Ethical business growth and Islamic finance
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.
More on ethical finance
Explore related perspectives on building sustainable business
Sharia-compliant finance operates within the Islamic finance financial model. What this means is that any financial product or service must adhere to Islamic rules relating to financial transactions.
The increasing popularity of Sharia-compliant finance is being driven by the growth in the global Islamic finance industry. However, many businesses and individuals are looking to Sharia-compliant finance to provide them with ethically based options and solutions. Ethical investors and the growing trend for socially responsible investing means Sharia compliant services are aligning with the values of many people across the world.
Sharia-Compliant Finance
Sharia-compliant finance must have the following qualities:
- Aligns with Islamic values
- Prohibition on interest/riba
- Ethics and morality screening
- Social responsibility
- Risk management
- Profit and loss sharing
- Ongoing monitoring and compliance
- Asset backed finance
- Avoiding speculation and ambiguity
Promoting Inclusion
Sharia-compliant finance is a great draw for ethical investors in the market looking to invest their money in ethical enterprises that promote individual inclusion and diversity. By providing equitable access to financial services, Sharia-compliant finance serves underprivileged communities who may not previously had access to products and services.
The focus on building inclusion and equity through transparency, information, and sharing of profits enables Sharia-compliant finance to promote inclusion.
There are several ways in which Sharia-compliant finance promotes inclusion.
- Prohibition of interest: the charging or receiving of interest is seen in Islam as an exploitative practice that is unjust and unfair.
- Avoiding speculation: keeping transactions transparent and equal makes them more inclusive.
- Ethical investment screening: screening for industries such as gambling and alcohol means that more focus is placed on environmental, social, and corporate governance.
- Asset backed finance: having transactions backed by assets leads to more clarity and equity between all parties.
- Risk sharing: this leads to greater inclusion as it removes the respective power of each party when coming into the financial deal. It also means that payments owing to the parties are fair and proportionate.
- Socially responsible investing: the onus on being socially responsible when investing or managing a portfolio places a responsibility on the investor to be conscious of working with marginalised groups.
- Sustainability: having a future focus on long term goals is a key element of Islamic finance.
- Fairness in contracts: Islamic finance emphasises the importance of having fair contracts and contract terms. Parties to a contract should act with integrity, honesty, and mutual consent.
Microfinance In Islamic Finance
Islamic finance recognises the importance of supporting small and medium businesses. Investment in these sectors and industries is encouraged.
Sharia-compliant finance understands that microfinance for small businesses is imperative for growth and sustainability. Often, small businesses can struggle to secure funding and capital. Islamic microfinance offers SMEs a lifeline with Sharia compliant finance solutions that are tailored to the business needs.
For investors, it means they can invest ethically, enabling entrepreneurs to access capital for business growth.
Risk And Profit Sharing
Risk and profit sharing is a key element of Islamic finance. What it means in principle is that partnership models such as Mudarabah and Musharakah are encouraged.
These partnerships enable entrepreneurs and financiers to agree on the terms of any profit sharing in a fair and transparent way.
Community Development Initiatives
Islamic finance encourages community development initiatives through mechanisms that align with Islam. The central principles of social responsibility and ethical investing mean that investors are required to act in a philanthropic way for the greater good of society. The outcome is that society benefits from the actions of the individual.
Sharia-compliant investments are directed towards the type of fund and project that positively impacts society. Investors looking for Sharia compliant investors prioritise investments in sectors that require funding such as healthcare, education, renewable energy, housing, and poverty alleviation.
These sectors have seen huge growth in recent years, so investing in them is often a win for the socially conscious investor and the initiative.
Staying Stable In Volatile Markets
Sharia compliant finance has demonstrated resilience and stability in volatile markets. This is due to its core principles of risk sharing, asset backed finance, and avoiding interest. Ethical investors are not looking for a quick and easy return, instead they want to invest in a stable and ethical sector.
As changes in interest rates affected the global markets in recent years, the Islamic finance investment market remained relatively stable as it is not dependent on interest backed lending or borrowing.
The value of the assets the finance is backed against provides some stability when the market becomes unpredictable.
Global Growth
Islam encourages a long term approach when it comes to investments. The focus is not on immediate profits, but long term sustainability and societal benefit. The principles of sabr (patience) and fairness in Islam mean that ethical investors investing using a Sharia-compliant framework are not always looking for an immediate return on investment. The aim is long term benefits and stable returns.
As the Islamic finance industry continues to grow, so too do the Sharia compliant finance options. Ethical investors from all backgrounds are pushing the drive for ethical and socially responsible investments.
WHAT IS A PENSION?
A pension is effectively a savings plan that is long-term. It is designed to help you save for your retirement and ensure that you can maintain your standard of living once you are no longer working, without having to worry about finances and bills.
Halal pensions are a Sharia compliant investment option for Muslims who do not want to compromise on their religious beliefs.
Halal Pensions
A halal pension is long-term savings plan that is compliant with Islamic rules relating to saving. Halal pensions are Sharia compliant.
Muslims are required to ensure that their money is managed and invested in a way that does not contravene the Sharia rules relating to finances, and this is why they look for halal pension products.
Difference Between A Conventional Pension And Halal Pension
As mentioned above, halal pensions are specifically geared towards Muslims, but can be utilised by anyone.
Halal pensions are different from traditional pension schemes as they each have different underlying principles and different investment strategies.
Many conventional pension schemes are not compliant with Sharia law and therefore not acceptable to Muslim savers.Halal pensions must have the following elements:
- No riba (interest)
- No maysir (gambling)
- No gharar (uncertainty)
Most traditional pension schemes invest in schemes that will not meet the above requirements. However, halal pension schemes have a Sharia compliant investment strategy. This means that the funds should be invested in assets that are Sharia compliant including real estate/ property and Islamic bonds.
In addition, halal pensions have a different management and market approach than traditional pension schemes. Halal pensions have to be managed in accordance with Islamic principles. These principles centre on the concepts of social and ethical responsibility which we will examine below.
Conventional pensions are more driven and focused on generating revenue and profits. The wealth and revenue growth of conventional pensions are often generated from risky or interest-based investment strategies.
Key Features Of Halal Pensions
If you work in the public sector and pay into a workplace pension it is very likely that you have a defined benefit pension. You should ask your employer for information relating to your pension so you can assess whether it is a defined benefit pension. If it is, then the pension should be halal.
Always check to see what fund your pension monies are located in.The main features of a halal pension include the following:
- Compliance with Islam and Sharia rules: this is fairly obvious but any pension you have must not contravene any Sharia rules about finances. Whilst you have a choice about which pension fund to invest in, it is your responsibility to make sure you seek expert opinion and advice about the investment and the operations of the scheme.
- Prohibited investment: for a pension to be deemed to be halal, investors need to make sure the monies are not invested in haram industries (gambling, porn, alcohol etc)
- No interest: this is one of the underlying concepts in Islamic finance. Sharia rules and guidelines strictly prohibit the payment of receipt of any form of interest. You should be sure to avoid haram bonds or any other investment instrument that relies on interest.
- Ethics: investors are faced with the obligation to act in an ethical and socially responsible way. This means that investments must align with the core Islamic value of transparency and fairness. Investments must adhere to Sharia rules and guidelines relating to finances.
Ethical And Social Responsibility
Halal pensions are designed to ensure that any investment is socially responsible and ethical. This is a fundamental principle of Islamic finance and must be adhered to.
Anyone who manages a halal pension needs to ensure that they do not invest in any industry, economy, market or product that would deemed to be unethical or haram under Islamic rules.
This means the pension monies cannot be invested in industries that are involved with gambling, porn, alcohol, and any other activities not permissible under Sharia rules.
Any profit or return from investment in these industries is haram
Importance Of Having A Halal Pension For Muslims
For Muslims, having a pension is an essential part of ensuring that they plan for their future.
Not only will having a pension provide you with an income for your future, but ensuring the pension is halal will increase its value for those who wish to remain Sharia compliant.
Workplace Pensions
In the UK, you should have a workplace pension, and your employer is legally required to contribute to your pension fund.
In addition to this, it is always a good idea to think about having a private pension. The main benefit of this, other than having a second pension pot, is that you can direct which pension fund to invest in and you have more of a say about where your pension is invested.
Having a halal pension means you have a savings plan that aligns with the ethical and religious values of Islam.
Key Benefits Of Having A Halal Pension
Some of the benefits of having a halal pension include the following:
- Compliance with Sharia law
- Alignment of personal values with financial planning strategies
- Accessibility to ethical investments
- Saving for retirement
Halal Pensions In The Uk
The popularity of halal pensions is growing in the United Kingdom and the rest of the world. Not only are they aimed at Muslims looking for Sharia compliant saving and pension plans, but they also attract ethical investors.
The number of banks and financial organisations offering halal pensions is increasing. Before approaching any organisation offering halal pension products you should always satisfy yourself that they are sufficiently registered and regulated by the FCA. You should also make sure the bank is fully aware of the rules relating to Islamic finance.
Please note that Qardus Limited does not provide financial advice.
What Is The Recovery Loan Scheme
The Recovery Loan scheme was launched on the 6th April 2021 by the UK government as a successor to the government’s Interruptions Loan Scheme and bounce back grants from 2020. As with any loan scheme, this scheme requires the payment of interest. This, of course, is contrary to Islamic Sharia law principles that forbid the collection or payment of interest.
For many Muslim-owned and backed businesses, the question has arisen as to whether the Recovery Loan Scheme is Sharia-compliant. Before we address that, we need to look at the Recovery Loan Scheme and its key features.
The Recovery Loan Scheme provisions were put in place by the government to ensure that they were able to provide financial support to UK businesses. The government wanted to offer additional funding to businesses in the UK that needed the funding to survive the economic turmoil brought on by the pandemic.
The Recovery Loan Scheme’s main purpose is to facilitate recovery and growth post-pandemic. The payments from the Recovery Loan Scheme also aim to ensure that businesses survive during the transitional period back to regular business activities.
The scheme is open to any business that is:
- Trading in the UK
- Able to show it has been adversely affected by the pandemic
- Not involved in any insolvency proceedings
- A viable business if not for the pandemic
How The Recovery Loan Scheme Works
The Recovery Loan Scheme wants to facilitate a full return to business activities for those businesses that have been impacted by the pandemic. The successive lockdowns have affected many small and medium businesses that have been unable to earn an income from their trade.
The Scheme is targeted at businesses that are viable enough to afford debt finance. The British Business Bank administers the Scheme. The actual funding is made available via a range of accredited lenders.
As with any process that involves applying for a loan, businesses need to make a formal application via the lender of their choice.
The loan consists of standard commercial lending terms and this includes the payment of interest on the loan amount. The interest rate varies depending on the lender who provides the loan.
Features Of The Recovery Loan Scheme
An approved lender of the Scheme can provide various loan products including:
- Overdraft facilities
- Asset finance monies
- Term loans
- Interest and fees payments
Any business applying for a loan through the Scheme can borrow up to £10 million. There are also minimum facilities that start in the sum of £1,000.
Some other key features are:
- Guarantee: the government itself guarantees up to 80% of the loan to the lender, irrespective of the size of the loan. This guarantee is not provided to the business, but direct to the lender.
- Interest: any business that takes out a Recovery Scheme Loan will have to make interest and fees payments from the date the loan is drawn. Although interest rates are capped at 14.99%, lenders are encouraged to keep the rates low.
- Term: terms vary from 3 months to 6 years.
What Are The Sharia Rules Relating To Loans And Interest
Sharia law prohibits businesses from paying or receiving interest. Interest, known as riba in Sharia law, is forbidden as it is seen as a mechanism that promotes social injustice. One of the central concepts of Islamic Finance is that Muslims cannot benefit from lending money and paying interest on loans.Sharia law deems riba as an exchange with no equity. That means that it encourages an exchange that is considered to be unequal and unjust. Riba is considered to be an exploitative transaction.
Bottom Line
If we have a look at the Recovery Loan Scheme, it relies on interest payments as a key feature of the Scheme’s repayment terms. The interest element of the Scheme deems it to be non-compliant with Sharia law. In this case, the business will be repaying the full loan amount plus interest at a rate decided on by the lender.
The Scheme goes against the Sharia principle of ensuring investments and payments are socially responsible.
Sharia law clearly states that lending with the payment of interest favours lenders who make money at the expense of the borrower. Islam forbids the receipt of income from money alone, and this is precisely what interest payments are.
Islamic Finance is based on ethical economic principles. The Recovery Loan Scheme is therefore not Sharia-compliant as the interest payment element of the Scheme is contrary to Sharia principles.However, businesses that operate within Islamic Finance principles can still recover from the pandemic. Islamic Finance is focused on sustainable economics and there are products available within the Islamic Finance market that can assist businesses with economic recovery.
The Qardus Option For Business Funding
We provide finance to small and medium-sized enterprises with growth potential that the business owners want to unlock. The funding available is from £50k to £200k with terms of between 6 and 36 months.
Our funding process is rooted in Islamic community principles and is certified as Sharia-compliant. As a result, we don't charge interest and we don't work in business sectors considered damaging to society, such as alcohol, tobacco or gambling.
Because of our principles, our funding solution is an attractive option for Muslim business owners, but we also provide funding to business owners outside the Muslim community.
We offer fast, flexible and affordable business growth funding that's firmly grounded in ethical principles.
Stay informed on finance
Subscribe to our newsletter for the latest insights on ethical financing
