Shariah-Compatible Preference Shares : The Fiqh Basis And Economic Rationale

ويمكن الاطلاع على النسخة العربية من هذه المادة ما يلي: http://ssrn.com/abstract=3188313Preference shares (PS) usually have priority over common shares in the payment of dividends and upon liquidation. Islamic Jurists generally deem PS as not Shariah Compliant, as these shares occasionally lead to the suspension of profit-sharing among partners. In addition, on liquidation of the company, preferred shareholders virtually stand as lenders (who can reclaim their principal) rather than as partners. The paper proposes a modified formula of PS which would maintain their essential economic functions while conforming to Shariah. The formula permits factoring out the profits of a company into two sub-streams, with the preferred sub-stream having lower variability at lower expected returns. The proposed formula can attract to the same company potential investors who have different risk preferences or profits expectations. This adds flexibility and desirable diversity to other Shariah compliant equity modes of financing