Managing the Investment and Financing Decisions of Companies

It is mandatory for every company to take right financial and investment decisions in order to compete with the rival companies and survive. One wrong financial or investment decision can ruin a company and it becomes very difficult for the organization to resurrect itself and achieve the same status it once enjoyed. Therefore, any company has to hire a well qualified, experienced and competent financial manager to manage its financial affairs in best possible manner. Similarly, it is also the duty of non-financial employees to ensure at any cost that the company meets its fiduciary responsibilities.

In the context of above discussion, following is a brief summary of the webinar, “Managing the Investment and Financial Decisions of the Company” by Dr. Alexander Van De Putte, the founding director of Sustainable Foresight Institute. In this seminar, Dr. Alexander throws some light on the role of CFO as the corporate architect of the modern company and what is the difference between investment and financial decisions. Moreover, he also explains all aspects of Islamic finance such as prohibition of Riba and Gharar in detail.

The Role of Chief Financial Officer:
Most modern organizations, the Chief Financial Officer (CFO) is responsible for corporate planning and financial policy making. In fact, the CFO plays a pivotal role in ensuring the survival of the company in the long run. The way the financial policy of any company is designed actually determines whether that company is going to last for years to come or not. Usually, the CFO performs either of the two very important duties that are, whether he is a treasure or a controller. For instance, the duties of treasurer include cash management, maintaining relationships with the banks and raising capital for the company. On the other hand, a controller is responsible for preparation of financial statements, payment of taxes and accounting.

In simple words, the role of the CFO is to discover various sources of funding. Similarly, it is also his duty to identify potentially productive projects and invest the money received from the funders in those projects in order to ensure the expected return on investment. Finally, the financial manager also has to formulate the policies that facilitate the reinvestment of the profits earned and finally, return the cash to the investors.

ROLE of CFO

The Islamic Finance:
Islam is a complete religion and provides guidance about every field of life and the finance is not different. As a matter of fact, Islamic finance can offer long lasting solutions to all the financial woes world is struggling with. Islamic finance is actually a group of financial products, the basic purpose of which is to meet the needs of almost 1.6 billion people living in different parts of the world. However, the Islamic finance has also garnered real popularity in non-Muslim countries as well in the wake of recent economic recession that shook the very foundations of world’s economic systems and exposed its shortcomings and incompetency. Before moving forward, it is important for us to take a look at the trends in Islamic finance over the course of 40-50 years as summarized by the following figure.

2

Islamic Versus Conventional Finance:
Islamic finance is different from the conventional finance in many respects. Some of the important differences are highlighted in the following lines.

According to Islamic finance, the money cannot earn more money by itself and therefore, it does not deal with the money directly. On the other hand, Islam insists on investing money in a real business venture.
The relation of suppliers of funds and the receiver is also somewhat different in Islamic finance. As compared to conventional finance, Islamic finance promulgates interest free trading with the banks wherein the borrower is actually the custodian of the money lent by the banks. The banks become the investors whereas the borrowers become entrepreneurs and both of become business partners sharing equal risks.

The Prohibition of Riba, Gharar and Haram:
As mentioned above, Islam eliminates interest from all the financial dealings whether they are between two individuals or between investors and borrowers. In this regard, Islam also prohibits Riba, Gharar and Haram and following lines explain these terms briefly.

Prohibition of Riba:
In Islamic finance, two separate classes of assets (any selected community, like food and currency) are subject to Riba. Riba simply implies that any interest on these two classes of assets is prohibited.

Riba

The Prohibition of Gharar:
Gharar is an important feature of Islamic finance. Gharar basically prohibits any financial dealings or transactions that incorporate gambling, risk and extreme uncertainty. The basic purpose of the Gharar is to help both parties avoid any transaction, the outcome of which is potentially detrimental to both of them. The biggest reasons of obscurity or uncertainty are lack of proper knowledge or extreme risk involved.

The Prohibition of Haram:
Haram implies that only those investments that Sharia approves are allowed. Similarly, the investment in any kind of unethical activities such as sex, casino, alcohol, tobacco and other similar activities is strictly prohibited.

The Salient Features of Islamic Finance:
Islamic finance is definitely superior to conventional finance as it has many features that help both parties to earn profits or make them equally liable to losses. Following are some of the salient features of Islamic finance.

It is interest free.
It is based on the principle of risk sharing.
It emphasized on the need of underlying assets.
Islamic finance prohibits investment in unethical and unlawful activities, goods and services,
Islamic finance eliminates uncertainty and denounces gambling.
Islamic finance is Sharia compliance.

Types of Contract in Islamic Finance:
There are basically five main types of contracts in Islamic finance.

Muharabah:
Mudarabah is a special kind of partnership where one partner providers the capital to the other (mudarib) for investment in a commercial enterprise.

Finance

Musharakah:
It is the partnership contract in which the funder has executive involvement.

Istina:
Istina is a sort of construction finance.

Ijara:
Ijara is another type of contract in Islamic finance that can be compared to operating lease.

Mudarabah:
Mudarabah is a profit sharing contract in Islamic finance.

Conclusion:
The recent economic recession has highlighted major flaws in the financial system in vogue in most of the countries. Therefore, it is the need of hour to look for financial alternatives that can offer relevant and long lasting solutions to the world’s financial problems and the Islamic finance is the biggest candidate to replace current financial system. The Islamic finance has proved its worth in the past and it is fully equipped and ready to meet the current challenges as well. This is evident from the fact that many countries has successful implemented some features of Islamic finance in their financial systems.

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