Syllabus B. Advanced Investment Appraisal B3. Impact of financing on investment decisions and APV

B3b. Advantages of Islamic finance 8 / 18

Syllabus B3b)

Discuss the role of, and developments in, Islamic financing as a growing source of finance for organisations; explaining the rationale for its use, and identifying its benefits and deficiencies.

Advantages of Islamic finance

Remember there should always be a link between the economic activity and the financing of that economic activity

  1. Access to Islamic finance is not restricted to Muslim communities, which may make it appealing to companies that are focused on investing ethically

  2. Speculation is not allowed, reducing the risk of losses

  3. Excessive profits not allowed, only reasonable mark-ups

  4. Banks cannot use excessive leverage and are therefore less likely to collapse

  5. The rules encourage all parties to take a longer-term view leading  to a more stable financial environment

  6. Co-operation and profit creation through ethical and fair activity benefits the community as a whole