An Introduction To Murabaha
WHAT IS MURABAHA?Murabaha is an important concept of Islamic finance. Technically, murabaha refers to a contract of sale within which the seller declares the cost and any profit generated. This type of financing arrangement is also known as a costs-plus financing arrangement. This means that the murabaha contract is a contract for the sale of goods at cost price plus an uplift for any agreed profit.
The murabaha contract is essentially a contract whereby the Islamic bank is asked by a customer to make a purchase from a third-party supplier or seller and resell it to the customer.
Payment for the item can be done immediately or on a deferred basis.
Murabaha And Business Transactions
For many small businesses, murabaha financing arrangements have become an essential way to raise funds in a way that is compliant with Sharia rules.
As a form of financing, murabaha is used in many different types of transactions. These can include the purchase of goods for households, real estate, and business equipment.
What murabaha contracts facilitate is a structure whereby an interest free form of financing is available for those who need it.
Murabaha contracts also enable individuals and businesses to have help with making purchases from specialist markets they may not be familiar with.
For small to medium businesses, murabaha financing arrangements mean that capital assets can be bought without the business needing to take out loans to make the relevant purchases.
Murabaha As An Alternative Funding Option
Murabaha contracts have become increasingly popular in the United Kingdom in recent decades, as these types of contracts have become a viable Sharia compliant alternative means of finance.
In the current unpredictable economic market, murabaha arrangements are less risky and more ethical. Customers do not have to worry about fluctuating interest rates.
This form of financing arrangement and funding option is asset-backed and this makes it less tumultuous and risky for people and SME enterprises.
Murabaha Financing
Murabaha is a legal mode of financing structure that many Muslims are keen to use as it offers interest free financing. Many Islamic banks globally offer murabaha contracts to their clients and customers.
Murabaha contracts are used to purchase all manner of goods including raw materials, equipment, machinery, real estate, and exported goods.
This form of Islamic finance is an alternative to the debt based finance systems that have become synonymous in many economies throughout the world.
Murabaha And Sharia Rules
In order to comply with Sharia rules, murabaha contracts must:
- the product or subject of the murabaha must be owned by the bank or financial institution when the financial transaction takes place.
- the asset or goods must be of value (classified as property by Islamic finance rules).
- the goods cannot be commodities that are forbidden
- debt cannot be sold via murabaha contracts.
- there must be no interest payment at all, instead a set fee should be agreed.
- there is a requirement that the entire murabaha transaction should complete in two contract stages - the first being when the customer requests the murabaha transaction and promises to buy it from the bank. The second stage is when the bank purchases the commodity and the customer buys it back on agreed repayment terms.
- both contracts should be valid and enforceable.
- As with any Sharia based contract, the terms and conditions should be clear, concise and unambiguous especially when it comes to the terms relating to money and payments.
- the bank assumes the risk when they buy the goods requested
- the purchaser has the right to return the asset if there are any defects.
The two distinct contract stages (ie two definite and distinct sales) circumvent the Sharia prohibition on charging interest.
Murabaha Contracts - The Stages
There are 3 main stages of a murabaha contract:
- Promise: this stage requires the parties to the contract to negotiate the terms and carry out any due diligence or credit checks that they need to. At this contract stage, the customer will promise the bank that they will purchase the goods the bank will acquire on their behalf.
- Acquisition and Possession: at this stage of the transaction, the bank acquires the goods and keeps possession and takes on the risk of ownership.
- The final stage is when the customer purchases the goods from the bank.
ARE MURABAHA CONTRACTS LOANS?The answer to this question is that murabaha contracts (as long as they are compliant with Islamic finance and Sharia rules) are not loans. There is no interest element at all, instead there is a mark-up based on profit, and this mark-up is agreed upon by the parties.
These types of contracts are contracts for the sale of commodities.
Instead of any form of loan agreement or loan repayment, murabaha contracts are based on the existence of two purchase contracts or agreements. The first agreement is the one where the bank purchases the asset, and the second relates to the purchaser buying the asset from the bank.
The risk of the ownership rests with the bank when they purchase the item. Murabaha contracts are not interest based. Instead, the parties negotiate the terms and the profit margin which should be based on the cost of the original purchase and a profit margin.
Murabaha contracts are increasing in popularity as they are a viable alternative to traditional contracts which are not compliant with Sharia rules. What this means for individuals and businesses is that they are able to finance their endeavours within the framework of Islamic finance.
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Introduction
Zakat is the third pillar in Islam and plays a significant role in the way Muslims live and conduct their financial affairs. The recipients of zakat are a very specific group of people as outlined in the Quran, and there is a specific calculation involved.
Our online zakat calculator assists with calculating the amount of zakat that is owing.
Understanding Zakat And Its Obligations
WHAT IS ZAKAT?
The word zakat means growth and purification in Arabic and refers to the mandatory obligation to give a portion of wealth accrued to charity. Zakat is a fundamental obligation for all Muslims who meet the criteria, and its purpose is to purify wealth and create economic equality and enhance social welfare.
According to Islamic teachings, zakat is a fundamental act of worship. The Quran (2:110) states: 'Establish prayer and give zakat'
WHO NEEDS TO PAY ZAKAT?
Muslims who are required to pay zakat must first understand if they have accrued the minimum amount of wealth required before they become eligible to pay zakat. This is known as nisab and this is worked out based on the equivalent of 85 grams of gold or 595 grams of silver.
Those eligible to pay zakat include the following:
- Adults who have reached puberty and have wealth over the nisab threshold.
- Adults who have full mental capacity.
WHAT ASSETS COUNT TOWARDS ZAKAT?
Zakat is payable on different types of wealth:
- cash
- silver
- gold
- business assets
- investment income
- agricultural produce.
When And How Much Zakat To Pay
Zakat is due on wealth that you have been in possession of for one lunar year. It's also important to note that you can deduct immediate debts from zakatable wealth (see below).
You can pay zakat at any time of the year through instalments or in one lump sum.
Calculating Zakat Step-By-Step Using A Zakat Calculator
Muslims are expected to pay 2.5% of their zakatable wealth every year. Follow these steps to work out how much zakat you need to pay:
- Determine your zakatable wealth total by adding up your assets and deducting immediate debts.
- Ensure that you meet/exceed the nisab threshold
- Apply the 2.5% rule
- Use the online zakat calculator to work out what you need to pay
Always visit a reliable zakat calculator website.
Deductions And Liabilities
There are certain debts and liabilities that be deducted when making your zakat calculation.
The following deductions are allowed:
- short term debts such as credit card balances and small loans that become due in the zakat year.
- for long term debts such as mortgages you can only deduct the payment owing in that zakat year.
- living expenses including bills, rent, good costs, transport.
- unpaid wages to employees.
- business liabilities for the zakat year.
Please note that future debts and expenses are not deductible.
Zakat Payment And Its Impact
Zakat is more than a financial payment, it goes beyond wealth distribution into the realms of spiritual growth, economic justice and fulfilling an important religious obligation.
Paying zakat on time fulfils an essential Islamic obligation and strengthens the relationship with Allah.
Timely payment of zakat leads to increase in blessings and purification of our wealth.
How To Pay Your Zakat
Zakat can be paid in different ways. You can pay zakat direct to individuals who are eligible to receive zakat. Zakat can also be paid to charities and global zakat funds.
Many Muslims choose to pay zakat online by utilising online zakat calculators.
Receiving Zakat
There are eight groups of people to whom zakat can be given:
The needy (this includes people whose earnings fail to cover basic needs such as food, home, water, clothing)
Those in poverty (who have little to no personal belongings and no means of earning a living)
Those employed to administer zakat monies
The wayfarer
People whose hearts have been reconciled to the faith In the cause of Allah (SWT)
People in debt
People in bondage
Recipients of zakat should not be members of your immediate family such as your spouse, parents or children. Other non-immediate relatives can be recipients of your zakat payments.
Many people give to charity throughout the year, for any donation to qualify as fulfilment of the zakat obligation, then there must be an intention to give the money as zakat.
Common Questions And Expert Advice
WHAT IS NISAB?
Nisab is the minimum amount of wealth you need to have before you become eligible to pay zakat. Typically nisab is the equivalent of 595 grams of solver or 85 grams of gold.
DO I PAY ZAKAT ON MY HOME?
Zakat is not payable on your primary home. If you have rental properties then zakat is payable on the income generated.
CAN I GIVE ZAKAT TO MY FAMILY?
You cannot give zakat to immediate family, ie those already dependant on you such as your partner and children. You can pay zakat to extended family members if they are eligible.
ARE ONLINE ZAKAT CALCULATORS ACCURATE?
Yes, as long as you insert the correct information based on your personal circumstances then zakat calculators are an excellent way to calculate your zakat.
IS ZAKAT PAYABLE ON MY RETIREMENT SAVINGS?
If you have full access to these savings and you meet the nisab threshold then zakat is payable.
WHAT IF I FORGET TO PAY ZAKAT?
Use an online zakat calculator to calculate what you owe and pay your zakat as soon as you can.
IS ZAKAT PAYABLE ON STOCKS AND SHARES?
Yes, if the value exceeds the nisab threshold then zakat is payable.
SHOULD NISAB BE CALCULATED ON GOLD OR SILVER VALUES?
In the United Kingdom you can use either the gold or silver value. Many scholars believe that using the value of silver is preferable as it means the amount of zakat increases. If you have assets that mainly consist of gold then it is sensible to use the gold nisab.
WHAT IS THE ZAKAT YEAR?
The zakat year begins on the date on which you first possessed the wealth that took you over the nisab threshold. This will be the start of your zakat year. The zakat payment will therefore become due when the year has elapsed.
HOW DOES ZAKAT APPLY TO YOUR INVESTMENTS ON THE WARDUS PLATFORM?
For all of you that pay zakat, it would be on the total outstanding amount payable to you from your investments via Qardus. The investment is based on a financing arrangement which involves the buying and selling of commodities, and therefore, we believe that these assets are zakatable in nature. Therefore, investors who pay zakat would use the capital plus the profit due to them to calculate the amount of Zakat payable.
Please note that Qardus does not provide tax or other financial advice and that if advice is needed, you should consult an appropriately qualified professional.
Conclusion
Calculating zakat accurately and paying it in a timely manner ensures that it reaches the most vulnerable in society. Paying zakat fulfils one of the core pillars of Islam.
Using an online zakat calculator not only ensures the payment you make is calculated accurately, it saves you time and helps you to make the sometimes complex set of calculations.
Zakat calculators also guide you to eligible recipients and make it easier for you to track your zakat payment history and accountability. The calculations eradicate errors and provide an audit trail. If you have any specific questions about your zakat payment, always remembers to consult with expert scholars.
Use the Qardus zakat calculator here.
Please note that the prices information and values mentioned above are for example purposes only. For an accurate figure of the zakat you are liable to pay then it is always best to use the zakat calculator, and also conduct your own research and obtain qualified advice where required.
Qardus do not offer financial or tax advice and if advice is needed, this should be sought from a qualified professional.
WHAT IS ISLAMIC FINANCE?
Islamic finance at its very core is a way of managing money and financial transactions in a way that is compliant with Islamic rules and guidance. There is a significant interplay of sustainability and ethics in Islamic finance.
One of the foundational principles of Islamic finance is that money itself does not have any value. Instead, money is a means through which we can exchange products and services.
Islamic finance rules state that you should not use money to make money. This is why one of the most important Islamic finance principles is the one which prohibits interest in any form.
Paying or receiving interest is not seen as a permissible or equitable way of managing finances in Islam. You cannot make money by charging interest, this is seen as unethical and exploitative but also non-sustainable in the long-term.
Another important element of Islamic finance is that our transactions should not cause any harm to other individuals or wider society.
The focus should be on economic activities that are grounded in tangible assets and services, and partnership arrangements where each party shares in the profits and losses.
Ethics And Islam
Islam provides ethical guidelines within which to operate. These guidelines are based on the teaching within the Quran and from the experiences of the Prophet Muhammad (PBUH).
Underlying Islamic finance is a foundation based on integrity and fairness. The underpinning of Islamic finance with ethical considerations can be seen as contradictory to conventional business models, but ethical finance is a fast-growing industry.
Investors, individuals, and businesses are more socially conscious and want to operate in a more sustainable way.
It seems that everyone wants a more inclusive financial system where there is a real interplay between ethics and finance. Having witnessed the financial collapse of 2008 and the current global pandemic, existing Western finance models have proved to be volatile, unstable, and temperamental.
Islamic finance offers a sustainable, unique and viable ethical alternative. Applying normative ethics to financial and economic transactions brings more equality and sustainability to the table. This is mainly because operating from an ethical perspective is about duties and responsibilities rather than consequences.
Considering the consequences and impact of financial decisions means negative impacts can be identified and eliminated early. This leads to a more robust, fair, and resilient financial system.
Islamic finance recognises that finance has a useful role to play in economics. It requires overarching ethical considerations to be in place to ensure that there is intrinsic value in financial dealings, and these are supported by ethical and moral conduct.
Islam places a great deal of emphasis on ethical conduct. This is because Sharia rules derived from Islamic teachings are based on an ethical framework.
Islam requires us to align our values with the teachings of Islam in all areas of our lives. What this means for parties involved in any kind of financial deal is that the transactions are just, fair and equitable.
Islam And Wealth Distribution
Another important thing to note is that Islamic finance places emphasis on the concept of wealth distribution and social justice.
Practices including the payment of zakat every year, and regular charitable donations in the form of sadaqa aim to distribute wealth fairly. Sharing wealth is a key component of Islam, whether this is through donations or promoting those economic activities, projects, and practices that contribute positively to society.
Justice and fairness are fundamental concepts in Islam.
What Does Islamic Finance Say About Sustainability
When it comes to Islamic finance and sustainability, there is a unique interplay. Islamic finance principles are derived from Sharia law which places great emphasis on ethics and being socially responsible.
This social responsibility covers everything from wealth generation, wealth distribution, climate change, business, capital receipts, financial services, education, personal and business objectives, and education.
Sustainability in Islam must be viewed through the lens of being Sharia compliant in all dealings throughout life.
Adopting sustainable practices means you are promoting fairness and equality in every aspect of your life.
It has long been known that Islamic finance helps to divert capital into those environmental and social projects that benefit society.
There is growing recognition and support for the moral concepts of Islam and their link to global sustainability and development goals as set out by the United Nations.
Sustainable Development Goals
In 2015, the UN established sustainable development goals with the aim of achieving them by 2030.
These goals have common ground with Islamic finance as they both aim to promote social, economic, and environmental sustainability. In fact, there are several aspects of Islam and Islamic finance that align perfectly with the objectives within the UN's sustainable development goals:
- Zero hunger:
- Alleviation of poverty:
- Improving health and wellbeing
- Education
- Clean and affordable energy
- Industry, innovation and infrastructure
- Gender equality
- Clean water and climate action
- Reducing inequality
- Partnership arrangements
Role Of Islamic Finance In Sustainable Development Goals
Islamic finance is already playing a large role in contributing to the achievement of the UN's sustainable development goals. The foundations of Islam already align with these goals seeking to empower vulnerable communities.
Islamic finance initiatives such as zakat and sadaqa focus on poverty alleviation and working towards zero hunger. Islam promotes good health and wellbeing which is another UN sustainable goal.
Whether it comes to climate action, peace and justice, responsible consumption and sustainable cities, Islam is already ahead of the game.
With its emphasis on sustainable and ethical principles, Islam has been focusing on these kinds of goals for over 1400 years.
WHAT ROLE DOES SUSTAINABILITY PLAY IN ISLAMIC FINANCE?
Sustainability is a key concept in Islam, it therefore follows through that Islamic finance will also include elements of sustainability.
The Islamic finance and industry is well placed to support sustainability and sustainable development goals, whether that is individually or via collaboration.
Islam promotes social inclusion and socially responsible finance decision making. In today's global market where there is a wage labour crisis and worries about economic growth, sustainable Islamic finance is becoming more and more popular.
Research indicates that Islamic finance is one of the most sustainable and leading finance and funding models. Not only does Islamic finance base itself on ethics, it works with human beings to problem solve societal issues.
In the United Kingdom, the Bank of England recognises the significance of Islamic finance and the diversity it offers. Islam encourages inclusion and places great value in equality.
What this means for those using Islamic finance is that greater opportunities are available, and many argue that finance models based on Sharia principles will create ethical and socially responsible foundations.
Sustainability And Ethical Investments
Sustainable Islamic ethical investments are those investments that align with socially responsible and sustainable goals.
This interplay of finance and sustainability leads to positive benefits on an environmental, social and governance practices. Let's have a look at some sustainable and ethical Islamic finance investments:
- Green sukuk: green sukuks are Islamic bonds that invest in environmentally friendly projects. These projects can relate to renewable energy initiatives, climate action and other green policies.
- Islamic microfinance: Islamic microfinance provides financial services to people who may find themselves excluded from mainstream funding options.
Community development initiatives: these initiatives finance projects in agriculture, address the vulnerability in communities, and alleviate poverty.
Leveraging Islamic Finance To Build Sustainability
It is clear that Islamic finance has the potential to play an even greater transformative role in sustainability.
What is needed is for all stakeholders from individuals, governments, countries, and organisations to work together to maximise the impact of Islamic finance.
Some strategies that could achieve the synergy between Islamic finance and sustainable development goals include:
- Partnering with sustainability initiatives
- green sukuks
- sustainable investment vehicles
- support for socially responsible enterprises
- Increase in Islamic microfinance services
- Innovative finance models
- Using zakat for sustainable development
- International collaboration
What Is The Recovery Loan Scheme
The Recovery Loan scheme was launched on the 6th April 2021 by the UK government as a successor to the government’s Interruptions Loan Scheme and bounce back grants from 2020. As with any loan scheme, this scheme requires the payment of interest. This, of course, is contrary to Islamic Sharia law principles that forbid the collection or payment of interest.
For many Muslim-owned and backed businesses, the question has arisen as to whether the Recovery Loan Scheme is Sharia-compliant. Before we address that, we need to look at the Recovery Loan Scheme and its key features.
The Recovery Loan Scheme provisions were put in place by the government to ensure that they were able to provide financial support to UK businesses. The government wanted to offer additional funding to businesses in the UK that needed the funding to survive the economic turmoil brought on by the pandemic.
The Recovery Loan Scheme’s main purpose is to facilitate recovery and growth post-pandemic. The payments from the Recovery Loan Scheme also aim to ensure that businesses survive during the transitional period back to regular business activities.
The scheme is open to any business that is:
- Trading in the UK
- Able to show it has been adversely affected by the pandemic
- Not involved in any insolvency proceedings
- A viable business if not for the pandemic
How The Recovery Loan Scheme Works
The Recovery Loan Scheme wants to facilitate a full return to business activities for those businesses that have been impacted by the pandemic. The successive lockdowns have affected many small and medium businesses that have been unable to earn an income from their trade.
The Scheme is targeted at businesses that are viable enough to afford debt finance. The British Business Bank administers the Scheme. The actual funding is made available via a range of accredited lenders.
As with any process that involves applying for a loan, businesses need to make a formal application via the lender of their choice.
The loan consists of standard commercial lending terms and this includes the payment of interest on the loan amount. The interest rate varies depending on the lender who provides the loan.
Features Of The Recovery Loan Scheme
An approved lender of the Scheme can provide various loan products including:
- Overdraft facilities
- Asset finance monies
- Term loans
- Interest and fees payments
Any business applying for a loan through the Scheme can borrow up to £10 million. There are also minimum facilities that start in the sum of £1,000.
Some other key features are:
- Guarantee: the government itself guarantees up to 80% of the loan to the lender, irrespective of the size of the loan. This guarantee is not provided to the business, but direct to the lender.
- Interest: any business that takes out a Recovery Scheme Loan will have to make interest and fees payments from the date the loan is drawn. Although interest rates are capped at 14.99%, lenders are encouraged to keep the rates low.
- Term: terms vary from 3 months to 6 years.
What Are The Sharia Rules Relating To Loans And Interest
Sharia law prohibits businesses from paying or receiving interest. Interest, known as riba in Sharia law, is forbidden as it is seen as a mechanism that promotes social injustice. One of the central concepts of Islamic Finance is that Muslims cannot benefit from lending money and paying interest on loans.Sharia law deems riba as an exchange with no equity. That means that it encourages an exchange that is considered to be unequal and unjust. Riba is considered to be an exploitative transaction.
Bottom Line
If we have a look at the Recovery Loan Scheme, it relies on interest payments as a key feature of the Scheme’s repayment terms. The interest element of the Scheme deems it to be non-compliant with Sharia law. In this case, the business will be repaying the full loan amount plus interest at a rate decided on by the lender.
The Scheme goes against the Sharia principle of ensuring investments and payments are socially responsible.
Sharia law clearly states that lending with the payment of interest favours lenders who make money at the expense of the borrower. Islam forbids the receipt of income from money alone, and this is precisely what interest payments are.
Islamic Finance is based on ethical economic principles. The Recovery Loan Scheme is therefore not Sharia-compliant as the interest payment element of the Scheme is contrary to Sharia principles.However, businesses that operate within Islamic Finance principles can still recover from the pandemic. Islamic Finance is focused on sustainable economics and there are products available within the Islamic Finance market that can assist businesses with economic recovery.
The Qardus Option For Business Funding
We provide finance to small and medium-sized enterprises with growth potential that the business owners want to unlock. The funding available is from £50k to £200k with terms of between 6 and 36 months.
Our funding process is rooted in Islamic community principles and is certified as Sharia-compliant. As a result, we don't charge interest and we don't work in business sectors considered damaging to society, such as alcohol, tobacco or gambling.
Because of our principles, our funding solution is an attractive option for Muslim business owners, but we also provide funding to business owners outside the Muslim community.
We offer fast, flexible and affordable business growth funding that's firmly grounded in ethical principles.
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