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Over the past three decades, halal financial services and products have emerged as one of the fastest-growing sectors in the financial industry, gaining widespread acceptance across various regions by both Muslims and non-Muslims.
These services fulfill the same essential functions as conventional financial systems, but they are aligned with Islamic principles and rules. Halal financial products play a significant role in driving economic growth, particularly within the Islamic financial sector.
In recent years, Islamic finance has experienced exponential growth in the global financial landscape, with strict adherence to Shariah compliance in Islamic banking. For further information about the growth of the Islamic financial industry, please refer to the detailed article Here
Read more about: Islamic Banking Vs. Conventional Banking
Investment banking is a sector of banking that helps individuals, companies, and governments raise capital by issuing and underwriting securities.
It offers a range of services, including capital raising through the issuance of bonds and shares, facilitating initial public offerings (IPOs) by selling shares on behalf of the issuer and earning a commission.
Investment banks also provide advisory services on financial strategies such as risk management, liquidity requirements, and market analysis.
Additionally, they offer merger and acquisition (M&A) services, assisting with the acquisition of smaller companies, or the sale of a company or its shares.
Investment banks generate revenue through various sources, with their primary income coming from providing services to clients and charging fees. These services include underwriting securities, facilitating mergers and acquisitions, and offering financial strategy advice.
Investment banks also earn from trading activities, such as buying and selling shares, bonds, and other financial instruments. Additionally, they generate revenue by investing their own capital and earning profits from these investments.
Read more about: The Basic of Shariah Compliant Profit & Loss Sharing
Below are the differences between investment banking and commercial banking:
1- Commercial banks provide services like savings and current accounts, mortgages, loans, and credit services to individuals and businesses, while investment banks offer services like underwriting securities, capital raising, mergers and acquisitions, and advisory services to individuals, governments, and institutions.
2- Commercial banks generally generate revenue by extending loans and charging fees on banking services, while investment banks generate revenue through commissions and fees from services like underwriting securities, trading activities, and advisory services.
3- Commercial banks primarily focus on liquidity management and financial stability, while investment banks focus on corporate finance, capital markets, and high-level transactions
Investment banks evaluate investment opportunities by considering factors such as risk potential, the financial condition of the company, profit margins, and overall financial health.
To do this, they conduct a thorough analysis of the company’s financial statements, including the balance sheet, income statement, and cash flow statement.
Investment banks manage conflicts of interest by adhering to the rules and regulations set by central banks.
They follow strict internal policies to ensure fairness among clients and prevent undue influence between departments.
This helps avoid conflicts between employees and clients. To maintain transparency, investment banks may disclose potential conflicts of interest to their clients when necessary.
The core principles of Shariah that govern investment banking include the prohibition of usury (Riba), protection against excessive uncertainty (Gharar), avoidance of gambling (Maysir), ensuring fairness in all transactions, and offering ethical investment opportunities that align with Islamic values.
Read more about: Gharar: What exactly it is & how to avoid it?
Investment banks offer products and services based on traditional practices, which may involve interest, speculation, and gambling.
In contrast, Islamic banks offer products and services that comply with Shariah principles, such as profit and loss sharing, asset-backed transactions, ethical investments, and the avoidance of Riba (interest), uncertainty (gharar), and gambling (maysir).
In investment banks, activities involving charging or paying interest (Riba), investing in unethical industries (such as drugs and gambling), transactions with excessive uncertainty (gharar), and engaging in speculative activities (maysir) are considered haram (prohibited) under Shariah law.
Yes, Shariah-compliant investment banking products and services are available, such as Islamic bonds (Sukuk), Mudarabah and Musharakah-based partnerships, and Islamic mutual fund options.
These products are structured to adhere to Islamic rules and principles, ensuring compliance with Shariah guidelines.
Shariah scholars play a crucial role in investment banking transactions. They structure products and services according to Islamic principles, review contracts and transactions, and address any Shariah non-compliance issues in a compliant manner.
In short, their role is to provide guidance and certification that transactions and services adhere to Shariah rules and principles.
Investment banks can address the issue of gharar (excessive uncertainty) by providing transparent and clear information to clients, disclosing all potential risks that may affect the profit and outcome of transactions.
By offering clear instructions and ensuring full disclosure, investment banks can minimize excessive uncertainty.
The implication of interest (Riba) in investment banking is that it allows money to be earned without taking on risk.
To avoid Riba, investment bank's structure financial products based on profit and risk sharing, ensuring transactions are backed by tangible assets. This way, income is generated from real business activities rather than from interest-bearing instruments.
Investors can verify the Shariah compliance of an investment banking institution by ensuring it has a Shariah supervisory board that reviews and certifies the bank's transactions.
They can also inquire directly with the bank about the Shariah compliance of its products and transactions. Additionally, investors can check the annual report of the Shariah board for further assurance.
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
