accordingly to the perception by capital market players of its expected return and risk.

Unit of account functions may come into question if valuations of complex financial instruments vary drastically based on timing. The " book value", " mark-to-market" and " mark-to-future" [3] conventions are three different approaches to reconciling financial capital value units of account.
Economic role

Socialism, capitalism, feudalism, anarchism, other civic theories take markedly different views of the role of financial capital in social life, and propose various political restrictions to deal with that.

Finance capitalism is the production of profit from the manipulation of financial capital. It is held in contrast to industrial capitalism, where profit is made from the manufacture of goods.

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Benefits of Islamic banking

Benefits of Islamic banking

By K.H.Azam Ahamed

Islamic banking and the finance industry is growing at an annual rate of 20%. Many international as well as local institutions have stepped into this multi-billion dollar booming industry by establishing its Islamic wings and units. International giant banks such as HSBC (HSBC Amanah), Citi Bank (Citi Islamic) and Standard Chartered have already established their Islamic units and functioning in the Middle East region.

In Sri Lanka , despite the Muslim population being just 8% of the total population, a considerable growth is reported in the past few years with the establishment of Amana, Ceylinco Profit Sharing, First Global and a new comer ABC Barakah. Recently it is reported that the largest state owned commercial bank, Bank of Ceylon intends to commence its Islamic banking unit in early 2008. All these new entries imply that this alternative banking system has drawn the attention of Muslims as well as non-Muslims due to its unique developmental characteristics.

The underlying principle of Islamic banks is the principle of justice which is an essential requirement for all kinds of Islamic financing. In profit sharing of a financed project, the financier and the beneficiary share the actual or net profit/loss rather than throwing the risk burden only to the entrepreneur. The principle of fairness and justice requires that the actual output of such a project should be fairly distributed among the two parties. If a financier is expecting a claim on profits of a project, he should also carry a proportional share of the loss of that project.

In contrast with conventional finance methods, Islamic financing is not centered only on credit worthiness and ability to repay the loans and interest; instead the worthiness and profitability of a project are the most important criteria of Islamic financing while the ability to repay the loan is sub-segmented under profitability.

One of the unique and salient characteristics of Islamic banks is that the integration of ethical and moral values with its banking operation. The ethical and moral consideration of Islamic banks cannot be detached and their behavior should be consistent with the moral and ethical standards laid down by the Islamic Shari’ah.

Unlike the conventional banks, the financing of Islamic banks are restricted to useful goods and services and refrain from financing alcoholic beverages and tobacco or morally unacceptable services such as casinos and pornography, irrespective of whether or not such goods and services are legal or not in a given country.

In contrast with conventional banks, Islamic banks do not consider only the credit worthiness and interest rate as standards; instead they must apply Islamic moral/ethical criteria in their provision of financing. This adds another merit for Islamic banks since there is a benefiticial impact on the productivity in the economy as it reduces the social and economic cost of such harmful products and activities.

Another important characteristic which forms the basis for the development of Islamic banks is the relationship with depositors. They deal with their customers on investment grounds rather than a pre-determined fixed interest rate. They invest the money of their depositors on high profitable projects after going through a strategic analysis in order to give a substantial return to their depositors.

Thus in Islamic banking industry, each bank will attempt to out-perform other banks if it wants to attract funds from investors. And the ultimate result is that a high return on investments for the investors, which is unlikely in a conventional bank where it deals with their depositors on a pre-determined fixed interest rate.

Furthermore Islamic banks eliminate the barrier between those who save and those who invest, and bring them closer to the real market. The nature of the financial intermediation of Islamic banks significantly defers from conventional banks and it is in harmony with real market and developmental changes in it.

It is important to highlight some of the challenges faced by the Sri Lankan Islamic banks. Although there are many, the most important challenges are the lack of Islamic banking professionals and the lack of Shari’ah scholars who have specialized in Islamic economics. Further the Shari’ah board should have a fair influence on the bank’s operational and strategic planning. For this process to be successful, the Shari’ah boards of our Islamic banks should absorb Islamic scholars based on their technical expertise rather than their popularity.

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