An Introduction To Murabaha

As a business owner, you're always making plans for your future. You're planning ahead on a daily, weekly and monthly basis, looking ahead to anticipate challenges and opportunities. Whether your business is in its early days or it's become established in its market, you'll always be thinking about tomorrow and what comes after.

A vital part of that planning is around finance - how you're going to pay for the people, the stock and the infrastructure you need not just to keep going, but also to grow the business. You want to avoid running out of working capital - cash - because that's the lifeblood of commerce. It's cashflow that makes or breaks a business.

For many, finance planning isn't the most exciting part of running your own business. But it is perhaps the most important task, and certainly one of the most rewarding when you get it right. Investing time in finance planning can literally pay dividends in the form of better cashflow and improved profits.

If you're undertaking any major new project in your business, such as launching a new product range or expanding your geographical market, you expect to put together a business plan. This covers all aspects of the project, including the financial element - this is your finance plan.

Here are our suggested steps for putting together that business finance plan.

Step 1 Know what you need and why

Most planning starts with having the end in mind. You have a vision for where you are going - such as opening branches in new locations, increasing turnover by a specific amount or becoming a recognised brand in a new market.

In your business plan you'll set out the steps you need to reach that destination. You'll identify your current strengths and weaknesses, also the opportunities and the threats.

The business plan will detail the actions you need to take, along with their anticipated costs. These are likely to include:

• Purchase of stock or equipment
• Marketing costs
• Employment costs

Your planning will also factor in the impact of new revenue streams, when your investment in growth begins to generate new sales. This should lead into a cashflow plan, where you document projected income and costs over time. The cashflow plan will help you to see how much funding you need and over what period of time.

Step 2 Understand your current numbers

Having planned for the future, you also need to have a strong grasp of where your business is today. Without a realistic understanding of current income and costs and the cashflow associated with these, it's hard to plan for the future.

However, you also need to be aware of other numbers in your business, such as the value and type of assets that you have and the existing levels of debt and their associated repayments.

Most businesses carry some form of debt, such as an overdraft, a loan or credit cards. Alternatively, there could be an obligation to repay an external investor, such as a business angel. While the expectation of repayment may still be some way in the future, it should be factored into your numbers and planning.

If you're looking for funding for a major new initiative that will grow or transform your business significantly, this presents an opportunity to restructure your firm's finances. You could consolidate existing small debts, or even do away with them entirely by taking on funding in a different form.

Step 3 Research your options

When you're raising funds to grow your business there are a number of routes you can take. Your choice depends on factors that include:

• Your credit rating
• Your attitude to risk
• How much control you're willing to give away

You should consider taking professional advice about raising finance for business growth, drawing on the knowledge and experience of others. Be sure to take into account the impact of taxation on your decisions. Take a look at how similar businesses are financing their projects.

It's possible that some of the assets your business owns can be used as collateral for finance, or used in another arrangement to release capital, such as a sale and lease back.

Where appropriate, involve others with a role in the management of the business, such as directors and other senior staff.

One major decision will be whether you decide to raise debt finance or equity finance. You can read more about this in our article 'Choosing the right funding option for your business'.

The more information you can gather at this point, the better informed your decision will be.

Step 4 Create your finance plan

As you pull together all the information you can start to make a finance plan based on your preferred funding options.

At the heart of your plan will be a cashflow forecast, which sets out the incoming and outgoing cash movements over time. This can be built in a spreadsheet or in a dedicated finance modeling app. Building the plan in a spreadsheet or app should allow you to adjust it based on different scenarios, helping you to assess the impact of various changes.

You may want to create alternative plans, based on different approaches to raising the finance - such as taking out a loan over several years versus receiving investment from a business angel.

Step 5 Review your plan in detail

Share your financial plan with others to get their feedback. Encourage them to question your assumptions and to suggest alternative options. The larger the project, the more important it is that you have a finance review by a professional, such as your accountant. An objective opinion from someone outside your business can be hugely valuable, particularly when they have experience of finance planning for similar projects.

Step 6 Source funding providers

Having thoroughly researched, built and tested your finance plan, it's time to approach potential funders. This could be a bank, a venture capitalist or a business angel, or some other provider of business funds. Your planning will have helped you identify at least one, and possibly several, funding options.

Depending on the scale and basis of the funding you're looking for, potential providers will have different questions and require specific information from you. This can include:

• Your firm's past financial performance
• How your business is managed
• Projected future cash flows

This information, along with other details about your proposed project, will be easy to supply if you've done a thorough job of your finance planning.

Funding your business project with Qardus

We work with owners who are looking to grow their small or medium-sized business. Having already proven their product and their process in the market, they're now seeking funds for major growth initiatives.

The funding we provide is from £50k to £200k with terms of between 6 and 36 months.

We're different from banks and most other UK finance providers because we don't charge interest. Our funding arrangements are rooted in Islamic community principles and are certified as Sharia-compliant. This also means 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 proving a popular choice not only with Muslim business owners, but also with others committed to ethical and community values.

Talk to us about getting access to fast and flexible growth finance.

WHAT IS QARD AL-HASSAN?

Qard al-hassan, also known as qard al-hasan, is an Islamic finance term that essentially refers to a loan that is interest free. Typically in a transaction that includes qard al-hassan, the borrower will repay the amount owing under the principal amount without any other mark up or interest payment being charged. Qard al-hassan financial products are compliant with Sharia rules that dictate that interest (riba) payments are not permissible, whether the interest is being paid or being charged.

These types of loans offer financial solutions for Muslims looking to borrow funds that do not include any interest payments.

Qard al-hassan loans are loans that are provided to help others. The word hassan itself means acceptable or good (of good faith). Islamic banking services are now offering qard al-hassan loans for both Muslims and non-Muslims.

Qard Al-Hassan Loans

In Islam and Islamic banking, Qard al-hasan loans do not have an interest rate element, and this means that businesses and consumers are able to borrow money on a goodwill basis. Generally speaking, qard al-hasan loans tend to be used for welfare purposes. The Quran stipulates that Muslims should endeavour to provide these types of benevolent loans where possible and to those who need these kinds of services.

"Establish regular prayer and give regular charity and give Allah Qard Hassan" (Quran 73:20)

The principle of qard al-hassan in Islam enables Muslims to further the social justice ethos that underpins Islamic finance. Islamic finance facilitates loans from those with the funds to those who need financial assistance without breaching Sharia rules. Qard al-hassan can be viewed as a loan agreement that is akin to giving charity. The borrower and lender sign an agreement confirming the terms of the qard.

HOW DOES QARD AL-HASSAN WORK?
In Islam, qard al-hassan works in the following way. A lender will lend a business or service an amount of money that they need (usually for social justice purposes). The principal amount borrowed will be interest-free. The borrower will then repay the amount of money borrowed without any interest or surplus payments owing. Borrowers are permitted to pay an additional amount back to the lender as a gesture of goodwill, but this cannot be done based on any promise or commitment.

Qard al-hassan loans do not increase over time or accumulate any interest charges like traditional loans do. This means they offer problem solving solutions for Muslims.

The most important element of Islamic qard al-hasan loans is that they are untouched by any form of riba. There should not be any reference or link to the economic market conditions and fluctuations, and the lender cannot ask for the return of the loan before the contractual repayment period ends.

Qard Al-Hassan - The Redistribution Of Wealth

Islamic finance systems focus on socio-economic justice and the enhanced wellbeing of society, especially the alleviation of poverty. Alongside sadaqa and zakat, qard al-hassan is an essential Islamic finance instrument of redistribution of wealth.

Qard al-hassan minimises the cost of borrowing and remains compliant with Islamic Sharia law.

Social Justice, Qard And The Islamic Finance Economic System

The Islamic finance economic system has always centred on principles of social justice (as mirrored throughout the practices and teachings of Islam). The focus of the finance system is to ensure and improve the overall wellbeing of society and using money to enhance social conditions.

Qard al-hassan is a key concept that acts as a crucial redistributive instrument. The distribution of funds from the rich to the poor aims to reinforce social unity and cooperation. As the global experience of, and appetite for, ethical finance options and factor analysis continues to grow, qard al-hassan is fast emerging as an important tool in the fight against poverty and the drive to ensure there is more financial freedom and equity for poorer communities.

As more and more Islamic finance companies and banks are offering innovative qard al-hassan products and financial services, project management for those customers and business operations working within the social justice sector will become easier and more accessible. Qard al-hassan services will start to become more readily available in banking and private sector financial industries.

The opinion of scholars is that qard al-hassan loans are problem solving as they facilitate the redistribution of funds that are compliant with ethical and Islamic finance principles. Islamic finance is facilitating financial freedom and investment options for those who have historically been excluded from traditional financial markets and industries that did not cater to their religious requirements.

According to Sharia law, qard al-hassan loans are deemed to be acts of good faith, and loans that help those in need. Advancement of news relating to qard products and websites, and information technology means that qard al-hassan financial services are more readily available and searched for online, especially in Middle Eastern territories. This has enhanced the supply and demand of qard services. Historically, qard al-hassan loans have proved to be effective for economic growth, enhancing employment, and alleviating poverty.

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.