We are trying to raise funding for our company from non-banking sources. One option we have is to go to private investors who want to come in as ‘preferential share holder’. What this basically means is that if investor ‘Mr. A’ puts in US$ 100,000 into the company ‘B’, then the following terms will hold: 1. The dividend on the share is a fixed percentage that is agreed upfront (say 10%). 2. The dividend is to be paid after a fixed time (say 2 years). 3. If after 2 years if B makes money, then B should pay A a 10% dividend on US$100,000 till the time that B pays of US$100,000 to A. 4. If B loses money then Mr. A also loses his money and cannot ask B to refund the US$ 100,000 to him (since he is a share-holder also in B). This is the gist of what I could understand by ‘Preferential shares’. This is one of the most common non-banking methods to raise money and it is quite popular among private investors in Malaysia. As respected Mufti saheb is well aware of economic matters too, maybe you have more information on this than me. Please clarify for me whether this kind of raising capital is valid in Sharia. Your answer will be of much benefit to many muslim business-men.
Jazakallah for your email.
Your basic explanation of preferential shares is correct.
From a Shar’ee perspective, it is not permissible to raise funds in this manner. The investor does not share in both the profits and the loss of the company. This form of investment is tantamount to dividends, with a few extra advantages. The 10% dividend will fall under the definition of Riba, which has emphatically been made Haraam in the Qur’aan.
The alternative suggestion would be that capital be raised in the form of Mudhaarabah. Investors should be invited to contribute capital, for which they will receive a pre-fixed percentage of the profits, as well as take the proportionate risk of loss.
and Allah Ta’ala Knows Best
Ml. Imraan Vawda
FATWA DEPT.
CHECKED AND APPROVED: Mufti Ebrahim Desai