Preference Shares from Shariah Perspective: Issue and Solutions

Abstract

Preference shares have their own characteristics that make them different from ordinary shares. Moreover, they can be divided into various types based on
unique features embedded in each type. This paper aims to scrutinise the different types of preference shares to identify related Shariah issues and subsequently propose solutions for the identified issues that would help in structuring Islamic preference shares. This paper employs a qualitative method by analysing relevant documents and literature to understand the subject-matter and Shariah-related issues. This paper finds that several features of conventional preference shares make the instrument as Shariah non-compliant. These are; (i) capital guarantee; (ii) loss sharing disproportionate to capital contribution; (iii) fixed profit; (iv) profit guarantee; and (v) waiving of right prior to realisation of profit. It is noted that there are a few articles discussed on preference shares. Nevertheless, this paper is significantly different from the others in term of in-depth analysis for each type of preference shares and the proposed Shariah-compliant solutions.