Commodity Murababa For Business | Sharia-Compliant

Introduction
Equity financing refers to a particular method of funding a business to sustain and grow its operations. Equity involves raising funds by issuing shares for investors. Investors who buy shares of a company become shareholders and can earn investment gains if the stock price rises in value or if the company pays a dividend. Dividends are typically cash payments as a reward to shareholders for investing in the company. Equity finance allows a company to raise these funds without borrowing from conventional banks, which typically charge interest. In equity financing, there is no promise to repay the investment like in a loan arrangement, nor is there an interest component.

Impact
Equity finance has no impact on a firm's profitability, but it can dilute existing shareholders' holdings because the company's net income is divided among a larger number of shares. This means that the overall number of shares have increased but the percentage of shares owned by a shareholder decreases. For example, let's say a company has 100 shares outstanding, and an investor owns ten shares or 10% of the company's stock. If the company issues 100 additional new shares, the investor now has 5% ownership of the company's stock since the investor owns five shares out of 200. In other words, the investor's holdings have been diluted by the newly issued shares.

Generally, equity finance has the following characteristics:

• Shareholders get a level of ownership in the company
• Shareholders do no receive any interest payments, but may receive a dividend
• The investment is generally permanent without any maturity
• Upon liquidation, shareholders through equity financing are generally last to be paid

Sources of Equity Financing

• Funds are generally raised through the following methods when financing through equity issuance:
• Personal finances / bootstrapping - most small business begins this way
• Venture capital (VC) - businesses who specialise in making investments in companies in whom they see potential
• Private investors / angel investors - like VC, but they are usually individuals rather than firms
• Family & friends - taking cash from people you know in exchange for part ownership
• Crowdfunding or equity crowdfunding - a recent method of fundraising which gives the public early or exclusive access to a product or service in exchange for up-front funds. Equity crowdfunding involves offering shares for funds at an early stage
• Government - in certain circumstances a government grant may be available for small businesses
• IPO (or initial public offering) - to float your company on a stock exchange and sell shares to the public

Shariah structures for Equity Financing
There are two famous structures in Islamic Finance which are used to establish equity financing, they are Mudaraba and Musharaka.

Mudaraba
Mudaraba refers to a relationship between an investor (Rab al maal) and an investment manager (Mudarib) to establish a profit-sharing partnership to undertake a business or investment activity. Under this structure, the Rab al maal provides the financing or funds and the Mudarib provides the professional, managerial, and technical know-how to carry out the business or manage the investment. The Mudarib must invest the funds in a Shariah compliant way. The parties share in any profits according to a pre-agreed ratio. In a Mudaraba, the Mudarib:

• Puts only its time and effort at risk and does not contribute any capital.
• Is not responsible for any losses of the venture. Losses, however, are borne entirely by the Rab al maal.

Musharaka
A Musharaka is an investment partnership or joint venture compliant with Islamic principles. In a Musharaka, the financing party and its client contribute assets (cash or property) to a joint venture and share in the profits of the joint venture in agreed percentages. The joint venture is structured so that the financing party receives its initial investment plus a return that is usually calculated by a reference to a benchmark. Losses, however, are shared in accordance with the parties' initial investment. All Musharaka parties have the right to exercise control over the joint venture but it is typically managed by the client.
Musharaka is similar to Mudaraba except that in a Mudaraba only the financing party bears the losses associated with the joint venture or partnership.

In the fast-paced and dynamic world of cryptocurrency and blockchain, staking is emerging as a popular way to earn passive income. This has led to discussions and debate about whether staking crypto is halal.

This article will examine the concept of staking and the considerations relating to whether it can be deemed to be halal.

WHAT IS STAKING IN CRYPTOCURRENCY?

In cryptocurrency staking occurs when investors lock cryptocurrency for a specific period of time. This is done to support the blockchain operation. The investor will lock in their digital tokens to a specific blockchain network and in return, they will earn rewards.

For the blockchain network, it means that transactions can be validated and for investors and individuals it means they can earn rewards without having to sell their crypto.

In comparison, bitcoin and staking are not linked. Bitcoin tends not to use the staking mechanism. Instead, it uses the proof of work mechanism where miners compete with each other to problem solve maths puzzles to validate transactions.

Any locked up cryptocurrency acts as collateral to support the blockchain network. This means that it is no longer available for use and therefore staking reduces the liquidity of the asset that has been staked for any given project.

HOW DOES STAKING WORK?

Crypto staking is a consensus-based mechanism. It enables token owners to validate a crypto chain by adding blocks. Using existing crypto to validate holdings as proof of stake on a blockchain.

Any newer blocks are also validated using the proof of stake mechanism. As the crypto funds are effectively locked in for a period of time this supports the activity of the blockchain. For the investor or asset owner who are using the blockchain platform, they earn staking rewards which are similar to earning dividends on their assets.

There are two main forms of staking:

1. Independent staking : this method is used when an individual deposits their crypto token as a single and sole validator on a blockchain. There is usually a minimum token threshold. For investors using this form of staking they aim to benefit from being the sole beneficiary of rewards earned.
2. Staking pools: staking pools are when there are a group of people who effectively pool their crypto tokens. This is the preferred method for newcomers to staking who want to share the risk with others.

Staking involves contractual terms that identify the obligations and the rights of the parties in the staking process. These terms can vary depending on the nature of the staking.

Sharia Compliance And Staking Crypto

Islamic finance provides the conceptual and foundational basis for operating financial transactions in line with Islamic rules. Operating in an Islamic finance framework means you use your finances to ensure you manage funds in an ethical and socially responsible way.

When considering crypto staking, it is important that you do all your due diligence. Investors or those staking their crypto need to understand the mechanism of staking and screen it for Sharia compliance. You need to fully understand what happens once you deposit your crypto onto a blockchain network.

In a proof-of-stake system, any crypto being staked is used to strengthen the consensus based network and improve the integrity of it. The profit is made from the rewards you receive for investing in the blockchain's sustainability.

Always make sure you understand the level of risk involved, the projects involved and the legitimacy of the network before staking your assets. A problem could arise if the blockchain itself is deemed halal but further down the line it starts to become involved in haram industries. Management of your crypto wallet should follow the same Islamic principles as your physical wallet. This requires ongoing due diligence.

Considerations

As a starting point, you need to ensure that the blockchain is not associated with any haram industries such as gambling, alcohol and pork. Look for morally sound initiatives and well-researched projects that have already been screened.

Another important point to consider is riba / interest. Whilst earning rewards via staking is not considered to be riba, examine the structure and payment of the rewards you will be generating. For many, staking a deposit is not seen as a loan so interest cannot therefore be generated. The reward is seen as the benefit of a joint endeavour, as more people join the blockchain, more rewards are achieved. The purpose of the stake is to improve the legitimacy of the network and to maintain it.

Another consideration is the governance and the values of the blockchain platform. Make sure that the governing values are ethically sound.

IS STAKING HALAL?

Consider all the advice in this article, but in particular, if you want to determine if any staking activity is halal you need to evaluate the halal status by ensuring:

1. there is no interest / riba involved in the staking or the investment of any capital
2. There is no excessive uncertainty or ambiguity - the terms required must be clear
3. look for ethical compliance
4. focus on asset backed transactions and stay away from gambling
5. seek an expert opinion
6. review the market the blockchain might be linked to and evaluate it for Sharia compliance
7. review the other users of the blockchain
8. make sure any incentive being offered is halal
9. check the governance, infrastructure, platform and protocols being used
10. learn all you can about your stake and the price

Staking in its traditional form does not currently involve any kind of loan or interest. There is no borrowing of money or any interest payment. Essentially, the software involved generates tokens as rewards. These rewards do not impact or come from any other users currency so there is no exploitation of others via investment or trading.

Practical Steps For Muslims Considering Staking

For anyone looking to stake crypto, it is essential that you seek guidance from scholars who are fully aware of Islamic finance concepts and principles when it comes to money matters. Look for blockchain platforms that are already established within Islamic networks.

Some of the benefits of crypto staking include having the opportunity to earn additional tokens (passive income). Also, as you are contributing to the security and efficiency of the blockchain network this could be seen as strengthening the decentralized platform for others.

When it comes to business practices and growth, the world is moving towards more ethics based industries. This shift towards ethical business reflects the growing recognition and awareness of the wider impact of business on our economy, our health and addressing inequalities in the world. When businesses link in with the principles of Islamic finance, there is a perfect synergy of value and values.

Ethical businesses and markets grew by almost 35% in 2021-2022. The ethical finance market grew by 50.1% during the pandemic.

There are many different reasons for the growth in ethical business and banking industries. One of the main drivers is consumer consciousness. Consumers are seeking services and products that align with their own personal values and are drawn to companies that can demonstrate their ethical standing. Research shows that 84% of consumers consider the ethics of a business before spending. 63% of customers want to see ethical business practices.

Other reasons include:

• Environmental concerns and climate change awareness
• Social media influence and the spread of information
• Employee and stakeholder expectation
• Regulatory pressures
• Investor preferences
• Global inter-connectedness
• Long-term sustainability

The question arises, does ethical business conduct, especially within an Islamic finance framework, lead to success and growth in business? The answer is a definite yes.

The International Federation of Accountants has found that the business landscape is continuing to see growth and change. The pandemic and global recession have led to changes in the ethics of businesses and how they operate. This is driven by the increase in Muslim spending, investing and operations, but also due to the demand for ethical business principles following a very unstable financial period.

Islamic finance is based on ethics, so the alignment of ethical business growth and Islamic finance goes hand in hand.

Reports by TheCityUK have identified that the global banking assets within the Islamic finance sector totalled $2.8 trillion in 2022. This figure increased by 50% in the years between 2026 and 2022. In addition, by 2021 the UK Islamic bank's assets were in the region of $77.5 billion. The global sukuk insurance industry was worth $196.5 billion by 2021 and continues to see growth despite the pandemic.

Within Europe, excluding Turkey, the UK made up 85% of the European Islamic banking assets. the UK has always been ahead of the game when it comes to using Islamic finance to promote research into sustainable development options and ethical finance options. London continues to be one of the leading financial centres in the world.

This blog will examine the pivotal role of ethical business growth and Islamic finance, and how Sharia principles play a pivotal role in steering businesses towards long-term success.

Ethical Business

Ethical business practices themselves can be a huge catalyst for sustainable development and business growth. When combined with an Islamic finance funding model of management, that growth can be long-term and successful.

Islamic finance is rooted in ethics and Sharia principles that focus on the greater good of society over exploitation.

Aligning business operations with ethics ensures that businesses are able to create an environment where long-term success can be achieved.

Ethics And Islamic Finance

Both Islamic finance and ethics are inextricably linked. The foundational principles of Sharia rules relating to financial transactions guide how deals should be conducted. The emphasis is firmly placed on social justice, ethics, fairness, and equity.

One of the main principles of Islamic finance is the absolute prohibition on interest. This is a fundamental principle of the Islamic finance market. For the traditional corporate world, a move away from interest based lending and transactions seems at odds with their profits based perspective. Actually, the opposite is true.

Charging interest is seen is Islam as creating an extremely exploitative market and cannot lead to stable economics and transactions. Recent fluctuations in global interest rates demonstrate how variable and unpredictable interest based lending can be. Islam considers the charging and payment of interest to be an unethical and prohibited practice.

According to the Fitch Ratings, in 2023 the assets within UK Islamic funds were approximately $280.6 million, a growth of 2.9% from the previous year.

Profits With Purpose

Islamic finance champions the idea that you can achieve profits with purpose. Ethical practices might be the driving force behind the stability, but they can also lead to sustainable practices that can weather turbulent markets and governmental changes.

S&P Global Ratings believes that the Islamic finance market will continue to grow by as much as 10%. This is based on evidence that despite the global pandemic, the market grew 10.6% despite the double blow of the oil prices drop and the pandemic.

Navigating Ethical Business Practices

Navigating ethical business requires a considered approach. It is not enough to simply state that your business is ethical, but to be able to demonstrate that it practices what it preaches.

Taking a professional and intentional approach to ethics within business is fundamental. Businesses need to have an understanding of their impact objectives and sustainability.

Here are some steps businesses should take:

• Develop strong leadership
• Lead by example
• Understand ethics
• Curate your business practices
• Understand the environmental, societal, political and individual impacts your business has
• Review your investment strategy
• Train, teach and communicate with staff
• Embed ethics in decision making

Beyond Profit Margins

Islamic finance focuses on business potential beyond monetary profits. It places emphasis on social justice, sustainability, and community wellbeing. These demands are also now coming from consumers who want to see ethical business practices from the companies they spend with.

The perception amongst consumers is that companies should prove they are ethical and sustainable.

Remember, 40% of consumers now choose brands that have environmental sustainability within their practices and values (DigitallyAlex.com). Over 60% of consumers want an ethical service, and 34% will stop using a product or service if unethical practices within the business are uncovered.

The relationship between consumers and businesses has been evolving rapidly over the last few decades. The recent Marigold Report in 2023 found that 60% of consumers make less impulsive spending choices, and the ethics of a business feed into their decisions.

Conscious Capitalism

Younger generations including Millennials and Gen Z have increased spending power. As consumers, they are very conscious and globally aware of social justice issues. These groups are leading the demand from consumers for more ethical and conscious capitalism.

In 2022, 53% of young consumers said they were willing to spend more to pay for ethical products. Over 63% of consumers aged between 25-35 stated that they would like to have the ethical values of products listed on them.

50% of Gen Z and Millennials want to buy from more ethical brands, and over 54% will avoid brands they do not think are ethically minded.

These statistics all highlight the role of responsible and ethical business practices in driving success and retaining customers.

Ethical Funding And Islamic Finance

For businesses looking to operate within Islamic finance frameworks, they will find that these funding options are no longer exclusive to Muslim regions such as the Middle East and Saudi Arabia. The Islamic finance industry in the West continues to grow year on year.

In the UK alone, the Islamic finance FinTech industry was ranked the 5th in the world in the Global Islamic Fintech Index in 2021. The UK continues to invest in Islamic finance infrastructure and services in the UK continue to expand.

For businesses to truly see ethical growth and sustainability, they need to look beyond the traditional financial services on the market. More and more businesses are looking at Islamic finance lending and funding options to incentivise growth.

Whilst the Gulf region still accounts for the largest share of Islamic finance assets (over 45%, with the Middle East and South Asia at 25.9%), the Islamic finance industry in the West is growing at a fast pace.

As concepts relating to corporate social responsibility increase, and consumers move away from capitalist, wealth hoarding enterprises, it is clear that Islamic finance offerings will increase with the demand.

From Values To Value

Transitioning from business models that are not ethics based to those where ethics are at the forefront of operations may seem daunting.

However, as long as a considered and intentional approach is taken, businesses will find that ethical business practices not only lead to innovation but better results. Businesses can leverage ethical practices to enhance their own market standing and position.

Ethical businesses see better results overall according to an Institute of Business Ethics report. This includes ethical finance, ethical practices, and ethical business objectives.

Ethical businesses attract diverse clientele and foster prosperity which is long-term. Often, customers wanting a more ethical approach are also those with more money to spend. The partnership of business and ethics leads to growth and customer retention.

In 2022, Deloitte found that 48% of spending adults wanted to see more ethical and sustainable business practices. Over 76% of businesses in the UK now mark ethics as a high priority for their organisation. The business landscape is evaluating, navigating and changing as they understand customer choice and preference.

Ethics And Integrity

What Islamic finance aims to do is foster long term business growth in a sustainable and stable manner. The ethical framework is one which many businesses now rely on and promote.

In the dynamic and fast-paced world of Islamic finance, investing and operating ethically has been yielding great dividends for business. From 2017-2-21, assets under Islamic finance funds globally saw an average annual increase of 13%.

For any business, whether large or SME, the market currently offers dynamic and flexible Islamic finance options to scale growth.