Sources of finance

(Naba Hashmi, )

A corporate has many options for long term investment. Equity Ordinary shares, term loans, debentures, bonds and securitization, hybrid financing / instruments, lease finance and hire purchase finance.

Equity / ordinary shares capital is a most important source of long term funds. it is a permanent source of finance without any repayment liability. It does not involve obligatory dividend payment. It forms the basis of further long term financing in the form of borrowing related to the credit worthiness of the firm. The shareholders with limited liability exercise control and share other ownership rights in the income / assets of the firm.
Equity capital has de-merits from the view point of the company as well as the shareholders.
(a) High cost of funds reflecting the high required rate of return of investors.
(b) The fact that equity dividends are not tax deductible payments, they are paid out of post-tax profits.
(c) Dilution of control existing shareholders on sale of new shares to outsiders / public.
(d) It ranks the last as a claimant to income as well as the assets of the company.
(e) The scattered and un organized shareholders are unable to exercise effective and real control over the company.
(f) The shareholders cannot claim dividends as a matter of rights.

Preference capital

Preference capital is an unique type of long term financing in that it combines some of the features of equity as well as debentures.

Merits of preference capital from the point of view of the investors.

The advantages for the investors are : (i) stable dividend (II) the exemption to corporate investors on preference income to the extent of dividend paid out. The issuing companies enjoy several advantages , namely, (i) no legal obligation to pay preference dividend and skipping of dividend without facing legal action / bankruptcy (ii) redemption can be delayed without significant penalties (iii) as a part of net worth, it improves the credit worthiness / borrowing capacity and (iv) No dilution of control.
DE –Merits
The shareholders suffer serious Dis-advantages such as (a) vulnerability to arbitrary managerial action as they cannot enforce their right to dividend /right of payment in case of redemption , modest dividend in the context of the associated risk. For the company, the preference capital is an expensive source of finance due to non tax deductibility of preference dividend.
Importance of investment in Islam
Investment in Arabic is known as al-istismar which refers to activities that increase wealth or revenues ( al- mausu ‘ah al- fiqhiyyah , 2003). According to kamusdewan (2002), investment can be literally defined as the capital invested in a transaction with the purpose of multiplying the profits. In technical terms, it is known as an activity of capital investment in the forms of properties and money to achieve long term profits in a project.(mazinubaydat , 1985) .based on this definitions , it can be deducted that capital and profits are the main factors in investment or business, besides its durations in the long run. This term is further enhanced in the view point of Islamic economy by utilizing thesharia law, as defined by al hawariyy (1982), investment in islam is regulated by the sharia in realizing the objectives of Islamic economy that may lead to the significant changes of Muslim community . similarly ,sanoqutub (2000) emphasizes that investment is an action is individual or organizational body in managing wealth that complies with the sharia principles to gain profit in securing his responsibility as khalifah of Allah SWT. These views therefore illustrate the significance of investment in Islam from various aspects, nonetheless, the ultimate goal is to perform investment as remembrance and thankfulness to Allah SWT for his benefits and blessings as mentioned in the Holy Quran.
A corporate can acquire huge amount for investment by shareholders Equity.
Eliminate dividend.
Distribution profit to shareholders by ratio on their capital.

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