Islamic Finance Methodology for The Western Economy

May 11, 2009 - PRLog -- In the current financial climate, banks and financial institutions find themselves on the same page as many small businesses.  Looking for a solution, many have started to see this as an opportunity to look outside the box, and perhaps beyond methods that they have been familiar with.

Recently, a Vatican newspaper mentioned that Islamic banking methodology may be the way to overcome the financial crisis that has spread across the world.    Several sources have cited that replacing the importance of interest rates with something along the lines of profit share could bring a more stabilized investment in the long term.

With the current finance system in many western markets less attractive these days, many investors are starting to look elsewhere.  Angel investors, independent (and usually individual) investors who want to find good returns – are often the first types of investors to try other methods.

To help bridge the gap between the western and Middle Eastern markets (and methodologies), the Angel Investment Network have opened a branch in the Middle East.  This has helped connect not only western investors to entrepreneurs and business start ups in the Middle East, but also has attracted the interest of European, Asian, Oceanic and North American companies that are looking to expand into the area or build capital from this type of investment.

The advantage angel investment has is that in many ways it is similar to Mudarabah and Musharakah partnerships.  Mudarabah is a partnership where an investor (known as “rabb-ul-mal”) allocates money to an entrepreneur (mudarib) who is in charge of the day-to-day business management and activities.  The investor may assign a particular business for the mudarib, in which case he shall invest the money in that particular business only. This is called al-mudarabah al-muqayyadah (restricted mudarabah). But if he has left it open for the mudarib to take on whatever business he choose, the mudarib is allowed to invest the money in any business he deems fit. This type of mudarabah is called 'al-mudarabah al-mutlaqah".   The investor typically does not contribute any executive input and lets the entrepreneur handle all business affairs, which is similar to a “Silent Business Partnership” in the west.  

In all mudarabah partnerships, both parties must always agree to the terms of all profit sharing before any deal is commenced (and so this eliminates the risk of interest rate fluctuation).  However, it is allowed that different proportions are agreed to in different situations.  For example, an investor may determine that the entrepreneur gets a higher or lower profit depending on what or where they sell or trade.  If the business has incurred loss in some transactions and has gained profit in some others, the earnings shall be used to balance the loss.  If there is anything remaining, it would be disseminated between the parties according to the arranged share.
   
Entrepreneurs in the Middle East and in fact worldwide can benefit from this system, as it is ideal for individuals who may have innovative ideas but does not have the capital to get started.  With more capital coming from Middle Eastern countries such as the UAE, adoption of these methods has been steady over the past few years.  To connect with entrepreneurs in the Middle East and investors on a global basis, visit the Middle East Investment Network at http://www.middleeastinvestmentnetwork.com

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The Angel Investment Network currently includes a wide range International investors looking for investment opportunities, along with entrepreneurs in the Middle Eastlooking to get their business off the ground.