Can Muslims invest in gold

WHAT IS INVESTMENT BANKING?

Investment banking refers to a form of banking that deals with large and complex financial transactions. These transactions include mergers, acquisitions, raising capital funds, and re-organisations of businesses.

Investment bankers work with clients within the world of investment and high finance. Investment banking often deals with raising funds and money for large companies and governments.

Investment banking also involves underwriting debts and securities and brokering trades for private and global investors.

As conventional investment banking includes many interest-based and speculative activities, this has raised the question about the permissibility of investment banking in Islam and if it is haram.

The Concepts Of Halal And Haram Explained

In order to ascertain and evaluate if investment banking is halal or haram, we need to understand the Islamic (Sharia) concepts of halal and haram.In their very basic form, halal and haram mean the following:

• halal - permissible
• haram - impermissible/prohibited

When something is deemed to be halal in Islam, it means that it meets the very specific criteria Islam sets out. Often, the concept of halal is commonly associated with the consumption of food and drink, but in reality for Muslims the concept of halal and haram permeates their daily lives, behaviours, and actions.

For example, drinking alcohol is haram, but so is engaging in dishonest or interest-based financial activities.

WHY IS HALAL AND HARAM IMPORTANT IN ISLAM?

The concepts of halal and haram are important for Muslims as they influence their daily choices, behaviours, and practices.

Let's explore these concepts and understand why they matter to Muslims.

Halal encompasses actions, behaviours, and practices that are permitted and encouraged by Islamic law (Sharia). Halal extends to various aspects of life, including business transactions, financial dealings, accounting, personal conduct, and moral and ethical considerations.

The importance of halal lies in its connection to piety and the pursuit of righteousness. Muslims strive to lead a life in accordance with Allah's commands, and adhering to the concept of halal is a means to attaining spiritual purity and fulfilment.

By consuming halal food, engaging in halal financial transactions, and following halal practices, Muslims aim to align their actions with the principles of Islam and seek the blessings of Allah.

Haram, on the other hand, means "forbidden" or "prohibited." It refers to actions, behaviours, and practices that are explicitly prohibited by Islamic law. Haram activities are considered sinful and spiritually harmful to individuals who engage in them.

Muslims avoid haram practices to maintain their spiritual well-being and to fulfill their duty of obedience to Allah. By refraining from haram actions, Muslims seek to purify their souls, develop self-discipline, and safeguard their relationship with Allah.

The Importance of Halal and Haram for Muslims:

1. Morality and ethics: for Muslims, the concepts of halal and haram provide a guide and framework within which to live their lives. This framework is centred on principles of morality and ethics.
2. Spiritual Connection: Halal and haram act as guiding principles for Muslims, enabling them to establish a strong spiritual connection with Allah. By adhering to halal and avoiding haram, individuals aim to cultivate righteousness and seek closeness to Allah in their daily lives.
3. Personal and self-discipline: Adhering to halal and avoiding haram helps Muslims in their personal development by fostering self-discipline, self-control, and mindfulness. Consciously following the halal path means individuals can enhance their character, strengthen their faith, and develop a sense of accountability.
4. Social Cohesion: The concepts of halal and haram contribute to social cohesion within the Muslim community. Shared adherence to these principles promotes unity, mutual respect, and a sense of collective responsibility among Muslims.

Islamic Finance Principles

Islamic finance principles that relate to investment banking are in place to ensure that investment banking activities are Sharia compliant.

Some of the key Islamic finance principles that would govern investment banking trading and activities include the following:

• No riba - one of the main principles to adhere to when looking for halal investment banking is ensuring there is no element of interest involved in the transaction.
• uncertainty - similarly, there should be little to no uncertainty (ghahar) and speculation.
• ambiguity - there should be no ambiguity
• Profit and loss sharing - the parties should share in any profits and losses.
• ethical - the investment activities should be ethical

Principles Of Traditional Investment Banking

Traditional investment banking operates within the framework of conventional financial systems and practices.

These systems are often interest-based. In Islamic the concept of interest (riba) is strictly prohibited. So, investment banking which relies on interest based activities is haram.

Conventional investment banking involves activities such as capital raising, mergers and acquisitions, underwriting securities, and providing financial advisory services.

Traditional investment banks typically engage in interest-based transactions, speculative investments, and may invest in sectors that are considered unethical or haram according to Islamic principles, such as alcohol, gambling, or pork-related industries.

In traditional investment banking, interest (riba) plays a significant role, as it is often earned through loans, debt instruments, and interest-bearing investments and payment options.

Additionally, derivative products, short-selling, and leveraging strategies are commonly employed in traditional investment banking practices. These activities may conflict with Islamic principles that emphasize fairness, transparency, and the avoidance of uncertainty (gharar).

The level of uncertainty and speculation within traditional investment banking can be deemed to be haram.

Sharia Compliant Halal Investment Banking

Halal investment banking, also known as Islamic investment banking or Sharia-compliant investment banking, is a specialised form of financial services that aligns with Islamic principles and guidelines.

Islamic investment banking operates within the framework of Islamic finance. These principles seek to promote ethical and socially responsible financial practices. This means there is less scope for one-sided risk and high levels of speculation. Ultimately, this leads to greater equity and fairness in business dealings.

In halal investment banking, interest-based transactions (riba) are strictly avoided. Instead, Islamic banks and financial institutions offer products and services that are structured in a way that eliminates interest, and instead, focuses on profit-sharing arrangements or partnerships.

For example, instead of charging interest on loans, Islamic banks may engage in profit-sharing agreements, lease-based contracts (Ijarah), or partnership-based arrangements (Mudarabah). What this means for the parties is that there is more fairness.

Furthermore, halal investment banking adheres to ethical investment criteria, avoiding sectors or activities that are deemed haram, such as the porn or alcohol industry.

Investments are directed towards industries that comply with Islamic principles, such as halal food, healthcare, sustainability projects, renewable energy, and ethical real estate.

The concept of risk-sharing is also emphasized in halal investment banking. Islamic financial institutions aim to distribute risks and rewards equitably among parties involved in investment activities. This principle promotes fairness, accountability, and responsible investment practices.

Key Differences Between Traditional And Halal Investment Banking

Overall, the key difference between traditional investment banking and halal investment banking lies in their underlying principles and practices.

Halal investment banking adheres to Islamic guidelines, avoiding interest-based transactions, speculative investments, and unethical industries while emphasizing risk-sharing, profit sharing, ethical investment, and fairness.

By aligning financial activities with Islamic principles, halal investment banking seeks to cater to the specific needs and values of Muslim investors.

Muslims And Investment Banking

Islamic investment banking is a growing industry. In the United Kingdom, there are many banks and financial institutions that offer halal investment banking opportunities, products and services.

For students who are currently studying economics and finance subjects, there are opportunities to seek employment and a career in Islamic investment banking firms.

However, it is important to make sure that you work with investment bankers who are familiar with the concepts of Islamic finance and halal and haram. They will guide you to investment banking services and options that are deemed to be halal under Islamic finance rules.

Qardus Limited does not give financial or investment advice.

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:

1. 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.
2. 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.
3. Credit scores - check your scores and improve them if you need to. In fact you should get all your personal finances in order.
4. Consider the range of financing options available to you and narrow down the ones that apply to your business.
5. 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.
6. 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.

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:

1. 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.
2. Acquisition and Possession: at this stage of the transaction, the bank acquires the goods and keeps possession and takes on the risk of ownership.
3. 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.