Ethical business growth and Islamic finance

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

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

WHAT IS STAKING IN CRYPTOCURRENCY?

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

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

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

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

HOW DOES STAKING WORK?

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

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

There are two main forms of staking:

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

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

Sharia Compliance And Staking Crypto

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

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

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

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

Considerations

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

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

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

IS STAKING HALAL?

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

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

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

Practical Steps For Muslims Considering Staking

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

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

The current cost of living crisis in the United Kingdom is affecting everyone. For many households, this is the highest squeeze on their finances that they have experienced. Many people are being forced to take measures in order to stay afloat. The cost of food, goods, and utilities are continuing to rise at an alarming rate, and people are having to make smart financial decisions.

According to recent statistics, up to 18 million households could face fuel poverty by January 2023 due to the ongoing energy crisis. Many of these families will have to decide between heating and eating. Investment bank Citi estimates that the UK consumer price inflation could reach 18% by early 2023. This will not only affect the finances of couples, and families with children, but almost everyone in the country.

This is why it is vital that you make smart financial decisions that could help you ride out this current cost of living crisis.

Let's have a look at some of the ways in which you can make your money go further.

Plan And Budget

One of the best things you can do is prepare a spending and budgeting plan. This will help you identify if you are overspending and examine those areas where you can cut back and save costs.

For example, do you still need to have a full Sky TV package? Can you get a cheaper broadband deal? Do you have any subscriptions that you no longer need or use?

Go through each direct debit and see if you can reduce or remove it. Check what you are paying for your smartphone packages and see if these can be reduced in any way. Ring your providers and ask them if they have any better deals on offer that could lower your costs.

Track all of your expenses and payments. This is the only way that you can successfully budget. Information and knowledge are power so use them to your advantage. Create a spreadsheet or table that lists all your incomings and outgoings, and then have a close look at where your money is going.

Muslims will already be used to the concept of planning and budgeting as they have to reconcile their finances and accounts every year in order to calculate their zakat calculations.

However, it is a good idea to keep a more regular eye on your finances, and remember that any drop in your income and savings may also affect your zakat and sadaqa payments.

Live Within Your Means

This is really important. It sounds so simple, but many people in the UK live beyond their means and this means they will struggle during the recession.

Having debt is not so much of a problem when times are going well. However, if you fail to make your repayments things could go wrong very quickly.

There is a famous Arabic proverb that states 'cut your coat according to your cloth'. Essentially, this encourages us to live within our means and not overstretch ourselves financially.

Islam does not look favorably on those who spend excessively and keep increasing their debt. We should all be looking at how we make use of our resources and expressing empathy for those less fortunate. Managing our finances well is something everyone needs to do, and needs to learn to do better.

Pay Off Debts

It might sound obvious but it is vital that you pay off any debts that you are able to. There are many online debt advice helplines that offer you recommendations and a guideline to help you reduce your debts.

You should prioritize paying off any debt, especially if it is a debt that accrues interest. Interest is not only strictly prohibited in Islam, but is also detrimental on your finances as the interest rates are likely to continue to increase.

If you can, pay off your debts.

Do Not Accrue New Debt

If you are thinking of taking on a new loan or new debt then think twice. Especially if the debt will be accrued due to a purchase that you do not necessarily need.

The same applies to buying things using your credit card. Now is not the time to be accruing more debt that incurs interest.

Start Saving Now

If you can, start saving now. It is never too late to start saving. Good financial management not only means monitoring your spending habits, it also means looking at your savings strategies.

You may need to undertake an evaluation of all your incomings and outgoings to see if there is anything you have left to save. If you do, even if it is a small amount, it is never too late to start saving.

If you do not have an ISA now is a good time to find information about what savings products are out there. For Muslims, there are some halal savings accounts that do not pay interest.

These halal savings accounts offer the same banking services as conventional savings accounts without interest.

Set Savings Goals

Set savings goals for yourself. This could be as little as saving £10 a month, to saving much more.

If you are saving to buy your first home, then you will likely be impacted by the increase in interest rates.

Look for banks and lenders that offer halal mortgages based on Islamic finance principles. Halal mortgages tend not to be as dependent on standard interest rate fluctuations and offer more stable repayment options.

Invest

Many people are scared of investing during a recession or economic crisis, but there are some good investments out there that can generate revenue and income.

Do your research and have a look at what investment opportunities are out there for you.

Investing in the right funds, stocks and bonds can be inflation busting. If you do your research you could find investments that offer a good rate of return. For Muslim investors, there is a range of halal investment options on the market which tend to be more stable than the conventional stocks and shares.

If you want to minimise the risk when it comes to investing, then try not to be too exposed to a limited number of sectors or assets. Diversifying your portfolio via investment is a good way to spread your money with less risk.

Think About Side Hustles

Side hustles have become popular in recent years when it comes to generating additional monthly income. Some low cost side hustles that have been successful in recent years include the following:

• Amazon selling
• Etsy selling
• Selling digital art and services
• Creating a website
• Freelance graphic designing
• Freelance writing
• Blogging and vlogging
• Social media influencing
• Shopify
• Dropshipping
• Creating online courses and offering advice
• Affiliate marketing and advertising services
• Starting a podcast
• Using comparison and cash back websites

These are just some side hustles that require very little financial outlay at the start.

Undertake Due Diligence Before Making Big Financial Purchases And Decisions

If you are thinking of making a big purchase such as a home or a car then make sure you do all the necessary research. Use comparison websites to find the best prices for things like electrical goods and holidays.

When it comes to home purchases, remember the housing market is likely to undergo some change in the coming months.

It might be better to sit tight to see if there is a fall in house prices. You should also look at different funding options such as halal mortgages. These types of mortgages tend not to have fluctuating rates as they are not interest based loans.

Take Your Time - Don'T Be Hasty

This is important. Now is not the time to make rash decisions or rush into big purchases or commit to long-standing and expensive monthly subscriptions.

Whether it is a smartphone or a new streaming service, take your time in deciding whether you definitely want to commit some of your monthly income to it.

WHAT IF YOU ARE SELF-EMPLOYED?

For the self-employed there are some additional concerns during a recession. For a start, whilst you may already be accustomed to fluctuating monthly income, you may see a drop in overall income as your customers feel the pinch and cut back on their spending.

Rising inflation is likely to affect all businesses, irrespective of size and industry.

Now is a good time to look at your personal finances, and check to see that you can:

• meet your mortgage repayments or rental payments
• meet all your essential direct debit payments for things like utilities
• have enough money to cover food and groceries for at least 3 months
• have some savings to fall back on in case your monthly income drops
• cut back on any non-essential items of expenditure

Some Ways You Can Protect Your Money

The Bank of England recently raised the interest rates. When this happens, it is usually an indication that the Bank of England wants people to start saving more and spending less.

Some ways to future-proof your money and savings include the following:

• Pay off as much of your existing debt as you can
• Make changes to your living standards that would bring your costs down
• Check to see if you can consolidate any of your debts
• If you have investments, check up on them and see how they are performing
• Save for a rainy day - even a few pounds a month will soon add up
• Track your spending by separating your wants from your needs
• Limit spending on gifts
• See if you can fix your mortgage if you are currently on a variable rate, there are some deals to be had out there

A sukuk is a form of financial certificate that is issued in compliance with Islamic finance principles and Sharia law. Sukuk is an Arabic word meaning 'deed, cheque, or legal instrument'.

The main purpose of a sukuk is to create returns for investors that are similar to the returns available on traditional fixed income bonds.

As the Islamic finance market has grown over the last few decades, so has the interest in and demand for sukuk bonds. Essentially, sukuk bonds are similar to traditional bonds in that they have parties who are involved in seeking a return on investment, and sukuk bonds are subject to the same credit rating as conventional bonds.

Sukuks are commonly used by corporations and even governments to finance their business operations.

Islamic Finance Principles And Sukuk

Sharia law does not permit investors to partake in investment activities that involve riba. The payment or receipt of riba (interest) is strictly forbidden in Islam.

Most conventional Western market bonds are based on an interest paying structure, and this is not permissible for investors who do not want to receive or pay interest on their financial investments.

Sukuks were first issued over a decade ago in Malaysia who were forward-thinking when it came to creating and supporting financial investment products that Muslims could be involved in. Bahrain was quick to follow Malaysia in issuing sukuks, and these days sukuks can be found in economies across the globe.

Sukuks take up a respectable share in the fixed income market globally. Sukuks have emerged as a great Sharia compliant alternative to traditional interest based bonds.

Sukuks offer Muslim investors the opportunity to invest in bonds and subscribe to certificates that represent the right to actually receive a share of profits that are generated by an asset base. The profits are generated by the asset base being traded on the market.

What do we mean when we refer to fixed income bonds? Sukuks are fixed income bonds. This means that they are fixed income investments and they can provide what is considered to be a more steady stream of income.

Islamic Bonds

Sukuks are considered to be Islamic bonds. They involve asset ownership which is direct, rather than indirect interest based bonds that Western markets tend to offer.

Any income, return, or profits generated from a sukuk cannot be derived from any speculative activity. This would render the return haram under Sharia laws.

So, how do sukuks work? What normally happens is that the issuer of the sukuk certificate will sell an investor a certificate. The proceeds of the sale are then used towards the purchase of an actual asset. The investor then has a partial interest in the asset based on their respective investment.

Another element of sukuk that is important to note is that the issuer of the certificate must promise that they will buy back the sukuk at a future date.

When it comes to sukuks, compliance with Sharia law means that any profits that are derived from the investment must be totally free of speculative activity and interest.

Sukuk Versus Traditional Bonds

As Islamic finance rules do not permit interest, this means that the traditional Western debt and loan instruments are not accessible to Muslim investors who want to comply with Sharia rules.

Sukuks have therefore become a great alternative for investors (Muslim and non-Muslims) to use sukuks as a viable alternative method of raising funds.

Sukuks are considered to be an interest in an asset, and not a debt obligation or debt instrument.

Conventional bonds and sukuks do have some similarities:

• Both traditional bonds and sukuks offer investors a stream of income payments. The payments on traditional bonds include interest payments, and the payments from sukuks are based on profits from the assets.
• Both bonds and sukuks are sold initially by issuers of the certificates.
• Sukuks and bonds are viewed as less risky than equity based investments

When it comes to ownership, sukuks allow for partial ownership of the asset, whilst conventional bonds are more of a debt obligation. Sukuks are not debt obligations.

It is also important to note that often, conventional bonds finance businesses or industries that are deemed to be haram under Sharia law principles. These haram industries include the gambling industry, alcohol industry, and porn industry. Sukuk bonds cannot be linked to any form of haram activity or industry.

HOW ARE SUKUK CERTIFICATES ISSUED AND HOW DO THEY WORK?

Sukuks are usually found in the form of certificates, also known as trust certificates. In the United Kingdom, sukuk certificates are regulated by the Financial Services Authority. In other countries and economic landscapes across the world where sukuk certificates are issued, there is similar regulation of them.

There is a very specific process for issuing any form of financial certificate including sukuk certificates/ bonds.

The steps below outline the most common steps that are involved in issuing a sukuk certificate:

1. Normally a company that requires some form of capital will establish a special purpose vehicle that is known as an SPV for short.
2. The company is known as the originator.
3. The special purpose vehicle aims to protect the underlying asset from potential creditors in the event that the originator gets into financial difficulties.
4. The special purpose vehicle issues the sukuk certificates.
5. These sukuk certificates are then sold on to investors for a price.
6. The originator uses the funds raised from the sale of the sukuks to purchase the asset they want.
7. The special purchase vehicle will then purchase the asset from the originator.
8. The special purpose vehicle will then establish a form of lease to lease back the asset to the originator.
9. The originator will make the necessary lease payments to the special purpose vehicle.
10. The special purpose vehicle will then distribute the lease payments to the investors.
11. Once the lease is terminated, the originator will buy back the asset from the special purpose vehicle at nominal value.
12. The proceeds of the sale are then distributed by the special purpose vehicle to the holders of the certificate.

Different Types Of Sukuk

As mentioned above, most sukuk certificates have been presented in the various global markets as trust certificates. It is very common for English common law to govern the law relating to sukuk trust certificates in different countries.

However, the management of sukuks varies from country to country so it is always advisable to do your research about the jurisdiction that regulates your sukuk. Information and transparency are key when it comes to any form of investment, especially sukuks. Where possible, always carry out an analysis of the sukuk product or service before you proceed.

The main types of sukuk are as follows:

1. Trust certificates - in this form of structure the originator of the sukuk will create the special purpose vehicle and issue trust certificates to the investors. The proceeds are then used to build a portfolio of assets which will eventually yield a return.
2. Civil law structures - these types of structures have emerged to enable sukuk transactions to be undertaken in accordance with the local laws of the country where the originator is based. One example of a country that used civil law structures when it comes to sukuks is Turkey. Turkey have passed their own legislation relating to sukuks which has to be complied with.

Sukuk For Investors

As Muslim investors have historically not had the opportunity to invest in bonds without an interest element, sukuk bonds have been welcomed across many global economies.

Sukuks are a great way of enabling investors to link returns with the cash flow of financing assets without the riba of traditional form of debt financing.

However, it is important to point out that sukuks as a form of financing should only be used for identifiable assets. Identifiable assets are those assets whose commercial value can be ascertained at any given point of time. Identifiable assets include things like real estate, equipment, cash, and stock.

In this way, the holder of the sukuk bond /certificate does not own a debt, but as the owner of the sukuk certificate, they own a share of the asset that is purchased using the sukuk funds.

Even though the special purpose vehicles that issue the sukuk certificates are usually brand new, this does not mean that investors will bear exposure to the credit risk of that special purpose vehicle.

Advantages Of Sukuk

Here are some of the main advantages of investing in sukuks:

• For those looking for investment from Islamic economies and markets there is a great marketing benefit to sukuks who will appeal to investors looking for Sharia compliant ways of investing their money
• Sukuks are known to yield similar profit on par with conventional bonds
• More bank and financial institutions are offering sukuk products (always check the website of any organisation offering Sharia compliant products to ensure that you have all the information you need)
• The investor base of Sharia compliant investors is vast and continues to grow
• In addition to the Islamic finance investment market, there is also potential to tap into the ethical investment market which has developed over the last few decades and is always in the news
• Issuers of sukuk certificates are entitled to the same tax arrangements as the equivalent traditional financing arrangements
• Assets that are acquired by the sukuk bonds are jointly owned
• Instead of receiving interest, the holder of the sukuk certificate receives actual profits
• Sukuks offer banks the opportunity and tools to invest their excess liquid assets
• Sukuks can operate for contractual terms that are agreed upon between the parties
• Sukuks continue to grow with success attracting all kinds of high-quality investors including Muslim and non- Muslim investors
• Sukuks have been used across various locations and industries including transport, water, power, education, infrastructure and industrial