Fauzia Mubarik
Corona Virus (COVID-19) has given a wakeup call to the traditional stock market trading patterns. This makes to think about an alternative investment method that needs to be asset backed. The bizarre of losses that has tremendously jolted the well-established stock exchanges makes the policy makers realize the importance of asset backed financing.
A stock market is a regulated market of trading activities where the rebuying and reselling of shares takes place. A share is a mere piece of authorized monetary paper issued by a company. This authorized paper represents a portion of the capital (money) owned by its holder who is theoretically called the shareholder and this is how the relationship between the company and the shareholder takes place.
The trading patterns of the shares (stocks) are market driven that if the market tends to be steady and smooth it’s a feast for the investors as a sign of promised returns but if the market turns out to be bumpy then the returns on the sto-cks roll out and the inv-estors have no other choice but to face a loss or no gain at all. Alternatively, if any stock is backed by a security then the investor seems to be more optimistic about the promised return as its stock contains an intrinsic utility within itself.
The asset backed financing is one of the key tools of Islamic banking and finance. According to the Shariah Law, any investment purely made in cash is not allowed until it is backed by a non-liquid asset otherwise it is merely a riba based investment. It is a well-known fact discussed by the conventional finance experts that cash/money has no intrinsic utility until it is utilized against the purchase of a commodity. This commodity in context of Shariah has to be physically existing non-liquid commodity.
The Shariah law explains the concept of Musharakah and Mudarabah instruments as an ideal alternative trading instruments to the interest-based financing that dema-nds the asset backed financing otherwise the trading of these instruments in the secondary become void and invalid. According to different Islamic school of thoughts, these instruments could be the mixture of the liquid and the non-liquid assets with major portion of the non-liquid assets but none of these thoughts have purely allowed the trading of the liquid assets in the secondary market.
The asset backed financing is also a part of the conventional finance but the principle applied is purely based on the repayment of the debt obligations from which the return is paid whereas the asset backed financing in context of Islamic finance is based on the transfer of ownership in an asset or a business. The Shariah, doesn’t permit any loan repayment as a debt obligation based on riba (interest) rather it believes in partnership.
Musharakah, an Arabic meaning of Shirkah which means sharing, is known as partnership. It comprises of a joint pool of capital and the assets employed in the business are jointly owned by the Musharakah members. The most striking feature of the Musharakah agreement is that all the members are the beneficiaries of the assets’ appreciation valuation along with the profit that is accrued through sales.
Similarly, Mudarabah again is a type of sharing or partnership between Rabb-ul-Mal(investor) and Mudarib (manager). Irrespective of Mudarib who carry out the daily operations of the business tends to act as the partner of Rabb-ul-Mal which clearly indicates that the Islamic law out-weighs the ownership structures and does not treat the capital and the entrepreneur as the separate entities as in traditional finance.
Its principles are well established across the fact that the partners benefit from the pre-specified proportionate share of profit from their businesses as well as the loss according to their ratio of investment.
Keeping in view, the key strength of the asset backed trading patterns and considering the capital and the entrepreneur as a single entity in Shariah; new doors could be opened to restructure the traditional trading patterns of the regulated and well-monitored stock exchanges of the super powers around the globe.
