Preference shares: analysis of Sharīʿah issues

Abstract

Purpose -The purpose of this paper is to analyze the different features of preference shares from accounting and Sharīʿah perspectives. It also aims to study Sharīʿah issues arising from preference shares and to subsequently propose solutions for identified issues that will help in structuring Islamic preference shares.Design/methodology/approach -The paper uses a qualitative method by analyzing relevant documents and literature to understand the subject matter and Sharīʿah-related issues.Findings -The paper finds that several features of conventional preference shares, such as capital guarantee, loss sharing disproportionate to capital contribution, fixed profit, profit guarantee and waiver of rights before realization of profit, make them a Sharīʿah non-compliant instrument.Research limitations/implications -The paper is conceptual in nature; however, it provides directions for future empirical research.Originality/value -The paper provides a practicable solution to structure Sharīʿah-compliant preference shares.

Examining preference shares from the Shari’ah perspective: a systematic literature review

“…However, Muslim scholars unanimously agree that loss-sharing must be proportional to the capital contribution. (Mohamad et al, 2017) then listed down five Shari'ah issues in the Musharakah-based preference shares, namely, capital guarantee, loss sharing disproportionately to the capital contribution, fixed profit, profit guarantee and waiving the right to profit prior to its realization.…”

“…The issuing entity is obliged in the case of redeemable preference shares to pay back whether the original issue price or any preagreed amount to the preference shareholder. Finally, for the conversion right, the preference shareholders may have the right to convert or exchange their shares into ordinary shares or any other financial instrument if their shares are convertible preference shares or else this right is omitted in the case of nonconvertible preference shares (Mohamad et al , 2017).…”

“…This Tanazul with no consideration is nearly like conditional Hibah which is a controversial issue by itself. Some scholars, including Malikis, some Hanafis and some Hanbalis, permitted it, while others did not, such as Abu Hanifah, Al-Shafi' and some Hanbali scholars(Mohamad et al, 2017) Another solution for Shari'ah compliance, only upon profit realization ordinary shareholders can give priority to preference shareholders to receive dividends. This could be arranged through an EGM for ordinary shareholders to pass the resolution to the board to represent their agreement and consent to grant preference…”

An Overview of Sukuk Liquidity Market Issues in the Shariah Perspective

“…If one does not exist, then this method does not apply (Alkhamees, 2017). Mohamad et al (2018) also concluded that the mud ajwah method is seen as relevant if it involves ribawi goods physically.…”

“…If the physical assets, benefits and rights exceed 50%, then there is no need to comply with the law of sale and purchase bay al-sarf (Habib et al, 2015). Mohamad et al (2018) discuss the principles of al-asalah wa al-tab'iyah, al-aghlabiyyah and alakhtariyyah in the context of stocks. Discussions are more focused on stocks.…”