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Understanding Assets Valuation Models

Accuracy, Transparency, Consistency

Asset Valuation: Legal Framework

Asset Valuation is a crucial aspect of USA Financial Reporting, Transactions, and Regulatory Compliance. 

• It involves determining the Monetary Value of Assets, which can range from Tangible Items like real estate and machinery to Intangible Assets like Intellectual Property and Goodwill.  

• The Process of Asset Valuation within a legal framework involves determining the economic value of assets, be it tangible (like property and equipment) or intangible (such as patents and trademarks). 

• This process is crucial for various legal and financial purposes, including Financial Reporting, Risk Management, and Regulatory Compliance.  

Asset Valuation is the Legal Framework Process of determining the Fair Market or Present Value of an Asset. 

• Asset Valuation refers to a wide range of Assets including Tangible Assets like buildings and equipment, and Intangible Assets like Brand Value and Intellectual Property.

• Asset Valuation Models determine Fair Market or Present Value of Asset.

• These models can be broadly categorized into Absolute Valuation Models (like Discounted Cash Flow Analysis) and Relative Valuation Models (like Comparable Company Analysis). 

• The choice of model depends on the Type of Asset and the available information.  

Key Terms Used in Assets Valuation Models

• The Value of an Asset is the Monetary Worth of that asset, which can be determined through various Valuation Methods depending on the context and Type of Asset. It represents what someone would be willing to pay for it, taking into account its Current Worth and potential Future Benefits.

• Asset Valuation Models are frameworks used to determine the Monetary Worth of an Asset. These models help governments, investors, businesses, and individuals to assess Value of Assets.

Asset Valuation Methodology

Asset Valuation Methods Techniques to determine the Monetary Worth of Asset.

Asset Valuation Approaches

Three Primary Approaches

Cost Approach, Market Approach, Income Approach

• These approaches help in various situations, including Financial Reporting, Investment Decisions, and Business Transactions (Government & Industry).  

Asset Types

Assets are generally categorized into Tangible and Intangible, and further classified based on their Liquidity (how easily they can be converted to cash) and how they are used in business operations.

• Tangible Assets are Physical Items, while Intangible Assets are Non-Physical Resources.

• Moveable (Tangible items) and Movable Assets are tangible items that can be easily relocated or transferred from one place to another without significant damage. 

• They are distinct from immovable assets like land and buildings. Examples include vehicles, furniture, equipment, machinery, jewelry, and even some forms of intellectual property.  

• Immoveable Assets:  Anything permanently attached to the earth. 

  • • Immovable Assets, also known as Real Estate, are properties that cannot be moved from one location to another. Examples include homes, commercial buildings, agricultural land, and Natural Resources like Minerals and Trees attached to the land.  

      • • Renewable Resources: can be replenished naturally over a relatively short period. Examples include sunlight, wind, water, forests, and wildlife.

        • Non-Renewable Resources are available in limited quantities and cannot be replenished at a rate comparable to their consumption. Examples include fossil fuels and minerals.

Arbitrage Pricing Theory & Capital Asset Pricing

Arbitrage Pricing Theory (APT) and the Capital Asset Pricing Model (CAPM) are both models used in finance to determine the Expected Return on Asset (EROA), but they differ in their approach. 

• CAPM is a single-factor model that uses the Market's Risk and Return to determine an Asset's Expected Return (AER).

• APT is a multi-factor model that considers multiple Macroeconomic Factors that can influence an asset's price.  

  • The APT (Arbitrage Pricing Theory) is an alternative to the CAPM (Capital Asset Pricing Model) that uses fewer Assumptions.

  • Arbitrage Pricing Theory (APT) is a Multi-Factor Asset Pricing Model based on the idea that an asset's returns can be predicted using the linear relationship between the asset’s expected return and a number of macroeconomic variables that capture systematic risk. It is a useful tool for analyzing portfolios from a Value Investing perspective, in order to identify securities that may be temporarily mispriced.

Our Vision

Level Playing Field for Islamic Economic System

Our Mission

Organize Communities at Grassroots Level; Proactively Participate and Lawfully Support Ongoing Global Efforts for Justice Based Policy and Structural Reforms which Foster Shared Prosperity, Equality, Opportunity and Well-Being of Humanity and Environments.

Our Direction

We Endeavor for Justice Based Sustainable Shared Prosperity Focusing Lawful Optimization of Indigenous Resources; Skills Capacity Building; Innovation; Compassion; Excellence; and Empowering Communities at Grassroots Level.

Our Focus

Digital Money and Payment Systems, Policies, 

Regulatory Frameworks, Constitution, Statutes, 

Regulations, Institutions, Court Decisions, and International Treaties

Arbitrage Pricing Theory vs Asset Pricing Model

Key Takeaways

• Arbitrage Pricing Theory (APT) is a Multi-Factor Asset Pricing model based on the idea that an asset's returns can be predicted using the Linear Relationship between the Asset’s Expected Return and a number of Macroeconomic Variables that capture Systematic Risk.

• Unlike the CAPM, which assumes markets are perfectly efficient, APT assumes markets sometimes Misprice Securities, before the market eventually corrects and securities move back to Fair Value.

• Using APT Arbitrageurs hope to take advantage of any deviations from Fair Market Value.

Arbitrage Pricing Theory vs Asset Pricing Model

Key Takeaways

• Arbitrage Pricing Theory (APT) is a Multi-Factor Asset Pricing model based on the idea that an asset's returns can be predicted using the Linear Relationship between the Asset’s Expected Return and a number of Macroeconomic Variables that capture Systematic Risk.

• Unlike the CAPM, which assumes markets are perfectly efficient, APT assumes markets sometimes Misprice Securities, before the market eventually corrects and securities move back to Fair Value.

• Using APT Arbitrageurs hope to take advantage of any deviations from Fair Market Value.

Formula for the Arbitrage Pricing Theory Model 

E(R)i​=E(R)z​+(E(I)−E(R)z​)×βn

where:

E(R)i​=Expected return on the asset

Rz​=Risk-free rate of return

βn=Sensitivity of the asset price to macroeconomicfactor n

Ei=Risk premium associated with factor i​

Mathematical Model for the APT

• While APT is more flexible than the CAPM, it is more complex. The CAPM only takes into account one factor—market risk—while the APT formula has multiple factors. And it takes a considerable amount of research to determine how sensitive a security is to various macroeconomic risks.

• The factors as well as how many of them are used are subjective choices, which means investors will have varying results depending on their choice. However, four or five factors will usually explain most of a security's return. (For more on the differences between the CAPM and APT, read more about CAPM and Arbitrage Pricing Theory Differences.)

• APT factors are the systematic risk that cannot be reduced by the diversification of an investment portfolio. The macroeconomic factors that have proven most reliable as price predictors include unexpected changes in inflation, Gross National Product (GNP), corporate bond spreads and shifts in the yield curve. 

• Other commonly used factors are Gross Domestic Product (GDP), commodities prices, market indices, and exchange rates.

Capital Asset Pricing Model

• The Capital Asset Pricing Model (CAPM) describes the relationship between Systematic Risk or the general Perils of Investing, and Expected Return for assets, particularly stocks. It is a Finance Model that establishes a Linear Relationship between the required return on an Investment and Risk.

• CAPM is based on the relationship between an Asset’s Beta, the Risk-Free Rate (typically the Treasury Bill Rate), and the Equity Risk Premium, or the Expected Return on the market minus the Risk-Free Rate.

• CAPM evolved as a way to measure this Systematic Risk. It is widely used throughout finance for pricing risky Securities and generating Expected Returns for Assets, given the risk of those assets and Cost of Capital.

Global GDP Estimate

2025: $115–$118 trillion; Average Global CAGR: 4.8%–5.2%

2035: $184–$196 trillion; Average Global CAGR: 4.5%–4.8%

Muslim Economy from 2025 to 2035

Key Assumptions

1. Global Muslim Population: 2.2 billion by 2030, 2035 ~2.5 billion

2. Muslim Consumer Spending:  2021: $2.29T - 2024: $2.7T 

3. Muslim Consumer Spending Growth: 5–7% CAGR post-2025

4. Islamic Finance Growth: 6–8% CAGR post-2026

5. Sector-specific CAGRs: Halal Food (6%), Fashion/Cosmetics/Media (7–9%), Travel (8–10%)

Key Islamic Finance Principles

1. Prohibition of Riba (Usury/Interest): Transactions must not involve interest. Cryptocurrencies like Trump Coin typically don’t inherently involve riba unless they are part of interest-based lending or borrowing schemes.

2. Prohibition of Gharar (Excessive Uncertainty): Transactions should avoid excessive ambiguity or risk. Speculative Ventures with unclear outcomes can fall under gharar.

3. Prohibition of Maysir (Gambling): Activities resembling gambling, where gains depend on chance rather than legitimate effort or value, are forbidden.

4. Underlying Purpose and Utility: An asset should have lawful (halal) utility or value, ideally contributing to societal benefit, and must not be tied to haram (forbidden) activities.

5. Legality and Compliance: Transactions must align with local laws unless those laws explicitly contradict Islamic principles.

Islamic Economy

﷽

"يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ لَا تَأْكُلُوٓا۟ أَمْوَٰلَكُم بَيْنَكُم بِٱلْبَـٰطِلِ إِلَّآ أَن تَكُونَ تِجَـٰرَةً ..."

"O believers! Do not devour one another’s wealth illegally, but rather trade by mutual consent..." AL Quran Surah 4 : Ayat 29 

"Islamic Economics is a comprehensive and independent economic system which defines economic principles in accordance with Islamic law and taking into account, all aspects of human life: the spiritual, material, social and political aspects, at both Microeconomic and Macroeconomic levels".

Islamic Economic System Fundamental Principles include: 

Socio-Economic Justice 

Market Economy

Right of Ownership (Individual or of enterprise)

Regulated Competitive Environments

Muslim Economy

Muslim Economy Share

Global Consumer Spending Market

2012 = US $1.62 trillion  

2023 = US $2.29 trillion

2022-2023 Consumer Spending Growth 

US $2.29 Trillion, 9.5% YOY

Investments = US$ 25.9 Billion, Increase of 128% YOY

Source: State of the Global Islamic Economy Report

Country Case Study = U.S.A.

Regulatory Framework: Basel III-Compliant, Tier 1 Capital

First Sukuk (Bond) Issued in USA

Issued by: FAB Sukuk Company Limited

The Shari’ah Framework

The Shari'ah Framework is based on divine principles revealed in Islamic sources, primarily Quran and Sunnah, represents the legal framework of Islamic Laws, which deal with all aspects of day-to-day life, including politics, economics, business, family, and social issues. 

Global Major Challenges

Concentration of Wealth & Disparity

Opportunity

Islamic DAO (Decentralized Autonomous Organization) Infrastructure

Technologies Integration Methodology

Blockchain and Distributed Ledger 

Featured Product

Lawful Global SMART Contracts

Emerging Islamic Economic Ecosystem

The inflexibility of the Conventional Monetary Ecosystem due to Riba (Interest-Usury) based system leads to a number of Injustices, Bankruptcies, Discrimination, Exploitation etc. consequently great loss of productive potential for the whole society; widening of Regional Disparity; Social Injustices; Unemployment; Rise in Capital Crimes etc.

Preferred Methodology 

Equity Based Intrinsic Value Macroeconomics 

Legal Frameworks

Our Research Focus

Global Regulatory Policies and Reforms to Strengthen Oversight of the Sharia Compliant Monetary System (SCMS).

Methodology

Comparative Study of Multiple Contemporary Monetary Systems and based on the selected country experiences, a number of important lessons and policy options can be drawn that have implications for the stable and sound development of Global Islamic Financial System (GIFS).

An enabling regulatory and institutional framework and a level playing field for Conventional and Islamic Banks is critical for the sound and stable growth of the Islamic Banking Industry. 

The country regulatory experiences also underscore the importance of providing an enabling framework while letting market forces determine the size of the industry 1.

Modes of Islamic Financing

👉Bai Salam (Forward Sale) 👉 Ijarah (Lease) 👉Istisna (Long-term Contract)

👉Takaful (Insurance) 👉Mudaraba (Sale Contract) 👉Musharaka (Partnership - Equity)

👉Murabaha (Cost plus make-up) 👉Sukuk (Bonds)

What is Musharakah?

Source: Institute of Islamic Banking and Insurance 

Musharakah

The term refers to a Financing Technique adopted by Islamic Banks.  It is an agreement under which the Islamic bank provides funds which are mingled with the funds of the business enterprise and others.  

All providers of capital are entitled to participate in the management but not necessarily required to do so.  The profit is distributed among the partners in predetermined ratios, while the loss is borne by each partner in proportion to his contribution.

Musharaka is another popular techniques of financing used by Islamic banks. It could roughly be translated as partnership. In this technique two or more financiers provide finance for a project. All partners are entitled to a share in the profits resulting from the project in a ratio which is mutually agreed upon. However, the losses, if any, are to be shared exactly in the proportion of capital proportion. All partners have a right to participate in the management of the project. However, the partners also have a right to waive the right of participation in favor of any specific partner or person.

Musharaka (Partnership Financing)

This is a classical partnership agreement. All parties involved contribute to towards the financing of a venture. The parties share profits on a pre-agreed ratio while losses are shared according to each parties equity participation. Here again the reason is because in Islam, one cannot loose what they did not contribute. Management of the venture is carried out by all, some, or just one party member.

Musharaka (Joint Venture-Equity)

We add our funds to your funds, and participate in the equity of the project. We share profits and losses in direct proportion to our contributions.

Permanent Musharakah

In this form of Musharakah, an Islamic bank participates in the equity of a project and receives a share of profit on a pro rata basis. The period of contract is not specified. So it can continue so long as the parties concerned wish it to continue. This technique is suitable for financing projects of a longer life where funds are committed over a long period and gestation period of the project may also be long.  

Diminishing Musharaka

Diminishing Musharaka allows equity participation and sharing of profit on a pro rata basis but also provides a method through which the equity of the bank keeps on reducing its equity in the project and ultimately transfers the ownership of the asset on of the participants. The contract provides for a payment over and above the bank share in the profit for the equity of the project held by the bank. That is the bank gets a dividend on its equity. 

At the same time the entrepreneur purchases some of its equity. Thus, the equity held by the bank is progressively reduced. After a certain time the equity held b y the bank shall come to zero and it shall cease to be a partner. Musharaka form of financing is being increasingly used by the Islamic banks to finance domestic trade, imports and to issue letters of credit. It could also be applied in agriculture and Industry.  

Musharaka (Venture Capital)

This Islamic financing principle refers to a partnership between two oe more parties, who provide capital towards the financing of a project. Both parties share profits on a pre- agreed ratio, but losses are shared on the basis of equity participation. Management of the project is carried out by both the parties.

State of the Global Islamic Economy Report 2023

Global Islamic Economy Indicator (GIEI) Ranking

# 1. Malaysia (10th consecutive year) 

# 2. Saudi Arabia, Indonesia and the UAE

# 3. Indonesia

👉Global Muslim Spending Forecast (Food and Beverages) = US$1.89 Trillion by 2027

👉Islamic Finance Assets Forecast = US$ 5.96 Trillion by 2026

👉33 Opportunities Including: Halal Certification, Islamic DeFi and Blockchain, Leisure and Spiritual Retreats, Tourism, Social Media-Led Commerce, Fashion, Vaccine and Biopharmaceutical, Green Pharma, and Live Commerce

Case Study: Islamic Monetary System

Islamic Financial Terminology

Common Sharia-compliant Financial Contracts include:

👉Consumer Loan (Murabaha): Asset purchased by bank and sold on to the customer with an agreed mark-up;

👉Leasing Agreement (Ijarah): Asset purchased by the bank and leased to customer over a specified period;

👉Joint Venture Agreement (Musharaka): Investment partnership in which profit sharing terms are agreed in advance and losses are attributable to the sum invested;

👉Equity Financing (Mudaraba): Partnership financing contract under which one party provides the labor whilst the other provides the capital;

👉Advance Payment (Salam): A contract in which advance payment is made for specific goods to be delivered later.

👉Gradual Financing (Istisna): A kind of Manufacturing Finance where payments are made in stages to facilitate gradual progress in manufacturing, processing or construction.

👉Agency Agreement (Wakalah): A contract where a person authorizes another to do a certain well-defined legal action on his behalf. Other commonly practiced financial products:

👉Bond (Sukuk): Islamic type of bond representing the ownership by the Sukuk holders in the underlying asset;

👉Insurance (Takaful): Mutual Insurance. Takaful is a risk sharing entity that allows for the transparent sharing of risk by pooling individual contributors for the benefit of all subscribers.

Underlying Technologies

Blockchain - Distributed Ledger

Types of Distributed Ledger Technologies

There are primarily three types of distributed ledger technologies out there. 

👉Permissioned 👉Permissionless 👉Hybrid

Let’s discuss each one of them briefly below.

👉Permissioned networks are private networks. They are designed to work in a closed ecosystem where the user needs to have access granted through a KYC procedure. 

The users once validated can access the features of the permissioned network or permissioned distributed ledger systems. In a permissioned network, the validation nodes do the heavy lifting as they are responsible for validating the transactions within the network.

The network can also be designed to restrict a few users to have limited access to the network functionalities. This feature is very useful for businesses who want to take advantage of blockchain, but do not want to make their data public to everyone. After all, for a business, it is important to protect their important business data. That’s what makes them unique and keep their market position safe from their competitors.

👉Permissionless distributed ledger systems or networks are public networks. By definition, users do not need permission to participate in the permissionless network. The distributed ledger system is open to everyone for making transactions, validating blocks, and making other forms of interaction with the network.

The key here is freedom. The best example of a permissionless network is bitcoin itself. It was the first cryptocurrency that utilized blockchain technology – an implementation of DLT. Anyone can send bitcoin or receive it. There is no limitation on who can use it irrespective of the location, laws, and other factors that govern how transactions are carried out.

👉 Hybrid Distributed Ledger System combines both Permissionless and Permissioned networks and offers a network that benefits from both of them. 

Hybrid DLTs are an excellent choice for businesses as they can decide on which aspects of the system they want to make public and which ones they want to keep private. 

Legal Frameworks

Monetary policy describes the ways in which the central banks change the money supply in order to accomplish economic objectives. In the U.S. this is done by the Federal Reserve.

Setting The Banking and Capital Markets Applicable Financial Rules

In Alignment with Constitutions, Statutes, Regulations, Court Decisions, and Treaties

Our Research Focus: Global Regulatory Policies and Reforms to Strengthen Oversight of the Lawful Divine Acquiescent Monetary System (DAMS).

Methodology: Based on the selected country experiences, a number of important lessons and Policy Options can be drawn that have implications for the stable and sound development of Global Islamic Financial System (GIFS).

An enabling regulatory and institutional framework and a level playing field for Conventional and Islamic Banks is critical for the sound and stable growth of the Islamic banking industry. The country experiences also underscore the importance of providing an enabling framework while letting market forces determine the size of the industry1.

The management of Financial and Monetary Systems is intimately connected to Global Risks - in the form of Potential Market Meltdowns, Spiraling Inflation, Pandemics, and Heightened Geopolitical Tensions. 

Sustainable Growth Strategy

Growth investing is an investment style and strategy that is focused on increasing an investor's capital. Growth investors typically invest in growth stocks—that is, young or small companies whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market.

Growth investing is highly attractive to many investors because buying stock in emerging companies can provide impressive returns (as long as the companies are successful). However, such companies are untried, and thus often pose a fairly high risk.

Growth investing may be contrasted with value investing. Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.

Questions about Musharaka

Source: Institute of Islamic Banking and Insurance 

Q – Will it be lawful for a company lo enter into a musharakah for a business enterprise with an interest-based bank when there is an understanding that business will be conducted in a manner that conforms to the principles of the Shariah?

H.A London, U.K

A – There is no legal impediment into entering into a musharakah with an interest-based bank for the purpose of conducting lawful business. The evidence for the legitimacy of this opinion is that the Prophet of Allah himself, upon him peace be peace, is known lo have done business with the Jews, and they dealt with interest. Except that the Prophets dealings with them were confined only lo lawful transactions in which interest was not involved. After him, his Companions did the same.

Q – When a bank agrees to enter into a musharakah with one of its clients for the purchase and sale of goods, will it be necessary for the bank to deposit a cash amount as its share of the capital investment at the time the contract is signed? Or will it be lawful for it to deposit the capital as the need arises?

S.U Bahrain

A – When the agreement is made between the bank and its client to enter into a musharakah for the purchase and sale of goods, and the amount of capital to be invested (by both parties) is determined, this will be the same as a mutual promise to enter into a partnership. A partnership, however, will not be legal until both parties have actually paid their shares of the capital. Thereafter, all accounting for profits and losses will be based on the percentage of the amounts actually invested by each of the partners.

Q – Will it be lawful for the bank to present letters of surety in return for its receiving a percentage of profits? The letter of surety will be issued for the musharakah accounts, and may be considered a part of the bank’s share in the capital investments. Will all of this be lawful?

S.J Turkey

A – The bank may not lawfully present letters of surety and then consider its doing so a part of its share of the capital investment in a musharakah. This is because surety indicates a readiness to lend, and a loan may not be used for the capital invested in a musharakah because a loan is a debt. So a readiness to lend is even less acceptable. Moreover, if an exporter seeks a letter of surety for a share of profits from a musharakah, he will be taking a fee for the surety. Whereas the Jurists have said, and this has become a legal principle, that it is not lawful to take a fee for a letter of surety. Therefore, it will not be lawful to consider a letter of surety an instrument of the banks financing a musharakah.

Q – Is it possible to Securitise a Musharakah Transaction?

J.O Saudi Arabia

A – Musharakah is a mode of financing which can be securitized easily, especially, in the case of big projects where huge amounts are required which a limited number of people cannot afford to subscribe. Every subscriber can be given a Musharakah certificate which represents his proportionate ownership in the assets of the Musharakah, and after the project is started by acquiring substantial non-liquid assets, these musharakah certificates can be treated as negotiable instruments and can be bought and sold in the secondary market.

However, trading in these certificates is not allowed when all the assets of the musharakah are still in liquid form (i.e. in the shape of cash or receivables or advances due from others). It must be noted that subscribing to a musharakah is different from advancing a loan. A bond issued to evidence a loan has nothing to do with the actual business undertaken with the borrowed money. 

The bond stands for a loan repayable to the holder in any case, and mostly with interest. The musharakah certificate, on the contrary, represents the direct pro rata ownership of the holder in the assets of the project. If all the assets of the joint project are in liquid form, the certificate will represent a certain proportion of money owned by the project.

IMF - WBG Key Questions 

👉Investment Risk: The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Lower volatility may result in a lower return relative to the reference index

👉Counterparty Risk: The possibility that the counterparty to a transaction may be unwilling or unable to meet its obligations

👉Derivatives Risk: Derivatives can behave unexpectedly. The pricing and volatility of many derivatives may diverge from strictly reflecting the pricing or volatility of their underlying reference(s), instrument or asset.

👉Exchange Rate Risk: Changes in currency exchange rates could reduce or increase investment gains or investment losses, in some cases significantly.

👉Index Tracking Risk: To the extent that the Fund seeks to replicate index performance by holding individual securities, there is no guarantee that its composition or performance will exactly match that of the target index at any given time (“tracking error”).

👉Investment Leverage Risk: Investment Leverage occurs when the economic exposure is greater than the amount invested, such as when derivatives are used. A Fund that employs leverage may experience greater gains and/or losses due to the amplification effect from a movement in the price of the reference source.

👉Liquidity Risk: Liquidity Risk is the risk that a Fund may encounter difficulties meeting its obligations in respect of financial liabilities that are settled by delivering cash or other financial assets, thereby compromising existing or remaining investors.

👉Operational Risk: Operational risks may subject the Fund to errors affecting transactions, valuation, accounting, and financial reporting, among other things

👉Shariah Investment Restrictions (in USA) may result in the funds performing less well than funds with similar objectives which are not subject to these restrictions.

Past performance does not predict future returns. 

👉The fund is denominated in USD. Returns may vary with fluctuations in the exchange rate, globally.

Cautionary Note: Further information on the potential risks can be found in the Key Investor Information Document (KIID) and/ or the Prospectus or Offering Memorandum.  (IMF-WBG)

Citation - Reference Sources

Major USA Regulator Agencies: