Digital banking the Sharia compliant way
Introduction
Islamic banks are able to offer their customers financial services that are compliant with the principles of Islamic finance. Digital banking enables banking systems to be personalised, informative, and efficient. Users are able to quickly access information that is relevant to their account and spending habits. It can take seconds to access your account and your credit and debit balance.
Personalising services via digital banking means customers are more aware of their financial dealings and more able to control their financial habits.
Islamically, knowing exactly how much money you have in your account means you are less likely to overspend, or get into debt. Where in the past customers would have had to attend a bank or a cash machine to find out their account balance, now with digital banking the enquiry can be made at any time and anywhere from a mobile phone.
WHAT IS DIGITAL BANKING?
Digital banking is when a bank or financial institution offers its customers financial services via digital platforms. Customers are now able to access information via their mobile, desktop, accessing their bank's website, and using various apps.
One of the aims of digital banking is to offer a seamless service to people and also to ensure there is financial inclusion when it comes to managing money. Banks want to operate in a more efficient way and make banking more accessible to their clients.
For the bank, it means that they have fewer operational costs as they can rely on digital platforms to offer their services and products.
Digital banking is used widely across the globe, and it means that communities that formerly may not have been served by banking sectors now have more access to basic financial services. Digital banking relies heavily on technology and the technological advancements that have taken place over the last few decades.
Benefits Of Digital Banking
There are many advantages of using digital banking, they include the following:
- greater efficiency
- more seamless service
- enhanced customer experience
- increased transparency
- intuitive platforms
- ease access to information
- no need to attend banks in person
Types Of Digital Banking
- Business to consumer services
- Crowdfunding
- Zakat payments
- Micro-financing
- Interest free loans
- Family banking
- Social banking
- Collections of payment
Islamic Finance And Banking
As digital connectivity and technology continues to grow, the demand for digital services is increasing. At the same time, the Islamic banking industry is also growing and working hard to keep up with digital innovations.
With both industries growing at pace simultaneously, Muslim consumer needs have driven the need for digital solutions within the Islamic banking sphere.
Muslims represent almost 25% of the population of the world and Islam is the fastest growing religion. This means there is already a large demand for digital Islamic services. In addition, the Muslim population has a strong youth demographic who are tech savvy, educated, and aware of how they want to manage their money.
This demographic is also keen to have increased information and transparency when it comes to banking services.
The Islamic economy has moved hand in hand with halal infrastructure. This is definitely the case when it comes to Islamic finance and the banking infrastructure to support it.
There is an increased focus on ensuring that payments and financial transactions are interest free and free from speculation and other haram activities.
Muslim consumers are digitally aware and connected. They are also educated on the principles of Sharia law which deem transactions halal or haram. Their Muslim identity is an important part of the lifestyle and the choices they make.
It is not only Muslim countries that are developing their Islamic finance infrastructure. The Islamic finance industry is thriving in the UK, the US and the rest of Europe. One example is the Port of Rotterdam which has created what is known as a halal distribution park to cater to European Muslims.
Let's examine the fundamental principles of Islamic finance:
- No interest
- No ambiguous terms or uncertainty
- Purification: a requirement that banks ensure money generated is Sharia compliant and separate from non compliant income
- Ethical and socially responsible transactions and investments
- Asset backed systems: not seeing money as a tradable commodity but linking it to real economic activity and assets.
Ethics And Islamic Banking
With the ongoing recession and global financial crisis, there is also an increasing and growing demand for more ethical and socially responsible banking options and services.
Islamic finance services, together with Islamic digital banking services, are well positioned to offer ethical practices and options for consumers. Islamic finance is centred on ethics and offering an alternative system that strengthens real economy sectors.
What Islamic finance also requires is increased due diligence and transparency. In order to be Sharia compliant banking services must comply with the rules of Islam and must be vetted for compliance.
Digital Islamic Economy
The digital Islamic economy is a fast growing industry. The rise of Islamic lifestyle magazines and online platforms means there is a demand for Islamic content and services. For example, the modest fashion industry has become a big player in the fashion sector and has seen incredible growth online.
With over 1.7 billion Muslims in the world, the digital services landscape has the potential to grow and accelerate fast. With it comes an emerging digital Islamic economy that is focused on the consumer needs of Muslims.
Commercially and digitally, Islamic finance is one of the most attractive vertical sectors. However, it's success will need to ensure compliance with Islamic finance principles and Sharia rules.
In terms of the future and the potential of Sharia compliant digital banking, the opportunities are limitless.
There is support from individuals, companies and investors for further development of digital banking services. One of the challenges for digital banking will be to ensure that any product or service that markets itself as compliant will require additional and ongoing due diligence.
Whilst application software (app) programmes will continue to be developed to facilitate compliant investment, saving and money management options.
Digital banking platform Algbra did a survey and found that out of the 1.6 billion unbanked adults in the world, 800 million are Muslims. This is an alarming figure, but it is hoped that digital banking will be more inclusive than conventional banking methods.
Whether it comes to loans, savings, personal or business accounts, or investment, digital banking will ensure more marginalised groups are able to partake.
Developing a robust digital banking service should be a high priority for Islamic banks. In turn, this will lead to enhanced Sharia compliant tools and services.
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In recent decades the landscape and number of small and medium-sized (SMEs) businesses has seen a huge transformation. Many of these businesses are formed and led by Muslim entrepreneurs such as Shahzad Younas (Muzmatch), and Ufuk Secgin (Halalbooking.com). With the growth of Muslim entrepreneurs comes an increase in demand for Islamic finance based lending solutions and strategies.
SMEs dominate the world business landscape. They account for approximately 60% of private sector employment. It therefore makes sense that SMEs will require funding options in order to sustain and succeed as a business. With close to 60% of SMEs failing in the first few years, ensuring they have access to adequate funding is critical.
SME lending has historically been centred on the traditional models of funding that are interest based. However, there has recently been a move towards SME lending based on Islamic finance principles.
In the UK, SMEs are considered to be firms that employ less than 250 employees. UK SMEs play a significant role in the UK economy, and the government is keen to ensure that they are sustainable and successful.
SURGE OF SMEs
SMEs account for a significant portion of the world economy. They not only contribute to employment and job creation, they also play a leading role in sustainability and community impact. In the UK a staggering 99.2% of the business population comprises of SMEs.
SMEs are considered to be major employers and they drive local economy growth.
Recent statistics found that the total value of loans to SMEs in the UK reached a whopping £65.1 billion in 2022. This was an increase of over 10% on the previous year and was the official highest on record.
New business lending in the UK totals in the region of £259 million. Demand from SMEs for inclusive and diverse lending options continues to grow.
SMEs AND SOCIAL IMPACT
SMEs play a critical role in society and our economy. Not only do they facilitate and generate employment, they also increase the flow of money from individuals to industries and through society.
At the beginning of 2023 there were estimated to be 5.5 million SMEs in the UK, an increase of 0.8% over the previous year. The professional, scientific, and technical industries accounted for 14% of all SMEs while another 10% are in the retail, trade, and wholesale industry.
Beyond contributing to the economy, SMEs can impact different areas of society. They encompass social development, community wellbeing, alleviating local poverty, job creation, innovation, and reducing income inequality.
SMEs also tend to be more forthcoming in embracing sustainable and ethical practices. They foster financial inclusion by providing local opportunities for local people.
WHY SMEs ARE THRIVING
There are 1 million SMEs in London and over 852,000 in the South East. These SMEs account for 34% of the UK business population. SMEs account for 60% of the employment in the private sector within the UK. They also account for over 50% of the employment in the UK.
As SMEs have grown, so has the need to provide lending that meets their particular demands. Many SMEs do not have the stellar trading history and records of large business.
SMEs therefore need an innovative approach when it comes to lending and funding.
SMEs can come with limited credit history and collateral but bags of entrepreneurial dynamism and innovation.
Distinct from larger businesses, SMEs have unique considerations relating to scale, financials, structure and characteristics. They may have limited access to capital markets, and therefore need tailored and bespoke financial solutions. A one size approach to lending does not meet the needs of SMEs that provide a range of services in the economy.
This is where Islamic finance really comes forth as a viable option for SMEs.
Sme Lending
SME's often demonstrate adaptability and resilience when faced with economic fluctuations, challenges and issues. SMEs are well placed to weather economic downturns and maintaining local communities through change. Lending to SMEs in the UK amounted to £4.8 billion in the second quarter of 2023.
In 2022 36% of SMEs used external funding and finance options. Over 69% of SMEs have stated that they turned to lending options due to cash flow related issued.
For SMEs, obtaining favourable funding options is not as easy as it is for big companies. Perhaps this is the reason more and more SMEs are turning to Islamic finance services.
Islamic finance is a great option of raising funds for SMEs for many different reasons.
For Muslim SMEs that want to avoid interest and want to be Sharia compliant, Islamic finance provides funding options not available in the wider banking sector. Islamic finance is able to adapt to the requirements of Muslim SMEs ensuring compliance and inclusion.
It is also worth mentioning that Islamic finance is based on a risk and profit sharing arrangement. This means that the funder and the SME share the profits AND the risks.
For SMEs, this is a huge benefit as it creates a sense of partnership with support for the new SMEs on the market. SME borrowing has a huge impact on their operations and customer base growth, so it is essential that the SME lending market continues to diversify and educate itself on the needs of SMEs.
Islamic finance is asset backed finance. What this means for the SME is that the financing is linked to tangible assets. In the long term, this is a more sustainable and stable form of financing for them.
Diversity In Business
The great thing about SMEs that often goes unnoticed is how impactful they are when it comes to inclusion and diversity.
In 2020, 16% of SMEs were led by women. Almost 24% of SMEs were equally led by men and women.
Workplace diversity is essential for SMEs as they often operate within diverse local environments. With Millennials currently making up 50% of the UK's workforce (and Gen Z accounting for 27% by 2025), businesses lacking diversity are missing out.
When it comes to investment for the future and the business operations of the SME, they need to ensure they recruit and retrain properly.
Empowerment Through Enterprise
SMEs are known to encourage empowerment through enterprise. This should be done at every stage of the SME process from project initiations, implementations, cost analysis, research, and education.
The result is that SMEs can ensure that they can recognise and eliminate barriers to growth. Enterprise enables SMEs to plan and prepare, ensuring they have the right insight into how to fund their operations and continue to succeed.
For Muslim entrepreneurs there are additional considerations relating to compliance with Islamic finance rules when partaking in financial services and considering lending options.
Why should Muslim SMEs focus on Islamic finance lending:
- Adherence to Islamic rules relating to financial transactions
- Interest free finance options
- Asset backed financing
- Profit and risk sharing
- Flexible finance structures and services
- Financial inclusion without compromising ethics and religious principles
- Community impact
- Flexible payment options
- Lending is not connected to an industry, product or service deemed impermissible by Islam (ie alcohol, gambling, porn)
Faith In Business
Those SMEs that are looking for ethical and sustainable models of finance and lending can find answers in Islamic finance.
Risk sharing, loss sharing, ethical considerations and non-exploitative practices all underpin Islamic finance and support SMEs in a way that traditional financial service cannot.
WHAT IS LIFE INSURANCE?
Life insurance is essentially a contract between a person and a life insurance company. In exchange for you making regular premium payments, the insurance company agrees to pay out a lump sum to your beneficiaries upon your death. Choosing life insurance policies can be a difficult task as there is a lot of information to plough through online. For Muslims, comparing and choosing a life insurance plan means that additional consideration needs to be given to insurance plans on the market that are compliant with Islam and Sharia laws and principles. Life insurance is about protecting those you love, and ensuring that when you die your estate is and interests are kept safe. Life insurance pay outs provide an essential benefit to dependants and family members. The life insurance policy does not insure the life of the insured, instead, it is more of a financial transaction that protects families of the deceased from unexpected financial risk in the future.
Whilst Islam does not expressly prohibit life insurance, there are some considerations that need to be borne in mind by those looking for Islam centred insurance products.
Life Insurance Plans In Islam
In Islam, life insurance is not seen as contradictory to any Islamic laws or principles. The last few decades have witnessed a monumental rise in the availability and popularity of Islamic banks and finance products in mainstream markets, offering Sharia and Islam compliant products such as Islamic mortgages, life insurance policies and Sharia compliant finance options. Mortgage loans in particular have become increasingly popular amongst people looking for banks that offer financial services that do not contravene any principles of Islam. Conventional mortgage loans were always deemed to be unlawful in Islam due to the interest (riba) elements.
Whilst most life insurance plans do not include interest payments, there have been some questions raised relating to the permissibility of life insurance, particularly when there is an element of risk involved.
Whether the life insurance policy is deemed to be halal in Islam is dependent on the type of life insurance policy you are dealing with.
What Are The Types Of Life Insurance
There are various types of life insurance policies available on the market. However, we will focus on two of the most common types of life insurance policy.
WHAT IS WHOLE LIFE INSURANCE?
This type of life insurance policy is one that ends on the date the insured passes away. Whole life insurance policies guarantee the family a pay out when the insured person dies. These types of policies continue to provide lifelong protection by the operators of the insurance policy. Whole life insurance is also known as life assurance. It essentially operates to ensure that whenever you die your family is protected financially when you die. There is no uncertainty about the monies being paid out, but you do have to maintain premium payments on an ongoing basis.
Whole life insurance is far more expensive than term life insurance when it is compared to term insurance (see below).
WHAT IS TERM INSURANCE?
Term insurance policies are considered to be protective insurance policies. These policies cover lost income when the insured dies and cover things like mortgage costs and the coverage protects you for a limited term.
One example of a term insurance policy is where a person is aged 30 and buys a term insurance policy that costs £20 a month. The terms of the policy guarantee a pay out to your beneficiaries of £100,000 if you die before you turn 50. If you do not die before you turn 50 then the policy comes to an end and the insurer is not required to make any payments. There is no guaranteed pay out to beneficiaries (unless of course the insured dies before they turn 50).
Although used interchangeably, the two terms - life insurance and life assurance - are very different. Both are forms of protection designed to pay out sums when a policyholder passes away. When you compare the two, however, it is clear that life insurance relates to a specific term and life assurance covers the whole life of the insured.
Islam And Life Insurance Plans
When it comes to Islamic life insurance policies, many scholars agree that when the principles of takaful are applied to insurance then it is deemed as permissible Islamically. Takaful is a form of insurance system that is compliant with Sharia law principles, and it basically involves the pooling and investment of funds.
Takaful is a form is Islamic insurance and is based on principles of cooperation, mutuality, joint interests and indemnity/ debt, solidarity, and common interests.
Policyholders of takaful policies are considered joint investors with the insurance operators. The vendors and the policyholders share in the pooled monies and they also share any losses. There is no guarantee of a positive return on investment, and there is no element of definite and fixed profits.
Muslims looking for Islam and Sharia compliant life insurance policies and products that contain terms that do not contravene Islamic laws need to ensure that they choose policies that do not include the following:
- any element of interest
- uncertainty
- high-risk
- ambiguous terms
- gambling
These are all prohibited in Islam.
The basic concept of takaful is that a group of people pool their funds together in a way that does not generate profit, but acts as a mutual benefit to those within the group.
Takaful is about communal, charitable ventures.
The principles of takaful in Islam can be summarised as:
- co-operation between policy holders
- losses and liabilities shared
- uncertainty eliminated or minimised
- No advantage for one party over another
In Islam, the concept of insurance is takaful based - a form of social solidarity. The takaful is based on principles of co-operation and trustees that safeguard the position of each person who has pooled their funds. Muslims looking for life insurance policies should seek to find products that are based around the concept of takaful.
Life insurance with takaful is considered to be fully halal, and provides financial protection alongside long-term savings.
Gharar And Life Insurance
Life insurance is considered to be an important financial planning tool, aimed at providing protection for the family and children of the deceased. However, Muslims looking for Islamic insurance products and services have raised the question about whether some life insurance policies, in particular term insurance policies, contain elements of gharar that deem the policies non-Islamic.
Gharar basically refers to uncertainty, risk, and deception. In transactions where there is a speculative element or a degree of uncertainty.
As term life insurance policies tend to involve an element of uncertainty about whether the pay out will be made (for example, if the insured passes away during the term of the insurance), there have been questions about whether this level of uncertainty leads to gharar. the uncertainty of death, that is only in the hands of Allah (SWT) is deemed to add a nuance of gharar to term life insurance policies.
Whole life insurance policies (life assurance policies) are deemed to be compliant with Sharia laws as there is no element of risk or uncertainty as the pay out is made on death. The certainty lies in the fact that we all die, and there is a guaranteed pay out.
Islam prohibits transactions where there is gharar - uncertainty. Whilst it can be argued that term life insurance policies have an element of uncertainty as none of us really know when we will die, modern insurance policies are less speculative than we like to think. Insurance companies will undertake due diligence based on the health and history of the insured to make sure that the risks are measurable and contained.
Also, it is important to note that, historically, Islam has permitted some gharar is transactions that provide a great benefit and this argument can be applied here.
Maysir And Life Insurance
Conventional insurance policies, particularly term insurance policies, require that policyholder could lose all the sums they have paid in to the policy if they do not die within the term. Maysir refers to the gambling element within insurance policies. In term insurance policies, whilst there is no profit element, if the insured does not die within the term then the insurance vendor does profit from the premiums paid in.
Islam prohibits gambling, and transactions where there are elements of gambling.
There are some Muslims who may think that term life insurance policies and products contain elements of maysir due to the uncertainty relating to the timing of the death, benefits, and pay out. However, unless a policy contains huge elements of uncertainty and elements of taking a gamble, it is unlikely that maysir fully applies. Ultimately, the responsibility lies with the person looking for the insurance policy to ensure that it does not contravene any Islamic laws or rules. This is why it is always best to search out policies that are based on Islamic finance rules.
Riba And Life Insurance
We know that riba (interest) is not permissible in Islam, and this is why so many mortgage loans and bank products on the market are not Sharia compliant. Riba usually comes into play in endowment insurance policies that promise a payment that is guaranteed.
Often in endowment policies, the insurance funds are invested in financial products and businesses that may contain elements of riba.
Islamic Insurance Policies
Muslims looking for insurance policies that comply with Islam and Sharia laws relating to financial products and services need to ensure that elements of uncertainty, risk and interest are not present in the insurance products they invest in.
Those looking for insurance policies that do not contravene any Sharia and Islamic principles should make sure that they undertake due diligence on the contractual terms of the policies and compare and contrast them.
We know that takaful is deemed halal in Islam, so any insurance policy that complies with the principles of takaful should also be deemed to be permissible. If you have a policy with insurers who invest the monies and the investment is in areas deemed haram by Islam (ie industries related to alcohol, gambling, porn etc), then you should look to switch to a policy that is more Sharia compliant.
Conclusion
The key to ensuring you have a life insurance policy that is Sharia compliant is to question what type of policy you have. Is it an investment based policy? Is there an exchange of money? Does it feel speculative? Where are the funds invested? Is there an element of risk that may lead to a cause of action against the insurance company? These are all questions that need to be addressed when looking for a Sharia compliant insurance policy.
Most reasonably minded people would agree that getting your financial affairs in order and protecting your family from financial risks in the future is a responsible action to take. Some people have speculated that taking out life insurance could incentivise others to murder the insured, but this is rarely the case. Insurance policies act as a form of protection, particularly for those who do not have substantial have assets or real property. Life assurance/ whole life insurance policies are considered to be compliant with Islamic rules.
Before you take out any life insurance policy, check for elements of gharar, riba and maysir. These three concepts are not permissible in contracts according to Islamic law.
WHAT IS AN ISA?
An ISA is an individual savings account. The aim of an ISA is to encourage people to save money and invest in what is considered to be a tax-efficient way.
Having first launched in the United Kingdom in 1999, ISAs have become a popular way to prepare for your future by making sure you have savings set aside.
Anyone over the age of 18 in the UK can apply to open an ISA, and for anyone under the age of 18 there are options to open a junior ISA account.
The main things to note with ISAs accounts are as follows:
- You can only open one ISA per tax year
- There are limits to how much money you can put into your ISA each year
- The current ISA limit is £20,000
SHARIA-COMPLIANT ISAs
Sharia-compliant ISAs are essentially ISAs that comply with the strict Sharia rules relating to finance and savings. There can be no element of riba or interest as this is not allowed in Islam.
In addition, a halal ISA must ensure that any money generated comes from halal business and investment opportunities. So if you have a stocks and shares ISA you must ensure that the investment fund only invests in Sharia compliant companies and is not involved with industries that are deemed to be haram such as the porn, alcohol, and gambling industry.
The foundation of Islamic finance rules is that money itself has no intrinsic value. It is simply seen as a medium of exchange, therefore it cannot generate money by itself (hence the principle of interest being forbidden).
WHAT ARE THE ISLAMIC FINANCE RULES THAT APPLY TO ISAs?
As mentioned above, money held in Sharia compliant ISAs cannot attract nor pay any interest. In addition, any money held in a halal ISA must be invested ethically under Islamic finance banking rules.
A good bank that is Sharia compliant will go to great lengths to ensure it remains Sharia-compliant and in line with Islamic finance rules. For example, it will steer clear of businesses and industries that are deemed to be haram and unethical (such as gambling, weapons, and alcohol).
A Sharia-compliant will ensure no interest is paid on your ISA, and that you are not charged interest. Instead, many banks will pay what is known as an 'Expected Profit Rate' This is deemed to be profit that is earned on the savings (as opposed to interest which is accrued).
WHAT TYPES OF HALAL ISAs ARE AVAILABLE?
There are a variety of ISAs that are available on the market. These include the following:
- Stocks and Shares ISAs: also known as investment ISAs, these types of ISAs invest your savings into investments including stocks, shares and commodities.
- Cash ISAs: these work like a traditional savings account.
- Lifetime ISAs are popular with people saving for retirement or their first home. They are only available to those over 18 and under 40 years old.
INVESTMENTS AND ISAs
Sharia-compliant banks will invest your money into those ventures that are deemed to be halal and Sharia compliant. Any money that is generated from this investment is then returned to investors.
For cash ISAs, the important distinction between standard ISAs and halal ISAs is that no interest is payable on halal ISAs.
Banks offering their customers halal ISAs will ensure that they have lots of information about the businesses linked to their ISA investments, and potential opportunities are screened for compliance with Sharia rules. Any bank offering Sharia-compliant products and services will have a dedicated team who is responsible for the management and screening of the product against Sharia principles and providing advice about the products.
As ISAs are seen as tax efficient this is a big draw and incentive for people to open an ISA account.
IS MONEY IN A HALAL ISA SAFE?
There are various different banks in the United Kingdom that offer their customers and investors halal ISAs. They include Al Rayan Bank, Ahil United Bank, and Gatehouse Bank. There is further information about the ISAs on the website of these banks. ISAs in the United Kingdom are regulated by the Financial Conduct Authority.
Halal ISAs are available to Muslims and non-Muslims and offer what is considered to be a decent return on investment. Any provider offering halal ISAs and any other Islamic finance product or service in the UK will need to be registered with the regulating authorities and follow the guidance that applies to any company offering financial services. This means that customers have some peace of mind in the event of a collapse.
You should always make sure that any investment product you are interested in is offered by an institution that is regulated. Under UK law, this means that the Financial Services Compensation Scheme protects investors savings of up to £85,000 in the same way as they would be in a traditional bank.
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