Choosing the right business funding option

WHAT ARE INTEREST RATES?

Interest and inflation rates are linked and affect our daily lives from the cost of our weekly shop to how much money we can borrow. Interest rates are essentially the amount borrowers are charged for borrowing money. Most banks will show the interest rate as a percentage of the total loan amount. This means that the higher the percentage, the more interest you will pay back over the term of your loan.

If you are not a borrower and you are a saver, then the interest rate will inform you how much money you will accrue in your account. the higher the interest savings rate you have the more money you will be paid into your bank account.

Interest rates vary depending on who you are borrowing from, the amount of your borrowing, the level of risk involved, and the terms of your loan.

If a lender thinks lending you money is high-risk then it is likely they will charge you a higher interest rate. In this way, the economics of a country are impacted by the interest rates.

HOW CHANGES IN THE INTEREST RATE AFFECT US?

One of the most obvious impacts of a changing interest rate is that it affects the amount of interest we are paid (as savers) or pay (as borrowers).

Any time there are changes in interest rates you should examine your savings and lending to see if you will be affected.

For those looking to borrow money, whether that is to buy a house, invest in business, or even just for the purposes of education (such as a student loan), the cost of borrowing will increase when interest rates are raised.

Current economic uncertainty means that businesses, individuals, corporations, and almost everyone in society are impacted.

For homeowners, an increase in interest rates means an increase in repayments (unless the mortgage is based on a fixed rate). Ultimately, this will result in a squeeze on household income and budgets at a time when the UK is dealing with an energy bills crisis and an increase in fuel costs.

To summarize the main effects of rising interest rates:

• increase in mortgage repayments

• increase in the cost of borrowing

• reduced consumer and business confidence

• increased incentive to save more to take advantage of the improved interest rates (but this depends on the rate being offered by banks on savings accounts)

• slower economic growth

• possible rise in unemployment

WHAT IS A BANK RATE?

A bank rate is set by the Bank of England. Arguably, it is the most crucial interest rate and is also sometimes known as the base rate.

The base rate is controlled by the Bank of England and is the rate paid by the Bank of England to businesses and banks that borrow from it.

The Bank of England is known as the central bank of the United Kingdom. They not only set the bank rate, which is currently 1.25%, but they also undertake the regulation of the banking industry, and financial business services, and they oversee the country's monetary policy. This then goes on to affect the economy including employment, wages, spending, and borrowing.

When banks set an interest rate they consider many factors in addition to the bank rate.

However, if the Bank of England changes the bank rate, then banks will also change their interest rate for both borrowers and savers in the market.

WHAT IS INFLATION?

The word inflation describes rising prices. If prices of goods and services are rising quickly then this is referred to as the rate of inflation.

Currently, in the United Kingdom the rate of inflation is 9.4%.

The rate of inflation is worked out by comparing the cost of products today and comparing the price against what the same products cost a year ago. The Office for National Statistics is the organization that is responsible for checking the price of goods and services.

If the price of production, imports, and raw materials increases then it is very likely that the rate of inflation will also increase. In addition, any increase in demand from consumers also causes the inflation rate to increase.

This is what is currently happening in the UK with the cost of living crisis.

WHAT CAUSES INFLATION?

As mentioned above, inflation is caused by various factors. The main drivers of inflation rates going up are the increased cost of production, and increases in raw materials and wages.

If inflation rates begin to increase it means that the cost of basic necessities including food and household items also rises. This can adversely affect society as many people will struggle to afford the basics and fall into debt. Inflation rates could also affect employment rates as employers also face cuts to their budgets and increased costs of operating.

Inflation does not only affect the basic necessities such as food. As we have seen recently in the UK, inflation also affects utilities, fuel costs, clothing, luxury goods, and cars.

Some of the main factors causing the rising prices in the UK, and thereby affecting the rate of inflation, include the following:

• increase in energy bills

• high fuel prices

• the war in Ukraine

• the rising cost of car prices (according to the Office for National Statistics)

• increased costs of household goods and furniture

• increased costs of food

• higher interest rates impacting homeowners

Whilst the cost of goods is rising, the wage increases are not rising in line with the cost of living.

HOW ARE INTEREST RATES AND INFLATION CONNECTED?

Theoretically, interest rates and inflation rates have what is considered to be an inverse relationship. This means that when interest rates are low, inflation is expected to rise, and when interest rates are high inflation rates should go down.

When interest rates are lower, the borrowing power of consumers is increased.

If consumers are spending but the prices of goods are going up faster than wages are increasing, then inflation rates increase. In order to encourage borrowers to borrow less and encourage them to save more the Bank of England increased the interest rate.

The aim is to slow the economy down enough to decrease inflation.

WHY HAVE INTEREST RATES GONE UP?

The Bank of England has increased interest rates so that it can reduce the rate of inflation. If the rate of inflation continues to go up in the UK then this can have many negative effects on UK residents. Currently, the inflation rate in the UK is at a 40 year high.

For example, people will have to pay more and more for goods and services. Property could lose some of its value, and fuel prices could continue to rise.

If inflation rises too high then this is called hyperinflation. This can result in a full economic collapse and devalue the currency.

WHY DID THE BANK OF ENGLAND RAISE INTEREST RATES?

The general view is that if the Bank of England raises interest rates they want people to spend less money.

When interest rates increase the Bank of England hopes that people begin to spend less and save more.

The Role Of The Bank Of England In The Economy

The Bank of England was established in 1694 as a private bank that lent the UK government money.

In 1997, the Bank of England was granted independence so that it could set the interest rates without any form of political affiliation.

The Bank of England is not connected to the Chancellor of the Exchequer as it it is important for it to base its interest rates on economic factors rather than political ones.

Not only does the Bank of England set the base rate, but they also:

• forecast the inflation rates

• issue coins and bank notes

• act as a lender of last resort for UK banks

The Current State Of The Uk Economy

According to PWC, the UK economy was recovering well from the global pandemic.

Unemployment rates were low and the labour market and service industry was recovering well.

However, the war in Ukraine was a shock to the UK economy (and economics globally), impacting it in many different ways including:

• disrupting supplies and services for all industries including retail and construction,

• leading to higher commodity prices and less revenue for businesses

• lower trade levels

• less investment flow

News agencies and websites are reporting that the UK growth outlook for the next 12 months does not look promising.

KPMG has agreed with this analysis stating that the GDP growth this year will halve and slow further in 2023 (UK Economic Outlook Report, KPMG, 2022).

According to KPMG, they predict further interest rate increases from the Bank of England. This is based on data from economic forecasts, consumer spending, interest rates, and the unemployment rates.

WHAT IS HAPPENING IN OTHER COUNTRIES?

Many other countries around the world are dealing with similar problems that the UK economy is dealing with.

According to the Office for National Statistics, the European Union is facing similar rates of inflation as the UK.

The United States is reporting inflation levels of 9.1%.

DO INTEREST RATE AND INFLATION RISES AFFECT INVESTOR BEHAVIOR?

The basic answer to this question is yes. Interest rates and inflation rates affect investor behavior. In fact, changes in inflation and interest rates affect everyone.

What it means in real terms is that any money you have saved could be worth less today than it was yesterday. High inflation rates impact the purchasing power and confidence of consumers and their spending.

Inflation rates and interest rates affect investment portfolios. If investors are finding it more expensive to borrow funds to invest then it is very likely that investments overall will reduce.

Investor Risk

Investors aim to increase their wealth and minimize their risk and tax liabilities. In an economy where interest rates and inflation are rising, there is normally an impact on portfolios and investments.

Rising inflation not only affects stocks and bonds it also affects property prices. Of course, all investment comes with a risk of losses.

Any investor with inflation-indexed assets or liabilities needs to be particularly aware of the changes in their portfolio.

Also, as interest rates rise this affects borrowing. As borrowing becomes more expensive, this leads to investors having less money available to invest.

Rises in interest rates also affect the stock market and the impact of the rise is usually felt quicker than in the general economy.

Normally, when interest rates fluctuate investors should expect the market rate of their bonds to also fluctuate. However, not all bonds are equally affected. Bonds that have short maturities may not be as impacted as bonds with longer maturities.

For investors who have a long-term outlook and planning when it comes to their portfolio, short-term changes to the interest rate should not significantly impact them.

For an investor who is looking at the long-term goal and who has a mix of assets, the long-term outlook of their portfolio should be fine.

To summarize, when interest rates increase the impact on investments includes the following:

• a rise in mortgage rates

• affect on the price of commodities

• Fall in bond prices

• Potential losses in the stock market

• fluctuations in real estate values

• increases competition between banks

Interest Rates And Islamic Finance Customers

For many borrowers, any increase in interest rates will affect how much they pay back to the bank they have borrowed from. The exception to this is those with fixed rate loans or mortgages. As the interest rate on these loans has effectively been 'fixed' for a specific period, then interest hikes or drops will not affect the repayments. Make sure to check when your fixed rate period comes to an end so you can plan accordingly.

In theory, for customers of banks who want Islamic Finance and Sharia compliant services, changes in the interest rate should not adversely affect borrowers or savers. This is because banking services based on Islamic Finance principles do not rely on interest or include any form of interest payment.

Conceptually, Islamic banking customers are not motivated by profits or gains. Therefore, changes to the interest rate should not affect them.

However, on a wider scale, any changes to the interest rates and inflation will affect all lending institutions in some way. Many Islamic Finance lenders use the base rate of the country to benchmark their repayment calculations. This means any increase to the base rate could affect the repayments for customers of Islamic finance products.

However, for economies where the interest and inflation rates and subject to fluctuation, this could lead to more people being interested in the interest-free products offered by financial institutions that offer Sharia compliant services. A research study in Malaysia found that any increase in base rates increased consumer interest in Islamic mortgages.

Ultimately, how you are affected by increased interest rates and inflation rates depends entirely on your financial circumstances and the management of your investment portfolio.

WHAT IS ZAKAT?

Zakat is one of the five pillars of Islam. It is an obligatory act of worship and is also a mandatory form of charity for Muslims. It has always been seen as a means by which people can achieve social impact through the redistribution of their wealth. The five pillars of Islam are the absolute fundamentals of Islam and include the following:

• Faith (shahada)
• Prayer
• Zakat
• Fasting
• Hajj

Every Muslim is expected to fulfil these five pillars of Islam which serve as the very fundamental acts of worship prescribed by the Islamic faith.

Paying zakat, sometimes referred to as almsgiving, is an obligation for every Muslim who is able to and serves to bring economic equality, fairness, and to rebalance societal injustice.

The Obligations Of Zakat

Muslims who have the financial means and capability are required to pay zakat. They must donate 2.5% of their wealth (see our zakat calculator to work out how much you need to pay). The 2.5% is calculated on money and assets.

The aim of zakat funds is to ensure that they are used to provide the basic necessities for families and communities in need. These needs can include the provision of food, shelter, clothing, education and healthcare.

One of the most important elements of zakat is that payment of it is seen as a means of purifying your wealth whilst demonstrating empathy and compassion for others. In fact, the word zakat actually means 'cleansing' or 'purifying'.

The whole concept is based on the idea that once an individual donates a percentage of their wealth to charitable causes, they fulfil their moral obligation to serve others and build stronger communities and economies. Zakat is particularly important in times of crisis, as it can be used to alleviate hardship via the distribution of wealth.

Zakat is not the same as sadaqa which is encouraged but not obligatory. Zakat is an annual payment that is worked out in a specific way and spent in a specific way.

The Exemptions From Zakat

There are some important exemptions to be aware of when it comes to zakat.

Firstly, there are exemptions for those people who do not have to pay zakat and these include:

• children
• the mentally ill
• the infirm and elderly
• slaves
• Non-Muslims
• the very poor

WHO CAN RECEIVE ZAKAT?

Islamic finance principles set out clearly who can receive zakat. Those eligible to receive zakat include the following:

• Poor people
• The needy
• Debtors who cannot repay their debts
• Orphans
• Widows
• The stranded and destitute
• Travellers
• Slaves or captives
• New Muslims
• Those fighting a just cause

It is very important that when you pay zakat the recipients meet the eligibility criteria set out in Sharia law. Always make the intention of helping those who are in need and adhering to the principles of Islamic finance.

WHAT ROLE DOES SOCIAL JUSTICE PLAY IN ISLAM?

Social justice is one of the fundamental principles of Islam and Islamic finance. The Islamic framework is centred on social justice in all aspects from individual behaviour, to financial transactions, to how we behave in relationships with others.The teachings of Islam place great significance on ethical and moral behaviour. Islam promotes social justice by emphasizing the importance of the following concepts:

• Anti-discrimination: all humans are seen as equal in Islam and discrimination in any form is prohibited. In fact, the Prophet Mohammad's final sermon reiterated how important it was to treat everyone equally and fairly.
• Economic equity: Islam promotes economic justice by ensuring there are frameworks in place for wealth distribution. Zakat plays a key role in the distribution of wealth. Furthermore, the prohibition on interest further prevents exploitation and inequality.
• Charity: as already mentioned the concept of charitable giving is an essential element of Islam. Charitable giving takes place via zakat and sadaqa (amongst other forms of donation). Muslims are encouraged to consistently donate to the poor.
• Gender equality: as mentioned above, Islam believes that men and women are equal and it actively promotes gender rights (particularly those of women) and equality. The Quran consistently mentions treating people with respect and fairness.
• Legal justice: Sharia rules set out the legal framework within which Muslims operate and these rules focus on justice, fairness, and equity. The legal judicial system in Islam operates to ensure that justice and fairness are implemented.
• Ethical behaviour.

The Potential Of Zakat

The actual potential of zakat is large, and estimated to be valued in the region of $200 billion - $1 trillion (this is according to research from the Institute of Development Studies and the World Bank). It is difficult to estimate the exact amount paid each year, but it is clear that Muslims who pay zakat on an annual basis are some of the biggest and most consistent charity givers in countries across the world.

Whilst the Western world is still learning about the impact and potential of zakat, Muslim economies have harnessed the potential of zakat for many decades by establishing leadership institutions to manage and distribute zakat. In addition, Muslim countries have had discussion and debate with scholars relating to zakat and how best to use it, incorporating it into fiscal policy.

HOW DOES ZAKAT HAVE A SOCIAL IMPACT?

• Empowers individuals and communities
• Alleviates poverty
• Optimisation of social good
• Social cohesion building
• Wealth distribution
• Funding charitable projects (such as climate and environment change programmes, education, and healthcare initiatives and practices)
• Economic development
• Promote social justice

An underlying philosophy of Islamic finance and Zakat is the concept of mobilising finance for the greater good. Islamic finance embodies socially responsible actions whether from companies or individuals.

Zakat And Sustainable Development Goals

As zakat is applicable to all Muslims across the globe, it is one of the largest and most successful forms of philanthropy. It acts as one of the largest methods of wealth transfer from the rich to the poor that takes place consistently and with clear guidelines.

Inspired by the Islamic faith, zakat is taking on relevance in countries throughout the world including the UK, United States, Australia and beyond.

Alleviating poverty, inequality, and hunger are not only central tenets of Islam and Islamic finance, but they are also part of the UN's sustainable development goals. According to the Quran there are 8 categories eligible for zakat (see above) and these all align strongly with sustainable development goals.

Some countries such as Indonesia have started collaborating with zakat donors to achieve partnership working towards sustainable development goals. This is a win-win for Muslims as Islam and Sharia rules relating to financial transactions state that every person should seek to work collaboratively and fairly for the good of society.

Conclusion

The power of zakat to harness social impact through charity is undeniable. When you clearly understand what zakat is and its function in society it becomes clear that zakat has the power and potential to alter lives and bring equity.

Wills

A will is a legal document that sets out the wishes of a person with regard to the distribution of their wealth, income, and assets once they pass away. An Islamic will is a will that documents how your wealth, property, and gifts will be distributed when you die and is prepared in accordance with Islam and Sharia law. The last will and testament specifies exactly what happens to your assets and wealth when you die. What you leave behind is known as your estate, and this inheritance will be passed down to those mentioned in the will upon your death.Islamic wills are also known as wasiyyah, and are one of the many important elements of Islamic financial planning.This article will discuss Islamic wills, why they are important, and how to ensure you have one prepared.

Wills In Muslim And Non-Muslim Countries

Islamic wills are used by Muslims who want to ensure that their finances and responsibilities are dealt with in a Sharia compliant way once they have passed. In Muslim countries, the rules of the country dictate the laws of intestacy, which is the law that will apply on the death of a person.

However, in non-Muslim and western societies (such as the United Kingdom) where Sharia law does not apply, Muslims look to having an Islamic will in place before their death to ensure that it complies with their Islamic obligations and the rules stipulated in Islam when it comes to inheritance.

Why Islamic Wills Are Important

For Muslims, it is critical that they have an Islamic will in place before they pass away. Not only is the importance of having an Islamic will highlighted in the Quran it is also mentioned in the hadith.

If a Muslim does not have an Islamic will, this means that their property and wealth will not be distributed in accordance with Islamic Sharia rules and regulations.

Islam places great emphasis on making sure you live your life in an orderly manner, and this duty for orderliness and preparedness also applies to leaving this world.

If a Muslim dies without having made an Islamic will then they should expect their wealth to be distributed by the rules of intestacy of the country they live in. In the UK and the United States, the rules of intestacy are not in line with Sharia rules and are therefore not Sharia compliant.

Importance Of Having An Islamic Will

It is especially important to have an Islamic will for those with dependants, a spouse, children, or other beneficiaries. Not only will an Islamic will deal with the distribution of your assets, it will also ensure that any charitable donations you wish to make are dealt with, but your family is provided for adequately, and your funeral is managed in line with your wishes.

It is always best to make your Islamic will as early as possible, and whilst you are of sound mind.

The incentive in doing this is that once you sort your will it can remain in place until you die unless of course you decide to make any changes in which case your Islamic will can be updated.

Dying Intestate

If you die without a will in a non-Muslim country then the intestacy rules of that country will apply. For example, in England, if you have no surviving relatives then your estate will automatically pass to the Crown.

Dying intestate not only means that your assets will be distributed without your instructions, but it also makes dealing with your estate long-winded and difficult. It can also take months and sometimes years to unravel the estate and distribute the assets.

Usually, a close member of the family such as a spouse or parent has the legal right to distribute and manage the estate and the real property within it.

Islamic Wills Explained

An Islamic will is a legal document that will outline how a Muslim's assets will be distributed on their death. What sets the Islamic will apart from the traditional will is that the Islamic will is drafted based on the guidance and rules set down by Islam and Sharia law.

The Islamic will not only deals with the distribution of your assets but should also cover what happens to your debts and monies you owe to third parties.

Islamic wills should always comply with Islamic laws of inheritance, this is why you need to use the services of a solicitor who understand Sharia law and compliance.

Islamic Laws Of Inheritance

Islamic laws relating to inheritance are set out in the Quran and the teaching of Prophet Muhammad (peace be upon him).Some of the main principles of Islamic inheritance laws are as follows:

1. Equality - a key component relates to equality between female and male heirs. Sharia rules state that male and female heirs should receive equal shares in the estate of the deceased
2. Differentiating between debt and assets - debts and assets should always be separated and any debt should be settled before any assets are distributed to heirs and beneficiaries
3. Shares - Islamic rules and guidance states that there are certain heirs (such as husband / wife/ children) who are entitled to what is considered to be a mandatory share of the estate
4. Beneficiaries and heirs - for those writing and preparing wills, they should be mindful of the determination of heirs. That is those heirs who are specifically entitled to a share in the deceased estate (this includes spouses, children, parents, and grandparents)

Requirements Of Islamic Wills

When it comes to Islamic wills there are some key principles you need to be aware of:

• Compliance with Sharia law - make sure you know and understand the intestacy rules of the country you live in. Do not just assume that Sharia rules apply, do your due diligence and make any relevant inquiries
• Finding the right professional - when it comes to writing the will you should always seek the services of an Islamic lawyer who understands Sharia rules and the Islamic distribution of assets. The cost and expense will likely be the same as appointing a non-Muslim probate solicitor.
• Writing the will - the wording in the Islamic will should be clear and concise with no room for ambiguity or uncertainty
• Signing the Will - make sure your signature is applied in the right place and witnessed by two credible, Muslim witnesses. The last thing you want is for your will to be challenged in the future.
• Review - once your Islamic will has been prepared and signed you should review it periodically to make sure it still meets with your requirements and wishes.

Why Islam Recommends Having An Islamic Will In Place

There is a huge emphasis in Islam for Muslims to have an Islamic will. Ensuring that our assets and property are distributed in accordance with Sharia principles is the last legacy for Muslims before they exit this world and enter the next.Every Muslim will want to leave this world and leave their estate in a way that pleases Allah.

Benefits Of Islamic Wills

For Muslims, the main benefit of an Islamic will is that it ensures the estate is distributed in accordance with Sharia rules.Let's have a look at the main benefits of having an Islamic will prepared:

• Islamic estate planning - as mentioned above, there is peace of mind knowing your estate will be managed as per your wishes
• Islamic compliance - Islamic wills are Sharia compliant
• Avoids disputes - having the Islamic will prepared means that disputes about the distribution of your assets in the future are minimised
• Protection for heirs - of course, having the will ready means that your beneficiaries are protected and your assets, property, gifts, and money are shared in accordance with your wishes
• Burial - your Islamic will can outline plans for your funeral and burial and make sure it is all done in an Islamic way and in accordance with your belief and choice. This not only gives you reassurance but also makes the whole experience easier for those you leave behind.

In addition, Islamic wills can also address the importance and appointment of a legal guardian when minor children are left behind. Islamic law states that a legal guardian should be appointed in accordance with the best interest of the children.

Islamic wills can deal with such appointments, and this means that your son or daughter will be adequately supported by your nominated guardian.

ISLAMIC WILLS - WHAT IF THERE IS A DISPUTE?

If you find yourself in a situation where there is a dispute relating to an Islamic will then the first thing you should do is seek the services and advice of a professional Islamic wills lawyer.

Your lawyer will be best placed to advise you of your options, and many of them offer telephone call consultations and advice. If the dispute cannot be sorted via discussion and negotiation with the other parties involved, then you could seek a resolution through the Islamic Sharia court system.

Sharia courts are able to deal with disputes and help resolve disputes in accordance with Islamic principles.

What you should remember though, is that having a well-drafted, water-tight Islamic will means that it is less likely to be challenged or to lead to disputes in the future.

A good professional solicitor with knowledge of Sharia principles will help you prepare your Islamic will and ensure that it meets your requirements and remains Sharia compliant.

You should also make sure you speak to a financial expert who can advise you about tax planning making sure your property, assets and money are distributed in the most tax efficient way. Inheritance tax rules differ from one country to the next so it is always important to understand how they will impact you.

In addition to this, you should also consider having an executor you trust and who will abide by your wishes. The executor could be your solicitor, your child, or your parent, sibling, husband or wife.

Always be conscious of the fact that the rules about inheritance laws vary from one country to another, so always make sure you have the correct information you need. Seek the advice and opinion of a lawyer who specialises in Islamic Sharia law and Islamic wills.