graph in a paper with wooden houses
Being a Muslim doesn’t mean we live in a bubble, especially in regard to finances and living in a Western country. Like it or not, market changes like increases in interest rates or stock price drops can directly or indirectly affect how the Islamic financing world functions.
To keep you updated, here is what is currently happening in the financial ecosystem.
Higher Credit Costs
People who rely on credit for purchasing properties will feel the blow more than others, as this will influence additional charges applied when borrowing money. Payments for car and home mortgages will increase, so as interest charges on credit card bills. This will also affect how borrowers will allocate their funds and may require them to reduce the amount intended for savings or future investments.
Lower Investment Bond Return
Bonds are typically one of the most secure investment options, as US treasuries back these bonds and promise a full return upon maturity. However, depending on the bond purchased, interest rates may still affect the bond’s final price.
When sold before maturity in a financial climate with high interest rates, bonds may have a value that’s lower than the initial amount. Financial experts highly recommend holders revisit their bonds and other fixed-income investments to determine whether to hold on to or let go of those investments based on the interest rates.
Long-term bonds are more suspect to interest changes than short-term ones. Trading off bonds with a longer maturity for those with shorter maturity dates may offer protection from the interest spike. However, this may result in lower payouts.
Possible Stock Price Drops
Increased interest rates can cause consumers to limit spending. Borrowing funds from banks can also become more difficult, hindering expansion plans. The combination of these factors can negatively impact a company’s earnings which will reflect on its portfolio, indirectly influencing the stock prices of companies and making them less attractive to investors.
Interest Rate Spikes and Islamic Financing
With current market conditions, Islamic financing still provides several advantages, particularly in terms of real estate. Islamic financing options have limited control over the interest applied on the borrowed amount. However, it can give borrowers leverage to maximize investments.
One way of doing this is by placing an amount of the payment to the actual property as equity. As the equity grows, the borrower slowly gains control of the property until full payment. Additionally, they can use the accrued equity as funds for other projects, like home renovation or purchasing another property.
Reducing the Impact of High Interest Rates
Asset allocation is one of the best methods to work around interest rate spikes. Securing a diverse portfolio of stocks, bonds, and other investments allows investors to move funds where prices are better and capitalize on better opportunities. Keep in mind that profit or asset loss isn’t 100%, but this will reduce risks.