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KembaraXtra – Islamic Finance – Islamic Capital Market – Convertible Instruments
Convertible instruments are quasi-equity financing instruments that initially function as non-equity investments but include a mechanism that allows them to be converted into equity at a future date or upon meeting certain conditions. At the early stage, investors do not enjoy ownership rights and are positioned similarly to preferred investors or financiers. Once conversion occurs, the investor becomes a shareholder and gains equity participation in the company.
These instruments are often used by issuers who wish to raise capital without immediately diluting ownership. In the context of Islamic finance, convertible instruments must be structured carefully to avoid interest (riba) and excessive uncertainty. Sharīʿah-compliant versions are typically based on mushārakah or muḍārabah contracts, where conversion represents a genuine transition from financing to partnership.
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