Topic 7: Specialist sources of finance Flashcards
What are the key principles of Islamic Finance?
Sharing risk - Providers must take on some risk because it is not allowed to make money from money, they must make a risk to make money.
Interest - Interest is not allowed
Asset backed - the investment must be for a tangible asset.
Ethical - can only be invested in ethical activities becasue of sharia law.
Speculation - Speculative activity is banned, money can only be made through a trade.
What are the 5 types of Islamic Finance and what are there closest comparisons in convential finances? Spell each one.
Mudaraba - Type of equity finance.
Musharaka - Type of joint venture equity finance.
Murabaha - Type fo trade credit debt finance (short term)
Ijara - Lease style of debt finance
Sukak - Type of bond finance (Long term debt)
What is Mudaraba?
This is a partnership between investor (who provides the money) and the expertise partnership (provides skills) and profits are split between the investor and expert, in case it doesn’t work out only the investor takes the loss.
What is Musharaka?
Both parties provide skill and money and it is split equally and both take the loss.
What is Murabaha?
Similar to trade credit but the bank is involved. Bank pays supplier instantly and allows customer to pay later or installments. bank takes the risk.
What is Ijara?
A bank will buy an asset from a supplier and lease it to the company that wants to use it. Bank bears all the risk. Bank makes money by charging payment on the lease.
What is Sukuk?
A SPV (Special purpose vehicle) is set up and investors invest in the SPV and with the investors money the SPV buys an asset and rents it to a company. investors get rental profits also known as Sukak holders. Sukak holders bear the risk.
Why can finance for SME’s be difficult to get.
Past history - no known history with loans or repaying loans
Non auditied - less info on the business = less trustworthy
What are the specific sources of finance for SME’s?
Venture Capital finance - these business can invest in smaller companies to provode finance and they also provide management so they can control their investment.
Business angel - a wealthy individual who is prepared to invest in SME’s
Government assitance - making shares marketable - AIM, Making tax relief e.g super deduction 130%, financial assistance, Bounce back loan and grants.
Supply chain finance - a large organisation can vouch for the income of a smaller company which can lead to cheaper loans and improved workign capital.
Crowd Funding - Small amounts of finance from a large numbe of people.
