Islamic Preferred Shares

Dr. Mohammad Al-Suhaibani

College of Economics and Administrative Sciences
Al Imam Mohammad Ibn Saud Islamic University

Wednesday 12 Februry, 2014 (12 Rabi Alakher, 1435)

 Abstract

Conventional Preference shares (CPS) usually have priority over common shares in the payment of dividends and upon liquidation. Islamic Jurists generally deem CPS 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 presentation proposes a formula for an Islamic Preference Shares (IPS), which would maintain the essential economic functions of CPS while conforming to Shariah. The IPS formula permits factoring out into two sub-streams the profits of a company, 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.

The second objective of this presentation is to examine the implications of IPS for corporate governance. We study the implications of this new instrument as a powerful tool for corporate governance in the case of Islamic markets. We explain the possible contribution of IPS to agency cost reduction, Sharia screening costs and ethical corporate governance. The third objective of the presentation is to propose a pricing model for IPS.