Participation Term Certificate

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Definition of "Participation Term Certificate"

A financial instrument used by Islamized banks in Pakistan to replace debentures. Holders of the PTCs share in the profit or loss of the issuing companies. Usually issued for a maximum period of 10 years, secured by a charge on the assets of the company, the PTCs have a prior claim on profits of the company. Any loss is first met from past reserves, and any left-over loss is shared by all providers of the capital including PTC holders. In practice, PTC has imbibed the spirit of interest. The PTC scheme requires a ‘pre-production discount rate’ on long-gestation period projects. Similarly, when the company does not have profits to pay to holders of the PTCs, then it is required to issue additional PTCs in the name of existing holders, the amount being equal to the expected profit of the PTC holders. In certain cases, the PTC holders might also get equity holdings equal to the loss of the company. The PTC holders do not suffer a loss in any case. Thus, the PTC has been criticized widely for being against the Islamic financial principles. The instrument was discontinued in the early 1990s.


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