Loans create artificial money and therefore there is

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Loans create artificial money and therefore, there is always a difference in Money Supply and real goods and services produced. This gap fuels inflation. Islamic Banking Musharakah & Mudarabah 7
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Islamic Banking 8 Islamic financial relationships are ‘Participatory’ in nature
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Why is interest prohibited? The borrower has to repay the P + Interest irrespective of the fact that he has made a profit or loss. This gives rise to unethical or unsocial practices by borrowers to turn a Loss into a Profit due to ‘Fixed Leverage’ Tax evasion, Wapda’s Line Losses, Hoarding of Wheat, Sugar, Adulteration in Food Items Home Made Pepsi Islamic Banking 9
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‘Distributive Justice’ Capital and Entrepreneur are considered as separate factors of production in a capitalist economy. The capital gets a fixed or limited return and the entrepreneur gets the profit generated by use of capital. This is exactly what is called “ Financial Leverage ” where the ROE is increased by use of debt. Islam treats the capital and entrepreneur as same and both can have a share in the profit. In this way all the persons contributing capital to a business can share from its profits. Islamic Banking Musharakah & Mudarabah 10
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Fallacy of Conventional Finance For financial leverage to work for shareholders, ROA must be greater than WACC. WACC depends upon cost of debt + cost of equity. Cost of debt is always lower than cost of equity Why? Because irrespective of profit or loss, interest is deducted before net profit calculations, therefore equity faces enhanced risk called Leverage. When interest is deducted before net profit, it means that capital is considered as a separate factor of production just like all expenses of the business, rent, utilities, FC, VC, etc. Islamic Banking Musharakah & Mudarabah 11
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WACC as a %age of Profit? What if there is no cost of debt? Then WACC will be highest? or lowest? Why is it that all EVA & FCF calculations linked with ‘Profit from Operations’ instead of Net profit? Specially when Capital is considered as a separate factor of production. EVA = EBIT(1-tax rate) (Cost of Capital x Total Capital) FCF = Operating CFs Gross investment in Op. Capital FCF = NOPAT Net investment in Op. Capital Islamic Banking Musharakah & Mudarabah 12
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Musharakah
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Musharakah literally ‘Sharing’ A joint enterprise in which all the partners contribute capital and share the profit and loss. Islam has not prescribed a particular form or procedure for Musharakah, rather has set some broad principles which can accommodate numerous forms and procedures. Every new form is can be acceptable in so far as it does not violate basic Shariah Principles.
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