Islamic Perspective on Shares and Stocks Exchange - Dissertation Example

The Shariah Principles, which dates back to almost fourteen hundred years ago, has put forward certain immaculate methodologies and customs pertaining to the establishment of a financial system. These principles and ideologies can be applied even in the dynamic and robust global economic scenario of the twenty-first century without any downside. The Islamic financial system strongly condemns the inclusion of interest in the transactions between the borrowers and the lenders and has labelled any such transaction as repugnant to the principles of Shariah or ‘Haram’.

Following the same principles, not only such transactions are unlawful according to the principles of Islam, but investing in any of such companies and earning returns from such is also unlawful. With the passage of time, the development of the Islamic financial institution started taking place at a rapid pace. The trend was not only confined to the Middle Eastern and Far East Asian countries but the effects were far stretched to the European and the North American countries as well. The supporters of the conventional economic system soon realized that the rationale behind the Islamic financial structure and the concepts of an Islamic financial institution.

Several major conventional banks have since launched various Islamic products and experienced impressive responses from individuals as well as from corporations. Shariah principles related to the Islamic financial system not only provide guidance on the financial products pertaining to Islamic banking, but it has also issued pronouncements on how companies can regulate their operations and bring them in line in accordance with the laws of Islamic Shariah. Investing in the equity security of the Shairah compliant companies is allowed for the investors and the return earned on such investment is permissible and ‘Halal’.

There are certain conditions that the company needs to implement in its operational and financial strategy in order to become Shariah-compliant. The main The business of the company must not be prohibited as per the laws of Shariah If the debt ratio of the company is higher than 33% of its equity capital, then buying the shares of such company is not permissible as per Shariah Islamic scholars have allowed the interest income to be less than 5% of the total income of the company for it to be permissible for investment Relationship between the interest rate and the inflation has been discussed at large in various economic literature.

Both of these variables are responsible for shaping the essential aspects of the economy such as monetary policy and regulating the supply and demand of several commodities. Various studies have been conducted in order to understand the relationship between the interest rate and the rate of inflation. It is generally considered among economist that the nominal interest rate on any debt and shares are also an indication of inflation in the economy. If the nominal interest rate is showing an inclining trend it is an indication that inflation is likely to hike in the coming future, whereas the declining trend of the nominal interest rate would show that the situation is opposite.