Do you really know how investors exit from Islamic Financial Intermediation structures, lets look at an example? (God’s proposed structure – part 5)
Basic structures (that is building blocks) for Islamic Financial intermediation are: (1) Principle and Agent, (2) Partnership, and (3) Employer and Employee.
During the trade/business cycle the invested funds are being used. Once the cycle is complete these funds are now available for distribution. The investor can take their share of the funds or decide to reinvest them for the next cycle.
However, if the investor needs the funds during the cycle, then they need to find a partner to “buy them out” of the current business cycle. Depending on the demand and supply they may get a profit, have to settle for a loss, or worst case not be able to find a partner and need to wait till the end of the business cycle. Therefore, it is very important for the investor to ensure that there is plenty of liquidity and investor interest in the Financial Intermediary they are investing in. The investors need to properly ascertain their risk/return appetite and exposure.
Accordingly the different layers of financial intermediaries form different levels of expertise in markets, geographies and diversification – to meet the needs of different types of investors. The more diversified, lesser the risk, the more “agents” involved and hence the lesser the expected percentage return. The classical risk-return trade off.
However, one needs to be very careful combing the fixed and variable components of the profit and loss above, to ensure they comply with the Islamic legal tenants. Otherwise the structure would not be considered Halal (Acceptable).
So now we have some idea of the financial intermediation, but how should the economy and finance on the whole be structured?
The book “Islamic Finance and Trade: God’s Economic System”, is the culmination of over 25 years of research, to present the answer to the above question. You are kindly invited to Read, Review and Recommend the book. It is available at https://a.co/d/f1jTXvP and on all Amazon sites.
