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Home arrow Business & Finance arrow The art of RF (riba-free) Islamic banking and finance

Municipal Bonds

In the United States and other nations with sophisticated capital markets, local governments in states, counties, and cities can issue bonds for the capitalization of municipal local authorities' needs such as the building of a certain number of schools in a city, county, or state; the building of an airport that will help enhance the local economy; and the building of a new sewage and water treatment system for a city. In America, these bonds are called municipal bonds. In order to encourage investors to buy these bonds, the U.S. federal government law has rendered the interest paid by these municipal bonds to bondholders exempt from federal and state taxes. That is why these bonds are called “double-tax-free bonds” meaning the interest paid is free from federal and state tax. Municipal bonds are usually floated in the market after their approval by a vote in a referendum by the people in the state or municipality involved. Capital investment comes from high-net-worth families, usually retired persons or families and entities that need to reduce their tax liabilities (i.e., reduce their income tax payments). Capital investment in municipal bonds can also come from mutual funds that are designed to invest in these municipal bonds (called municipal bonds' mutual funds) to help smaller investors invest in a diversified municipal bond portfolio to derive tax-free fixed income.

Municipal bonds can be structured as RF municipal bonds if the quarterly income generated is based on a market-based rental or lease rate of the facility financed by the bond proceeds and is conditional on the fact that these bond investments have been invested in specific assets and the investors have acquired a lien on these assets using the LARIBA RF finance model as described in this book. One of the pioneering RF municipal bonds was structured in Malaysia to build the Kuala Lumpur International Airport and some large highway projects.

 
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