Understanding Islamic Finance - Doha Academy of Tertiary Studies

184 Understanding Islamic Financetubewells, tractors, setting up of poultry/dairy/fish farms and construction of storagefacilities.• Fixed investment finance: this is provided by way of term loans or purchase of debenturesor participation in underwriting and “bridge financing” arrangements.• Treasury products – liquidity and fund management: this involves money and capitalmarket operations, foreign exchange operations, inter-bank borrowing and lendingmoney on interest linked to tenor, credit considerations and liquidity amongst other factors.Treasury products are used to manage mismatches in liquidity position and to getreturns. The entire activity is based on interest receipts or payments. Repo and reverserepo operations involve selling/purchasing and entering into a back to back transactionfor purchasing/selling. The objective is to manage liquidity and enhance interestincome.• Nostro accounts, maintained by banks overseas to undertake trade finance activity andcorrespondent banking. Interest is paid and received on the balances maintained and theamounts overdrawn.8.4.2 Investment BankingInvestment banks facilitate the direct flow of funds from the surplus to the deficit unitsin an economy. They help business firms – private and public companies – and governmentsin need of funds in selling their debt or equity securities in the primaryfinancial markets and also play in the secondary markets as brokers and dealers. Theyderive their income primarily from fee-based activities or profits from trading securitiesrather than from a margin between borrowing and lending costs. The services providedby investment banks take many forms, including securities underwriting, stockand bond trading, facilitating mergers and acquisitions, arranging and funding syndicatedloans, providing financial advice to companies on aspects like pricing of securities,etc.For small and start-up companies in particular, investment banks facilitate mobilizationof funds from venture capitalists. General investors are not interested in small and start-upcompanies and their capital needs at this stage are met through venture capital financing.Investment banks facilitate them by managing funds from the venture capitalists throughprivate placements (issuers sell the securities directly to the ultimate investors). However,their most important job is facilitating initial public offerings (IPOs), that is the first saleof stocks by a company to the public. Companies go for IPOs to enhance their ability toraise funds. After IPO, investment banks serve as brokers, arbitrageurs and provide variouscorporate advisory services. 2Conventional investment banks normally raise medium- and long-term funds throughclosed- and open-ended funds, by issuance of COIs/CODs and offering guaranteed dividendaccounts without checking facilities. COI holders get pre-agreed interest income.A dividend at a certain rate is guaranteed by the account-maintaining institutionsduring the period of deposit. In some cases the account holder is given a minimumguaranteed return, generally below the market rate, whereas the upside is keptopen.2 For details about the functions of modern investment banks, see http://islamiccenter.kau.edu.sa/english/publications/Obaidullah/ifs/ifs.html; Obaidullah, n.d., pp. 146–150.