5 financial changes for the future - what should we be looking out for?
The United Kingdom is going through a turbulent financial and economic situation. Coming out of the pandemic, navigating the financial landscape and the economy has resulted in the highest inflation we have seen in decades, alongside stagnant wages and rises in energy bills.
The cost of everything is increasing and it is ordinary people who are struggling. From the National Health Service, to the private sector, and across every community we are all feeling the pinch.
Whilst we expect the government to ensure there is sufficient funding and investment in communities, families, and industries, what is clear is that we all need to be taking steps to minimise the risk of financial losses.
Whilst the government seems more focused on climate action, decarbonisation, and reducing emissions than effective financial planning, as individuals we need to take responsibility for our own actions.
Now is the time for us to be examining out own finances and expenditure.
As we move forward into 2024 and beyond there are some key steps you can take to make sure you are in the best financial position you can be.
Get Informed
Before we move on to the steps we can take to improve our finances, we need to consider our own financial literacy.
As individuals and communities we need to prioritise learning about and understanding finance. Prepare for the future by taking the time to learn about the key principles around money and money management. Learn how interest works, and why it is deemed to be haram in Islam.
As consumers, we need to scrutinise and assess our impact on our finances and understand how we spend and save.
The more information you have the better. The worst thing you can do is bury your head in the sand.
Start by getting details of all your bank accounts, savings, direct debits and debts. Understand your incomings and outgoings and make sure you are living within your means.
One of the key principles of Islam is to live within your means. This encourages people to be mindful of how they consume and spend, and to avoid extravagance.
There are also stringent obligations to ensure that you stay away from riba (interest) and haram spending. You cannot do this properly unless you understand your finances fully.
Knowing your finances means you can avoid haram practices. Also, in order to plan effectively for the future you need to understand how your money is saved, whether it accrues interest, and how much you can save each month.
There is ample information and advice on this website to guide you along the way. In addition, technology is so advanced that these days we can check all our accounts and finances using our mobile phones. As a result, you can keep a close eye on your finances.
Focus On Sustainable And Responsible Consumption And Investing
Focusing on sustainable and responsible consumption is key for everyone, but especially Muslims who want to live in a Sharia compliant way. Islam encourages ethical and socially responsible behaviour in every area of life.
We are required to make a commitment to being sustainable and responsible. Over-consumption goes against Islamic finance principles.
Some of the best ways of achieving a more halal and sustainable level of consumption include:
- The concept of amanah
- Islam considers money and wealth to be an amanah from Allah. What this means is that Muslims act as stewards of the wealth and will be held accountable for how they use and spend it. Sharia rules guide us to use the wealth in morally and ethically sound ways, and Islamic finance provides us with the structure in which to do this. The construction of Islamic finance principles helps us to make sure we operate within Islamic principles when it comes to our finances. In personal terms, it means that we should be more considered and careful with our finances, avoiding excessive spending, and always taking care to mind our money.
- Avoiding waste
- Any kind of waste should be avoided, and this includes wasteful purchases and spending. Responsible consumption aligns with the principle of stewardship. Keep an analysis of what you spend on and how you spend and you will be able to identify and report on poor spending and then eliminate it.
- Avoiding haram but invest wisely
- As Islam prohibits actions that cause harm to others, we need to be mindful of any spending that is deemed to be haram. This includes investing in industries that are haram such as gambling, alcohol and porn industries. Instead, we should look at halal investment options and services.
- There is a huge social impact to investing in haram industries. Be mindful of where your sums are stored and being invested. The corporate world may be focused on profits, but there are socially responsible and Sharia compliant industries you can invest in. There is also increased regulation and protective policy of most investment options across the United Kingdom which means you can be assured that your money will be safe.
Think Long Term
As mentioned above, try and think long-term. When it comes to your finances, whilst it may seem like you are living from one pay day to the next, there are some small steps you can take to plan for the future. As the old saying goes - fail to prepare, prepare to fail.Planning ahead can relieve the pressure you face tomorrow. The market is fluctuating and temperamental now but it will not always be like this.
Planning ahead builds financial stability and means you can cope with emergencies when they arise. Think of the scenario of when you are much older and unable to work as hard.
Living from one pay day to the next can result in more and more people turning to debt and credit to cover their everyday expenses. Long-term financial planning helps break the cycle of debt. The UK has an ageing population, so it is even more important that we plan ahead and make the right financial decision for our future.
Here are some steps you can take to effectively plan ahead:
- Set some financial goals: these do not have to be complicated or difficult. Instead, they should be realistic. For example, one goal could be to start saving for a home.
- Create a budget: once you have a goal, go through all your financial data including incomings and outgoings. Try and track your spending to see where you can cut back and what you can do cheaper. This will help you identify any spare funds for saving. Even £5 a month will help.
- Have an emergency fund: to stop yourself from falling into debt, try your very best to have an emergency fund.
- Save and invest regularly: consistent investing, even with the tiniest amounts, can accumulate over time. When dealing with the increasing cost of living, we need to have some money set aside for emergencies.
- Ditch the debt: overspending is one of the fastest ways to end up in debt. If you are in debt there is help and support out there, so reach out and see if you can reduce your debt and lower your spending.
For Muslims, financial literacy means they can plan and prepare responsibly. It also means they can account for their zakat payments which are obligatory.
Embrace Islamic Finance Principles
Muslims are obliged to follow the Sharia rules relating to finance. For Muslims, true success comes with pleasing Allah.
Embracing Islamic finance principles is extremely important for those wanting to be compliant with Islamic rules relating to financial dealings, but also for those wanting to live and manage their money responsibly.
Islamic finance prohibits any form of interest - that includes payment of interest or receipt of it. The whole idea behind avoiding interest is that this creates a fairer society and does not burden one group more than others. Interest is seen as being rooted in unethical and irresponsible economics.
Islamic finance is based on social justice and fairness. Islam places great emphasis on ethical behaviour, through choice. This means there is an obligation on Muslims to treat all their social and economic dealings with care.
Another key concept from Islamic finance is the idea of profit and loss sharing. Sharia rules encourage profit and loss sharing arrangements. This is to ensure that both parties are treated fairly.
For Muslims looking to save costs and stay away from debt, focusing on Islamic finance rules means they can operate Islamically but also in a way that maximises their money and makes it go further.
Establish Zakat And Sadaqa
Establishing zakat and sadaqa are critically important in Islam. Zakat is an obligation upon all Muslims, whilst sadaqa is voluntary but hugely encouraged.
In order to pay your zakat you need to understand your finances fully. Calculating and paying zakat on an annual basis is essential for Muslims.
Working out your zakat requires an important wealth assessment and analysis calculation. What it means is that through the whole year you are more conscious of your spending and you are making plans for the payment of zakat.
Zakat encourages people to be aware of their financial assets and situation. This prevents the problem of not knowing how much zakat you need to pay.
Understanding the importance of zakat and sadaqa actually encourages savings throughout the year. It also helps people to budget and plan accordingly. Also, by paying zakat people are able to understand the importance of distinguishing between needs and wants in their own lives.
Sadaqa, whilst voluntary, generates a feeling of generosity, compassion and empathy. By willingly sharing our wealth with others it means we are attuned to the needs of others and can budget accordingly.
Stay Away From Debt And Interest
Now is the time to really understand and analyse your spending habits. Make more informed choices about where to spend and save your money. This encourages a more balanced and moderate lifestyle.
Managing your debt is always a good risk management strategy. If you have a credit card then try and stop using it and clear any debt you owe. Credit card debt carries high interest rates and is deemed haram.
Staying away from debt is one of the best financial decisions you can make for yourself. Debt can lead to financial strain, and negatively impacted credit scores. It also means you have overall less disposable income from jobs, and this limits you being able to set goals, save and invest for the future. This will give you greater peace of mind when preparing for the future.
Qardus Ltd do not provide financial or investment advice. It is recommended that you seek your own independent advice from a qualified professional.
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Written by Ruby Hinchliffe on 5th August 2020
The UK is now home to a growing 27 Islamic fintechs, ahead of Malaysia, Indonesia and the United Arab Emirates (UAE).As of July 2020, IFN FinTech – a global network representing fintech’s Islamic segment – says it’s recorded 142 Islamic fintechs around the world.
Malaysia has 19 fintech start-ups, followed by the UAE with 15, Indonesia with 13, and Saudi Arabia and the US with nine.
The UK's Islamic fintech scene
The UK’s fintech start-up scene has seen some significant traction from Islamic-friendly – as well as focused – firms.My Ahmed, a sharia-compliant e-money platform, was accepted onto the Financial Conduct Authority’s (FCA) regulatory sandbox in July.
In the same month, Islamic peer-to-peer (P2P) lending platform Qardus launched its services in the UK. So did sharia-complaint gold trading platform Minted, which plans to launch a digital bank in 2021. As did Kestrl, a sharia-compliant ethical banking alternative.
Since January, Islamic banking app Niyah and sharia-complaint digital bank Rizq have also launched in the UK.
Capital at Risk. Returns are not guaranteed
August 5 2020, read the full article at Fintech Futures: https://www.fintechfutures.com/2020/08/uk-leads-the-way-in-islamic-fintech-ahead-of-malaysia-and-uae...
Starting a new business requires an investment of time, energy, commitment, and money. For any small business or startup company, the financial investment is what converts the original concept and elevates into a running business. However, securing the required finance to get your startup off the ground can be difficult, especially when the venture capital market is unpredictable or saturated. Funding is central to ensuring that the business can begin its operations, and it has the cash flow to pay for wages, suppliers, and equipment.
Money can often be one of the main limiting factors that prevent businesses from getting off the ground or launching properly. Many business beginners will not have access to the financial sums needed to build and expand their business. An injection of cash into the business means that it can start earning more quickly, and any profits can be reinvested into the business, thereby facilitating growth and profits.
Startup Businesses
Startup businesses can face many challenges when launching. Money can often be a barrier for new startups that can become overwhelmed with the costs of starting a business from scratch. Businesses that are new also find it difficult to attract investors or equity investments from private investors as they have no track record showing their performance levels.
New startups and small businesses may also find it difficult to raise funds via loans in the traditional financing route. Banks want to have a lot of information to support any application for funding, and many of them are more risk averse when it comes to small businesses and startups. This means that unless these businesses have personal savings to use, they can find it difficult to launch their business.
Sources Of Business Funding
Whilst there are some different options out there for those looking for startup funding, it is important to note that funding is dependent on many different factors. These can include the following:
- The strength of your idea
- The level of market research you have undertaken
- Leadership and their business ethos
- Early traction and users of your business
- Good advisors
Once you have a unique idea with a clear target market, and have considered all the points above and worked to strengthen them, you should be in a position to look for funding sources. Government statistics show that UK startups raised almost £2 billion of funding in 2021.Some common sources of business investment include the following:
- Banks
- Government lending schemes
- Grants
- Equity finance
- Angel investors
- Venture capitalists
- Business Partners
- Friends and family
- Savings
Let's have a look at the above in a little more detail.
BANKS
Commercial lenders have always been one of the more traditional routes to securing funding for businesses. Bank loans are an effective way of securing money and come with repayment terms you are familiar with. However, banks will always require some form of security and this can be prohibitive for new startups and smaller businesses who lack the security banks might require.
Securing financing through banks is far easier for established businesses than it is for new and startup companies, especially in unpredictable economic markets such as the one we have seen since the Covid-19 pandemic. This is one of the main reasons startups tend to look at alternative funding sources for their ideas.
GOVERNMENT LENDING SCHEMES
Government lending schemes are usually run in collaboration with banks and commercial lenders. You can find schemes that offer a percentage of the funding with the banks meeting the remaining funding required. Government lending schemes are a great source of funding as the terms are often far less stringent than those normally associated with commercial banks. The loan amounts for government schemes can vary depending on the type of business so always make sure you read the information carefully before you make an application.
GRANTS
Grants from the United Kingdom government tend not to be repayable but you should always check to see what the terms and conditions state. Grants are a great source of funding for small businesses as they can provide an essential cash injection. However, remember that grants usually require a detailed application that needs supporting information, and you need to be able to provide the information as quickly as accurately as you can. Grants are competitive and fiercely fought over so always make sure your application is the best it can be. You should also check to make sure that the grant does not require you to hand over any shares in your businesses, and what the time frame for using the money is.
EQUITY FINANCE
Equity financing refers to an arrangement whereby an investor invests in your business and in return they are given equity/ shares in the business. If the business makes profits, then these profits are shared in accordance with the equity arrangements, and if the business fails then there is no return of the funds to the shareholders who invested. It sounds simple, and in practice it is a simple give and take relationship. However, it can be difficult to find the right equity investor for your business.
ANGEL INVESTORS
Angel Investors are usually wealthy investors who have the funds to provide to small or startup businesses in return for business equity, or shares. Angel investors tend to use their own net worth in order to fund projects in a private equity type arrangement. Angel investors tend to invest their finances in smaller or startup businesses for minority stakes, rather than investing in large businesses where their financial impact is lessened. They also typically invest their experience and knowledge in the business to enhance its success and are usually involved in multiple ventures at the same time.
VENTURE CAPITALISTS Venture capitalists tend to favour larger businesses with high growth predictions. In return for their investment, they receive an equity stake. Unlike angel investors, venture capitalists do not use their own personal funds, but instead they use an investment fund to finance projects and businesses. Venture capitalists focus their investment within industries such as technology, life sciences, and digital media.
BUSINESS PARTNERS
Having a business partner is a smart idea for any new startup. Not only does it mean that you have a partner to share ideas and concepts with. It also means that you have support when it comes to financing, operating and managing the business. Many business partners have a finance background and provide analysis and support to the business, becoming a trusted advisor. For a successful business partnership, you need to have a mutual vision for the business, commonality, and compatibility.
FRIENDS AND FAMILY
Although this may seem like an easy and obvious funding option, using friends and family as a source of investment can be problematic. Unlike borrowing from a bank, taking money from friends and family does come with a lot of additional stress and pressure. However, if you do have friends and family that believe in your business vision and want to invest this can be a good source of raising money quickly. Of course, with new ways of network funding such as crowdfunding and patreon, there are different ways of using your own networks to secure funds.
SAVINGS
Many new entrepreneurs struggle to secure funding and dip into their own savings. This can be risky as there is no guarantee that your business will succeed and you will recover your savings. Using savings might be one of the easiest ways to finance your business, however you may not have all the funding you actually need. Also, the UK business industry is heavily regulated so it is not simply a case of putting your savings in and being able to take them out when you want. Business laws, regulations and guidelines dictate how business finance operates so make sure you have this knowledge before investing your own savings.
What To Do Before Seeking Funding
These are the steps you need to take before you seek our funding options and sources:
- Business plan - make sure your business plan is robust and refined. It should include a summary, a pitch, forecasts, income and expenditure predictions, business process, scalability, market research and strategic management strategies, and projections.
- Accountant - it is essential that you have a good accountant on board so that your financial planning and business service economics planning is robust and considered. A good accountant will help you throughout your business's growth and can provide you with important information about the valuation of your business, taxes, and financial obligations.
- Credit scores - check your scores and improve them if you need to. In fact you should get all your personal finances in order.
- Consider the range of financing options available to you and narrow down the ones that apply to your business.
- Perfect pitching - prepare your pitch and practice it. Remember, if you don't know your business inside out then it is likely that any potential investor could lose interest. Your pitch does not have to focus on sales or products, but it must be convincing and provide real time information.
- Create a website and start networking and sharing your ideas on various platforms, sharing and gathering data, and building momentum for your idea. Your first customers will probably come from word of mouth or networking so get to work as soon as you can.
As more and more people attempt to get their foot onto the property ladder, this article will examine in detail the alternatives to conventional mortgages. In recent years there has been significant growth in alternatives to traditional mortgages, and what this means in principle is more choice for those looking to purchase assets or property in a Sharia compliant way.
There are many different reasons why people look for alternatives to mortgages:
- Flexibility: people want more flexibility when it comes to financing property or asset purchases.
- Accessibility: for some investors, alternatives to interest-based mortgage products are problematic as they contravene Islamic finance rules and ethical investment principles.
- Cost: alternative mortgage products can be cheaper overall than the standard mortgage products available in the UK, especially for those with poor credit scores.
- Less risky: there is sometimes less risk associated with alternative mortgages.
ALTERNATIVE MORTGAGES - WHY?
A conventional mortgage arrangement exists as a loan between a lender (bank) and an individual or company. The lender lends you the money to buy the property and in return, the borrower repays the money they have borrowed plus interest.
The mortgage loan itself is secured against the property and against the value of the property.
For many potential homeowners, a conventional mortgage is not a viable option, especially those looking for Islamic finance or ethical mortgages.
One of the main reasons traditional mortgages are shunned is that they are interest-centred and therefore not Sharia compliant. This has led to Muslims and ethical investors looking for alternative financial products to source funding when buying a property.
Interest is strictly prohibited under Islamic finance rules, so Muslims have had to look outside the traditional mortgage market in order to secure funding for their real estate and asset purchases.
However, it is not only Muslims who are looking at the market for alternatives to traditional mortgage products and services. As the ethical finance market continues to grow, many ethical investors and purchasers are also looking to secure funding that comes without hefty interest payments and charges.
Islamic banks and products under the Islamic finance banner are often considered to be a safer option than the finance options available on the mainstream finance market. The reason for this is that they are seen as less risky and less speculative.
Let's have a look at the alternatives out there and whether or not they are deemed to be halal or haram under Sharia rules.
Buy To Let Loans
Buy-to-let mortgage loans are designed for those people or businesses who want to purchase real estate properties with the purpose of renting the property out. Once the property is let, the homeowner then generates revenue through the rent payments they receive from the tenant.
Normally, these types of mortgages are based on higher interest rates than conventional mortgages and for this reason alone they are not Sharia compliant and are deemed to be haram.
There are some Islamic banks within the UK that offer a buy-to-let mortgage product, and if you want to review what is on offer you need to make sure that the product is 100% Sharia compliant.
Certainly, conventional buy-to-let mortgages that include interest in the repayment structure are not permissible for Muslims.
Home Purchase Plans
Home purchase plans are structured to avoid the charging and paying of interest. Normally a home purchase plan will involve the bank and the homeowner taking part in a shared investment strategy.
The bank, or financial institution, will purchase the property outright on behalf of the homeowner. The bank and the homeowner will agree the payments that the homeowner will make to the bank in lieu of repayment.
The homeowner will then make the repayments to the bank until they have paid off the pre-agreed price of the property. Once all the payments have been made the homeowner will own the property outright.
Home purchase plans give customers the opportunity to get on the property ladder in a halal and Sharia compliant way.
This type of co-ownership arrangement means the bank and the borrower share the risk and no interest is payable.
Shared Ownership Schemes
A shared ownership mortgage enables the purchaser to buy a share of the property. The purchaser then pays rent on the remaining share which is often owned by a non-profit organisation such as a registered social housing provider.
Shared ownership schemes were developed to enable people to get on the property ladder in an affordable way.
When structured correctly, shared ownership mortgages can be halal. If the share (of ownership) being purchased is clearly defined, and the rent on the remaining share is based on payments which are fair then this could be considered a halal alternative to an interest-based mortgage.
Make sure that the rental payments do not attract any interest, and that the terms and conditions of the ownership scheme are clear and concise. In the United Kingdom, shared ownership schemes are regulated and can often be an effective way to get on the property ladder.
If you are interested in a shared ownership scheme, look to see if they are being offered in your local area, and then look to see if any Islamic banks are offering shared ownership services.
Guarantor Mortgages
Guarantor mortgages are for those people who are unable to purchase a property, or secure funding to make the purchase, on their own.
A guarantor is involved who guarantees that they will repay the mortgage loan amount if the borrower does not make the payments.
Usually, the guarantor is a family member or close friend.
Whilst Islamic finance does permit the concept of a guarantor, in order for the service to be halal it needs to follow Sharia rules relating to such transactions. For example, a guarantor can be involved in a joint purchase transaction. In this type of financial transaction, the guarantor owns a share of the property and the risks are shared.
This is a musharakah arrangement - that is a profit-sharing arrangement or partnership.
If the guarantor mortgage is simply one where the guarantor guarantees the loan repayments with zero ownership rights then this is not permissible under Sharia rules.
Crowdfunding
Crowdfunding is a relatively new alternative to conventional mortgages. In its very basic form, crowdfunding operates by way of a collection of funds from a crowd of people (investors).
Whilst historically, investment markets have tended to be reliant on interest. However, Islamic crowdfunding is an activity that is deemed to be halal. Funds collected from a community have never been prohibited. In fact, crowdfunding in its very essence can have a positive social impact and this is a key principle of Islamic finance - social responsibility and ethical finance.
Anyone considering crowdfunding should ensure that the crowdfunding arrangement is set up to be fully Sharia compliant.
Self-Build Mortgages
Self-build mortgages are for those people who want to build their own homes. What this means in principle is that the loan is released to the borrower in stages that coincide with the stages of the build taking place. The final loan amount if based on the value of the property once it has been fully completed.
This type of alternative to the conventional mortgage is not halal as it still incurs the same type of interest payment as a standard up-front mortgage does.
Conclusions
Muslims have been wanting Sharia compliant alternatives to standard mortgages for many years. To address this, banks in England and other western economies have developed Sharia compliant alternatives that enable Muslim and ethical investors to buy a house or a business property/asset.
Halal alternatives to interest-based mortgages have several unique features. They are less risky, less speculative, and more socially responsible.
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