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
(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
(d) It ranks the last as a claimant to income as well as the assets of the
(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 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.
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
A corporate can acquire huge amount for investment by shareholders Equity.
Distribution profit to shareholders by ratio on their capital.