Assigning Capital in Equity Based Financing Ventures: The Practice of Interest Free Banks

The interest-free mode of financing championed by Islamic banks in general worldwide favour investment on joint equity basis for generating profits, as against lending for earning interest income. In this process, the general requirement is that a stock of cash form the equity basis of the joint ventures, as against debt forming such basis. However, some operational procedures adopted by current-day interest-free financial institutions in the course of financing undertaken on joint-equity basis generally appear to fall short in this respect. A major reason could be that while allocating a stock of cash towards an equity venture did not pose difficulties in the former times, today, the identity of money has undergone substantial change. Credit has come to supplement money, where credit creation by banks has played a major role. This research suggests that an Islamic law based assessment of the change in the essence and nature of money in the current context needs to be carried out, for verifying the legal implications of this phenomenon.