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KembaraXtra – Islamic Finance-Islamic Banking-Loan Stock
Loan stock refers to a form of long-term borrowing where a company raises funds by issuing loan stock certificates to investors. These certificates represent a debt obligation, meaning the company is required to repay the principal amount according to agreed terms.
Loan stock is commonly used by companies to raise large amounts of capital for long-term purposes such as business expansion, infrastructure development, or refinancing existing debt. Investors who hold loan stock are considered creditors, not owners, of the company.
Key Features of Loan Stock
- Represents borrowed funds, not ownership
- Usually long-term in nature
- Issued in the form of loan stock certificates
- Holders receive fixed returns in conventional finance
- Principal is repaid at maturity or according to agreed terms
Loan Stock in Conventional Finance
In conventional finance, loan stock typically:
- Pays interest to investors
- Has a fixed or floating interest rate
- Is legally classified as a debt instrument
Because it involves interest (riba), conventional loan stock is not Sharīʿah-compliant.
Loan Stock in Islamic Finance
Islamic finance does not allow interest-based loan stock. Instead, Sharīʿah-compliant alternatives are used, such as:
- Ṣukūk – asset-backed or asset-based certificates
- Mushārakah or Muḍārabah certificates – profit-sharing instruments
- Ijārah-based instruments – leasing structures
These instruments replace interest with profit-sharing or asset-based returns, ensuring compliance with Sharīʿah principles.
Difference Between Loan Stock and Equity
- Loan stock holders are creditors, not shareholders
- They have priority over shareholders in repayment
- They do not have voting rights
- Returns are generally fixed in conventional systems
One-Line Exam Definition
Loan stock is a long-term debt instrument issued by a company to raise funds, representing a loan repayable to investors under agreed terms.
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