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Sources of finance

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Jamiu Akangbe
Jamiu Akangbe

The document provides an overview of various sources of financing, including both conventional and Islamic options. It discusses debt financing through instruments like bonds, sukuk, murabaha, and qard al hassan. It also covers equity financing such as venture capital, public offerings, private placements, and Islamic structures like musharakah and mudarabah. Practical tips are provided for sourcing financing, including factors financiers consider, requirements for applications, and emphasizing the importance of istighfar.

1 of 36
Sources of Financing Presented by Ndako Mijindadi at The Guild of Muslim Professionals Convention (2016)
2 Outline • Basics of Financing • Sources of Finance • Debt Financing • Conventional • Islamic • Equity Financing • Conventional • Islamic • Practical Tips for Sourcing Financing
3 Overview • Will you start a business without considering the source of your raw materials? Considering the source of finance should be the 1st step
4 For many individuals and businesses, financing is often the missing link required to take them to the next level. • What type of financing do we need What • At what point do we need each type of financing When • What is the capital raising process? How • Where do we get funds from? Who We need to understand: Financing Basics
5 Financing Basics Back to the Basics Parties There are typically two or more parties involved in a financing contract (financier and the financed) Purpose The purpose of seeking finance can vary between short term to long term needs Pricing Financing always almost comes at a cost which is considered the return on investment to the financier Short Term Medium Term Long Term
6 Individuals • Long Term • Home Acquisition • Short - Medium Term • Rent Payment • School Fees • Car Acquisition Businesses • Long Term • Business Capital • Property Acquisition • Business Expansion • Short Term • Working Capital Government • Long Term • Infrastructure finance • Developmental Finance • Short Term • Payroll • Overheads Common Financing Needs include: Financing Basics Back to the Basics Financing duration needs to match your objectives
7 The 6 common sources of funds Personal Funds Family &Friends Private Investors Grants Banks/ Fin. Institutions Public Financing Basics
8 Personal savings is a goldmine! • Most individuals or business have some avenue to save. • In the time of need and shortfall of funds, the savings/earnings automatically become the first source of finance to take advantage of. • This is usually the cheapest form of finance • Savings can vary in the form of bank deposits, stocks, pooled investments etc • This form of financing is mostly used by individuals and small businesses to finance short term needs such as asset acquisition • Many companies also resort to retained earnings for expansion. Financing Basics
9 Sources of Personal Finance Financing Basics 5% Helping Hand Account 55% Basic needs accounts 10% Enjoyment account 10% Educate yourself account 10% Saving to Spend Account 10% Siddon look Passive income Lotus Financial Health Plan
10 Sources of Funding Forms of Finance Debt Equity There are two broad categories of financing that are not very well understood. Not Yours Yours Debt providers are different animals from equity providers
11 Debt Finance • Debt financing involves borrowing funds from creditors with the stipulation of repaying the borrowed funds plus interest at a specified future time. • For the creditors the reward for providing the debt financing is the interest on the amount lent to the borrower. • Debt financing may be secured or unsecured. Sources of Funding
12 Debt Finance Medium- Long term • Bonds • Debenture • Mortgage • Finance Lease Short term • Personal Loan • Bank loan • Overdraft • Credit Cards • Commercial Paper • Treasury Bills Sources of Funding
13 Murabaha (Cost Plus) Qard Hassan/ Benevolent Loan Sukuk • In Islam, debt is generally discouraged • However the shari’ah permits certain debt like contracts • Unlike conventional finance, in Islamic finance any form of finance must be based on a tangible/valuable asset. Islamic debt finance is not a “money for more money” contract Islamic debt finance is underlined by Trade or Good will • All activities underlying Islamic debt financing must be permissible Islamic Debt Finance Sources of Funding
NIFI Supplier Client Cost plus mark up 1. The client approaches a NIFI and expresses intent to engage in a Murabaha transaction facilitated by the financier 2. Subject to the financier’s approval, the client signs a "Promise to Buy“ agreement 3. NIFI purchases the asset 4. NIFI sells to client at marked up price and client pays in full or in instalments as pre-agreed Cost PriceAsset Asset Islamic Debt Finance - Murabaha Sources of Funding
15 Goods Purchase of Goods Receipt of Goods Price & Mark Up Repayment Quality and quantity must be clearly stated and agreed upon Client should not have made purchase of the good prior to the murabaha agreement Client can appoint an agent to receive the goods. Must be clearly stated and agreed upon Clearly stipulate • Amount of each installment • Timing of each installment • Total duration of installments Goods must be shari’ah compliant Financier can appoint the client as an agent to purchase the goods on his behalf. No portion of this is to be paid prior to the buyer taking delivery Not to be resold prior to delivery Supplier of goods must be a third party Islamic Debt Finance - Murabaha Sources of Funding
16 • Sukuk are non-interest debt instruments, which are developed in accordance with Islamic tenets. • They are otherwise known as the Islamic equivalent of a bond. • The underlying activity financed must be Shari’ah permissible in both nature and use. • Sukuk holders have recourse to the assets acquired with the sukuk proceeds in the event of the originator’s bankruptcy. • Sukuk is mainly used as a form of financing by corporates and the government Islamic Debt Finance - Sukuk Sources of Funding
17 Sukuk • Sukuk represents ownership stakes in existing and/or to be built well defined assets. • The underlying contract for a sukuk issuance is a permissible contract The sale of a sukuk represents a sale of a share of an asset • The underlying assets financed by a Sukuk issuance must be Shari’ah permissible in both their nature and use Conventional Bond • Bonds represent pure debt obligations due from the issuer; • The core relationship is a loan of money, which implies a contract whose subject is purely earning interest on principal • The sale of a bond is basically the sale of a debt • Bonds, can be issued to finance almost any purpose which is legal in its jurisdiction regardless of moral screen Islamic Debt Finance - Sukuk Sources of Funding
18 Islamic Debt Financing- Sukuk in Practice 18 Osun state issued the first sub-sovereign sukuk in 2013 to raise funds for the construction of schools Model schools Sources of Funding
19 • A goodwill loan against which interest is not charged; where only the principal amount is to be returned in the future • This is typically the type of funding obtainable from friends and family Islamic Debt Financing- Qard Al Hassan Initial Loan $10,000 Repayment $10,000 Time A-B Sources of Funding
20 Equity Financing • Equity typically involves selling a stake in a business/project to raise additional funds/capital • It is underlined by profit and loss sharing • Equity finance is long term focused but through stock exchanges several investors/financiers can exit over a short period. • Equity is the most expensive form of finance because the “shareholders” bear the underlining risks of the business. • Equity finance is generally permissible by the shari’ah Sources of Funding
21 Venture Capital Angels • High Net Worth Individuals or retired company executives • Investors contribute experience, contacts and management knowledge • Investor supervises management • Usually for companies with high- growth potential • Investor looks for exit plan (IPO) • Investors should bring relevant experience Equity Financing - Start Ups Crowd Funding • Raising many small amounts of money from a large number of people • Typically happens via the Internet. Sources of Funding
22 Public Offerings Private Placement • Shares are offered to a close knit of select individuals and institutions Initial Public Offerings • Ordinary Shares • Preference Shares Rights Issues Sources of Funding Equity Financing - Big Companies Companies often employ the services of a professional financial adviser to help structure these equity capital raising deals Advisers come in different shapes and sizes
23 Musharakah (patnership ) Mudarabah • Business partnership between two or more parties • One party provides capital, while the other provides the investment management expertise • Both share profit based on pre- agreed terms • In the case of a loss, the investor bears any loss of capital while the Mudarib loses his time and effort • Musharakah means a joint enterprise formed by the contribution of capital by multiple parties. • Profit on the enterprise is shared on a pre- agreed ratio • Losses are shared based on the percentage of capital contribution Sources of Funding Islamic Equity Finance
1. NIFI and Client enter into Musharaka agreement and fix profit sharing ratio (PSR) 2. Client manages business 3. Profits are shared according to agreed ratio and losses are shared based on capital contribution 4. In the NIF industry, the musharakah contract is largely used for mortgages Capital & Effort Client Non Interest Financial Institution Project/Asset Acquisition Project Revenue Capital & Effort Musharaka contract Islamic Equity Finance - Musharakah Sources of Funding
25 Sources of Funding Partners Capital Business Profit sharing Contract Partners have the right to - Appoint agents & be appointed as agents - Right to sell the mutually owned property Any form of liquid or illiquid asset Not Debt Quantifiable and specified amount Permissible Role of the partners to be duly specified Based on ratio agreed Not restricted to capital contribution basis Not in absolute amount Loss based on capital contribution Clear and definite in language Islamic Equity Finance- Musharakah
NIFI Client Project Project Revenue Capital Management Profit/LossProfit 1. NIFI & Client enter into Mudaraba agreement and fix profit sharing ratio (PSR) 2. Client manages business 3. Profit is shared according to PSR 4. Loss is absorbed by the NIFI Islamic Equity Finance- Mudarabah Sources of Funding
27 Sources of Funding Mudarabah & Musharaka Financing Short/medium/long term financing Project financing Small and medium enterprises setup financing Large Enterprise Import Financing Export financing (Pre-shipment financing) Letter of Credit financing Working capital financing Islamic Equity Finance
28 Sources of Funding Other Islamic Finance Modes Ijarah (Lease to own) Istisna’ (Construction Finance’) Salam (Deferred Delivery) is a contract in which advance payment is made for goods to be delivered later on. Mostly used to finance agricultural produce A contract of exchange with deferred delivery, applied to specified assets that are manufactured on order is a simple leasing contract where a party leases an asset for a specified rent and term. This may include an option to buy the asset at the end of the lease
29 The Big Decision- key things to consider Practical Tips for Sourcing Finance Debt Equity • Equity involves loss of control • Less burden on company profits • Funding stays in for a long term • Both Parties share profit & Losses • Control is retained • More burden on company profits • Default could result in losses of personal asset
30 Type of business Size of business Urgency of financing need Availability of collateral Stability of cashflows Business prospect and profitability analysis The Big Decision- key things to consider Practical Tips for Sourcing Finance
31 Practical Tips for Sourcing Finance Approaching a Financier When a financier is asked by a customer for a credit facility, he will consider several factors; • The purpose of the loan A loan request will be refused if the purpose of the loan is not acceptable to the bank. Purpose • The customer must state exactly how much he wants to borrow. The banker must verify, Amount • How will the loan be repaid? Repayment • What would be the duration of the loan? Term • Does the loan require security? Security
32 Practical Tips for Sourcing Finance Approaching a Financier- Requirement Checklist Asset Acquisition (Individual) Application Letter Pro-Forma Invoice (In the Name and Address of financier) Referral letter from employer Source of repayment Three (3) months pay slip and last six (6) months bank statement. If from any other source please specify. Minimum contribution of 20% List and Details of Bank Borrowings C V (with passport photograph) Two Guarantors (Name, Phone Numbers, Details of Relationship and Address) Completion of Know Your Customers Form (KYC)
33 Practical Tips for Sourcing Finance Approaching a Financier- Requirement Checklist Asset Acquisition (corporate) Application Letter Two Guarantors (Phone Numbers, Details of Relationship and Address) Pro-Forma Invoice (In the Name and Address of financier) Minimum of 20% contribution Company Profile & Management Profile Memorandum and Article of Association (Certified true copy) Projected cash flow for the tenure of the lease Certificate of Incorporation One year historical cash flow of your company Board resolution Company last six months Bank statement C0.7 (List of Directors)and C0.2 (List of Shareholders) - Certified true copy Company last audited financial statement Passport Photograph of all Guarantors with copy of means of identification e.g. Drivers License, International Passport or Office List of bankers 10.Other bank borrowings
34 Practical Tips for Sourcing Finance When a financier is asked by a company for equity investment, he will consider several factors; Entrepreneurial spirit Competence Commitment Financial Discipline Governance + Trust Uniqueness of the idea Workability Profitability Exit
35 Practical Tips for Sourcing Finance Rasul Allah (sallallaahu 'alayhi wa sallam) said, “If anyone continually asks forgiveness, Allah will appoint for him a way out of every distress, relief from anxiety, and will provide for him from where he never realized.” (Abu Dawood, Book 20, Hadith 1873) “Ask forgiveness of your Lord. Truly He is Oft- Forgiving. He will send rain to you in abundance; increase you in wealth and children; grant you gardens and bestow on you rivers.”’“ [Nuh (71):10-12] Make Istighfar
Thank you for listening

More Related Content

Sources of finance

  • 1. Sources of Financing Presented by Ndako Mijindadi at The Guild of Muslim Professionals Convention (2016)
  • 2. 2 Outline • Basics of Financing • Sources of Finance • Debt Financing • Conventional • Islamic • Equity Financing • Conventional • Islamic • Practical Tips for Sourcing Financing
  • 3. 3 Overview • Will you start a business without considering the source of your raw materials? Considering the source of finance should be the 1st step
  • 4. 4 For many individuals and businesses, financing is often the missing link required to take them to the next level. • What type of financing do we need What • At what point do we need each type of financing When • What is the capital raising process? How • Where do we get funds from? Who We need to understand: Financing Basics
  • 5. 5 Financing Basics Back to the Basics Parties There are typically two or more parties involved in a financing contract (financier and the financed) Purpose The purpose of seeking finance can vary between short term to long term needs Pricing Financing always almost comes at a cost which is considered the return on investment to the financier Short Term Medium Term Long Term
  • 6. 6 Individuals • Long Term • Home Acquisition • Short - Medium Term • Rent Payment • School Fees • Car Acquisition Businesses • Long Term • Business Capital • Property Acquisition • Business Expansion • Short Term • Working Capital Government • Long Term • Infrastructure finance • Developmental Finance • Short Term • Payroll • Overheads Common Financing Needs include: Financing Basics Back to the Basics Financing duration needs to match your objectives
  • 7. 7 The 6 common sources of funds Personal Funds Family &Friends Private Investors Grants Banks/ Fin. Institutions Public Financing Basics
  • 8. 8 Personal savings is a goldmine! • Most individuals or business have some avenue to save. • In the time of need and shortfall of funds, the savings/earnings automatically become the first source of finance to take advantage of. • This is usually the cheapest form of finance • Savings can vary in the form of bank deposits, stocks, pooled investments etc • This form of financing is mostly used by individuals and small businesses to finance short term needs such as asset acquisition • Many companies also resort to retained earnings for expansion. Financing Basics
  • 9. 9 Sources of Personal Finance Financing Basics 5% Helping Hand Account 55% Basic needs accounts 10% Enjoyment account 10% Educate yourself account 10% Saving to Spend Account 10% Siddon look Passive income Lotus Financial Health Plan
  • 10. 10 Sources of Funding Forms of Finance Debt Equity There are two broad categories of financing that are not very well understood. Not Yours Yours Debt providers are different animals from equity providers
  • 11. 11 Debt Finance • Debt financing involves borrowing funds from creditors with the stipulation of repaying the borrowed funds plus interest at a specified future time. • For the creditors the reward for providing the debt financing is the interest on the amount lent to the borrower. • Debt financing may be secured or unsecured. Sources of Funding
  • 12. 12 Debt Finance Medium- Long term • Bonds • Debenture • Mortgage • Finance Lease Short term • Personal Loan • Bank loan • Overdraft • Credit Cards • Commercial Paper • Treasury Bills Sources of Funding
  • 13. 13 Murabaha (Cost Plus) Qard Hassan/ Benevolent Loan Sukuk • In Islam, debt is generally discouraged • However the shari’ah permits certain debt like contracts • Unlike conventional finance, in Islamic finance any form of finance must be based on a tangible/valuable asset. Islamic debt finance is not a “money for more money” contract Islamic debt finance is underlined by Trade or Good will • All activities underlying Islamic debt financing must be permissible Islamic Debt Finance Sources of Funding
  • 14. NIFI Supplier Client Cost plus mark up 1. The client approaches a NIFI and expresses intent to engage in a Murabaha transaction facilitated by the financier 2. Subject to the financier’s approval, the client signs a "Promise to Buy“ agreement 3. NIFI purchases the asset 4. NIFI sells to client at marked up price and client pays in full or in instalments as pre-agreed Cost PriceAsset Asset Islamic Debt Finance - Murabaha Sources of Funding
  • 15. 15 Goods Purchase of Goods Receipt of Goods Price & Mark Up Repayment Quality and quantity must be clearly stated and agreed upon Client should not have made purchase of the good prior to the murabaha agreement Client can appoint an agent to receive the goods. Must be clearly stated and agreed upon Clearly stipulate • Amount of each installment • Timing of each installment • Total duration of installments Goods must be shari’ah compliant Financier can appoint the client as an agent to purchase the goods on his behalf. No portion of this is to be paid prior to the buyer taking delivery Not to be resold prior to delivery Supplier of goods must be a third party Islamic Debt Finance - Murabaha Sources of Funding
  • 16. 16 • Sukuk are non-interest debt instruments, which are developed in accordance with Islamic tenets. • They are otherwise known as the Islamic equivalent of a bond. • The underlying activity financed must be Shari’ah permissible in both nature and use. • Sukuk holders have recourse to the assets acquired with the sukuk proceeds in the event of the originator’s bankruptcy. • Sukuk is mainly used as a form of financing by corporates and the government Islamic Debt Finance - Sukuk Sources of Funding
  • 17. 17 Sukuk • Sukuk represents ownership stakes in existing and/or to be built well defined assets. • The underlying contract for a sukuk issuance is a permissible contract The sale of a sukuk represents a sale of a share of an asset • The underlying assets financed by a Sukuk issuance must be Shari’ah permissible in both their nature and use Conventional Bond • Bonds represent pure debt obligations due from the issuer; • The core relationship is a loan of money, which implies a contract whose subject is purely earning interest on principal • The sale of a bond is basically the sale of a debt • Bonds, can be issued to finance almost any purpose which is legal in its jurisdiction regardless of moral screen Islamic Debt Finance - Sukuk Sources of Funding
  • 18. 18 Islamic Debt Financing- Sukuk in Practice 18 Osun state issued the first sub-sovereign sukuk in 2013 to raise funds for the construction of schools Model schools Sources of Funding
  • 19. 19 • A goodwill loan against which interest is not charged; where only the principal amount is to be returned in the future • This is typically the type of funding obtainable from friends and family Islamic Debt Financing- Qard Al Hassan Initial Loan $10,000 Repayment $10,000 Time A-B Sources of Funding
  • 20. 20 Equity Financing • Equity typically involves selling a stake in a business/project to raise additional funds/capital • It is underlined by profit and loss sharing • Equity finance is long term focused but through stock exchanges several investors/financiers can exit over a short period. • Equity is the most expensive form of finance because the “shareholders” bear the underlining risks of the business. • Equity finance is generally permissible by the shari’ah Sources of Funding
  • 21. 21 Venture Capital Angels • High Net Worth Individuals or retired company executives • Investors contribute experience, contacts and management knowledge • Investor supervises management • Usually for companies with high- growth potential • Investor looks for exit plan (IPO) • Investors should bring relevant experience Equity Financing - Start Ups Crowd Funding • Raising many small amounts of money from a large number of people • Typically happens via the Internet. Sources of Funding
  • 22. 22 Public Offerings Private Placement • Shares are offered to a close knit of select individuals and institutions Initial Public Offerings • Ordinary Shares • Preference Shares Rights Issues Sources of Funding Equity Financing - Big Companies Companies often employ the services of a professional financial adviser to help structure these equity capital raising deals Advisers come in different shapes and sizes
  • 23. 23 Musharakah (patnership ) Mudarabah • Business partnership between two or more parties • One party provides capital, while the other provides the investment management expertise • Both share profit based on pre- agreed terms • In the case of a loss, the investor bears any loss of capital while the Mudarib loses his time and effort • Musharakah means a joint enterprise formed by the contribution of capital by multiple parties. • Profit on the enterprise is shared on a pre- agreed ratio • Losses are shared based on the percentage of capital contribution Sources of Funding Islamic Equity Finance
  • 24. 1. NIFI and Client enter into Musharaka agreement and fix profit sharing ratio (PSR) 2. Client manages business 3. Profits are shared according to agreed ratio and losses are shared based on capital contribution 4. In the NIF industry, the musharakah contract is largely used for mortgages Capital & Effort Client Non Interest Financial Institution Project/Asset Acquisition Project Revenue Capital & Effort Musharaka contract Islamic Equity Finance - Musharakah Sources of Funding
  • 25. 25 Sources of Funding Partners Capital Business Profit sharing Contract Partners have the right to - Appoint agents & be appointed as agents - Right to sell the mutually owned property Any form of liquid or illiquid asset Not Debt Quantifiable and specified amount Permissible Role of the partners to be duly specified Based on ratio agreed Not restricted to capital contribution basis Not in absolute amount Loss based on capital contribution Clear and definite in language Islamic Equity Finance- Musharakah
  • 26. NIFI Client Project Project Revenue Capital Management Profit/LossProfit 1. NIFI & Client enter into Mudaraba agreement and fix profit sharing ratio (PSR) 2. Client manages business 3. Profit is shared according to PSR 4. Loss is absorbed by the NIFI Islamic Equity Finance- Mudarabah Sources of Funding
  • 27. 27 Sources of Funding Mudarabah & Musharaka Financing Short/medium/long term financing Project financing Small and medium enterprises setup financing Large Enterprise Import Financing Export financing (Pre-shipment financing) Letter of Credit financing Working capital financing Islamic Equity Finance
  • 28. 28 Sources of Funding Other Islamic Finance Modes Ijarah (Lease to own) Istisna’ (Construction Finance’) Salam (Deferred Delivery) is a contract in which advance payment is made for goods to be delivered later on. Mostly used to finance agricultural produce A contract of exchange with deferred delivery, applied to specified assets that are manufactured on order is a simple leasing contract where a party leases an asset for a specified rent and term. This may include an option to buy the asset at the end of the lease
  • 29. 29 The Big Decision- key things to consider Practical Tips for Sourcing Finance Debt Equity • Equity involves loss of control • Less burden on company profits • Funding stays in for a long term • Both Parties share profit & Losses • Control is retained • More burden on company profits • Default could result in losses of personal asset
  • 30. 30 Type of business Size of business Urgency of financing need Availability of collateral Stability of cashflows Business prospect and profitability analysis The Big Decision- key things to consider Practical Tips for Sourcing Finance
  • 31. 31 Practical Tips for Sourcing Finance Approaching a Financier When a financier is asked by a customer for a credit facility, he will consider several factors; • The purpose of the loan A loan request will be refused if the purpose of the loan is not acceptable to the bank. Purpose • The customer must state exactly how much he wants to borrow. The banker must verify, Amount • How will the loan be repaid? Repayment • What would be the duration of the loan? Term • Does the loan require security? Security
  • 32. 32 Practical Tips for Sourcing Finance Approaching a Financier- Requirement Checklist Asset Acquisition (Individual) Application Letter Pro-Forma Invoice (In the Name and Address of financier) Referral letter from employer Source of repayment Three (3) months pay slip and last six (6) months bank statement. If from any other source please specify. Minimum contribution of 20% List and Details of Bank Borrowings C V (with passport photograph) Two Guarantors (Name, Phone Numbers, Details of Relationship and Address) Completion of Know Your Customers Form (KYC)
  • 33. 33 Practical Tips for Sourcing Finance Approaching a Financier- Requirement Checklist Asset Acquisition (corporate) Application Letter Two Guarantors (Phone Numbers, Details of Relationship and Address) Pro-Forma Invoice (In the Name and Address of financier) Minimum of 20% contribution Company Profile & Management Profile Memorandum and Article of Association (Certified true copy) Projected cash flow for the tenure of the lease Certificate of Incorporation One year historical cash flow of your company Board resolution Company last six months Bank statement C0.7 (List of Directors)and C0.2 (List of Shareholders) - Certified true copy Company last audited financial statement Passport Photograph of all Guarantors with copy of means of identification e.g. Drivers License, International Passport or Office List of bankers 10.Other bank borrowings
  • 34. 34 Practical Tips for Sourcing Finance When a financier is asked by a company for equity investment, he will consider several factors; Entrepreneurial spirit Competence Commitment Financial Discipline Governance + Trust Uniqueness of the idea Workability Profitability Exit
  • 35. 35 Practical Tips for Sourcing Finance Rasul Allah (sallallaahu 'alayhi wa sallam) said, “If anyone continually asks forgiveness, Allah will appoint for him a way out of every distress, relief from anxiety, and will provide for him from where he never realized.” (Abu Dawood, Book 20, Hadith 1873) “Ask forgiveness of your Lord. Truly He is Oft- Forgiving. He will send rain to you in abundance; increase you in wealth and children; grant you gardens and bestow on you rivers.”’“ [Nuh (71):10-12] Make Istighfar
  • 36. Thank you for listening