Ethical business growth and Islamic finance

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.

The United Kingdom, and in particular London, has become one of the leading voices and stages for the development of Islamic finance. As the global Islamic finance industry has grown, London has emerged as one of the leading Western markets offering and improving Islamic finance services and products.

One of the key reasons for the investment and development of the Islamic finance market in London is to ensure that the finance markets and industry is able to keep pace with the emerging and dynamic markets in the Muslim centred Middle East region (Dubai and the UAE included).

The Islamic Finance Industry

There are other reasons Islamic finance has really surged ahead in London, and they include the importance of financial inclusion and providing access to funding and finance to those looking to invest in the economy without compromising their beliefs.

The UK is not the only country that is fast developing its Islamic finance reputation, regulation, and provision. Most European countries also offer Islamic finance products and services to individuals and companies.

What has become clear is that Islamic finance has enabled many people from diverse backgrounds to trade, invest and operate a business in the West. This can only be a good thing for the economy and when it comes to financial inclusion.

Interest, Profit Sharing And Risk Management

Many Muslims only use the Islamic finance system so that they do not have to pay interest and can trade and deal with any income, savings, investment strategy, and asset they own in a Sharia compliant way.

The result is that the Islamic finance industry is booming and entering the mainstream finance industry.

Islamic finance has opened up and increased the scope of investment options for investors wanting to raise or build capital, property and other assets.

In addition, the profit and risk sharing element of Islamic finance transactions and contracts are growing in appeal to a much wider audience. The first Islamic finance bank launched in the UK in 1982 - the Al Baraka Bank. Since then the Sharia compliant market has seen growth on a huge scale with Islamic finance products available in trade finance, project finance and real estate.

The Islamic sukuk (bond) market in the UK started around 2007 and has continued to grow. In 2014, the UK government was the first to issue sovereign sukuk.

Understanding Islamic Finance - Knowledge Matters

Many financial experts and researchers have become knowledgeable about Islamic finance and how it operates. In order to offer financial services and products that are Islamic finance and Sharia compliant, there needs to be a good depth of understanding relating to Islam and its principles and rules.

Islamic finance has proven to yield competitive and attractive rewards, and Islam's core underlying principle relating to social justice and equity is becoming more attractive to Muslim and non-Muslim customers alike.

The focus on risk sharing and collaboration between the parties means transactions are more transparent and fair. This in turn creates more stable investment options in volatile markets and economies.

Uk Leading Western Islamic Finance Centre

A recent report from The City UK has stated that the UK is the leading Western centre for Islamic finance. In 2021, the Islamic finance banking asset market was said to be worth approximately $7.5bn.

In addition to general Islamic finance products, Islamic fintech is also growing rapidly in the UK and Europe. The strong regulatory support from the UK government has led to an increasing number of Sharia compliant fintech services.

The UK has also been able to reach attract a large number of professionals with Islamic finance knowledge and expertise.

The growing Muslim population in the UK, the vast majority of whom are young professionals with capital, further strengthens the UK's resolve to continue developing its Islamic financial services market.

London Stock Exchange

The London Stock Exchange (LSE) is one of the leading exchanges for sukuk listings.

In addition, The UK has become one of the world's biggest providers of Islamic finance education. There has been a recent surge in the number of Islamic finance courses and qualifications available to those wanting to expand their knowledge and work in this field.

What is driving this demand for Islamic finance services is private sector initiatives. This coupled with support from government policy and compliance rules has provided a solution for those investors and businesses looking for financial services that are compliant with Islamic finance rules.

Investment

If the UK wants to continue to strengthen its position and status as a leading international centre for Islamic finance then it needs to continue to invest in the Islamic finance market.

This will require the development and progression of the right financial infrastructure and ecosystem to support the industry. It is forecasted that the Islamic finance assets under management are likely to double over the next decade.

The UK is well placed to grow its Islamic finance market and offerings. However, this must be done in line with Sharia rules relating to finance without cutting corners and innovation which could lead to non-compliance. More investment needs to be made in research relating to how Islamic finance operates so that any investor is reassured that their Islamic values are not being compromised during financial transactions.

The growing confidence in the Islamic finance market in the UK has attracted investments in regeneration projects and infrastructure - thereby directly benefiting society as a whole.

Introduction

Islamic microfinance refers to financial transactions that are based on wider Islamic finance principles. These Islamic finance principles themselves are based on the teachings of the Prophet Muhammad (PBUH) and the Quran.

Islamic microfinance provides access to financial services for those who live in low-income households or economies.

The contractual terms of Islamic microfinance arrangements are not interest-based, but instead the terms are Sharia complaint. Islamic microfinance is viewed as a positive tool and concept for facilitating poverty alleviation and financial inclusion.

Research has shown that economies that operate or make available Islamic microfinance widen the market for any Muslim customer looking for structures that do not contravene Sharia rules and want a more ethical basis for their financial dealings.

WHAT IS ISLAMIC FINANCE?

Islam sets out principles that should govern financial transactions, especially commercial financial transactions. One of the main principles of Islamic finance is that the money itself does not earn - what this refers to is interest. Interest, or riba, is not permitted in Islam as money is not seen as an asset that earns in and of itself.Some of the main principles of Islamic finance are as follows:

• No interest (see above)
• Prohibition of involvement in haram industries and products
• Equity in profit and loss sharing
• Ethical and socially responsible investing
• Fairness and transparency
• Avoiding speculation or gambling

WHAT IS ISLAMIC MICROFINANCE?

Any Islamic microfinance product or service in any capital form cannot mirror conventional finance arrangements. Many conventional financial arrangements, although able to provide financial resource, are not Sharia compliant.

Let's examine some of the key features of Islamic microfinance:

• Any Islamic microfinance commodity or service must ensure that there is no element of riba whatsoever. No interest is attached to the debtor, the lender, or the debt.
• In addition, microfinance transactions should always be linked to tangible economic activity. This means there cannot be any financial speculation or uncertainty that is excessive.
• Any product that is bought or sold must be clear and tangible. You cannot trade in or sell something you do not own.
• If involving activities, then these should be socially responsible activities that do not exploit or morally harm others.

What this means for Muslims is that many of them stay away from the financial services on offer. Whilst the structure of conventional finance options may appeal to the masses, Islamic microfinance offers an alternative form of finance.

Key Principles Of Islamic Microfinance

One of the main objectives of Sharia law and Islamic finance is to alleviate poverty and empower people and communities.

Whilst we have looked at some of the key principles above, let's have a look at them in more detail:

• Asset backed finance: Asset backed finance encourages finance options that are backed by real and tangible assets.
• Profit and loss sharing: Islamic finance is focused on profit and loss sharing arrangements. This means that the risk is also shared between the respective parties to the contract and transaction. Common forms of profit and loss sharing arrangements in Islamic finance include mudaraba and musharaka arrangements.
• Social welfare: Promoting social welfare is a central tenet of Islamic finance. Providing and facilitating access to education, healthcare, and essential services is seen as the promotion of social welfare so any form of financial arrangement that enables this to take place is seen favourably in Islam.
• Ethical investing: as is the case with social responsibility, Islamic microfinance heavily favours ethical investments. What this means in principle is that any investments need to add value to others and society. Examples of projects and investments that are deemed to be ethical include community development projects, agricultural, and healthcare projects.
• Interest (riba) avoidance: riba is strictly prohibited in Islam so any form of arrangement where interest is paid or charged is impermissible. Islamic microfinance steers clear of interest-based products (often used by lenders in Western economies which are credit and debt based).

Social Responsibility

One of the main principles of Islamic finance is that finance should serve society. What this means is that financial transactions must be conducted in a socially responsible manner. The foundation and ongoing management of Islamic microfinance products (on paper and in practice) should be equity-based.

The idea underpinning Islamic social responsibility is that there is a balance between social objectives and financial objectives. What this ultimately leads to is more sustainable finance long-term as the scope for exploitation and inequality within transactions is minimised.

In many ways, Islamic microfinance is underpinned by principles of benevolence, morality, unity, freedom, and equilibrium. Muslims believe that they all have a responsibility to society and the environment. Therefore, they must embody this commitment to social responsibility through their words and actions.

In this way, they can contribute to social justice (as prescribed by Islam) and ensure populations across the globe are not adversely impacted.

Types Of Islamic Microfinance

Islamic microfinance is based on the foundations of Sharia law. Sharia rules place great emphasis on transparency, fairness, social responsibility, and ethical behaviour.

Let's have a look at some Islamic microfinance products:

MICROCREDIT

Islamic microcredit is a term used to describe small financial services relating to credit. Microcredit operates within Sharia rules and is designed to ensure that entrepreneurs and small businesses are able to access fair and equitable financing options.

Islamic microcredit does not include any riba and is asset-based finance. Any loan issued is backed by assets or productive ventures.

MICROLEASING

Islamic microleasing (also known as microfinance leasing), enables small businesses and entrepreneurs to lease assets for varying periods of time. The leasing arrangements are compliant with Islamic finance rules.

In Islamic microleasing arrangements, the lessor (lender) will retain ownership of the asset and grants the lessee a right to use the asset for a period of time. The lessee then pays the lessor lease payments for the use of the asset.

MICROINSURANCE

Islamic microinsurance is also known as takaful insurance. This type of insurance does not contravene Islamic finance principles. Takaful is a cooperative arrangement based on shared risk and mutual assistance between the parties.

What this means in real terms is that businesses and individuals are able to access insurance coverage whilst remaining Sharia compliant.

Islamic Microfinance - The Prospects

It is estimated that over 60% of Muslims who live in Muslim countries do not use formal financial service institutions and services. One of the main reasons for this is that many Muslims view conventional finance institutions as incompatible with aspects of Sharia law.

This has led to the emergence of microfinance services and products being developed both inside and outside of Muslim countries and economies.

Muslims are increasingly keen to engage with financial services that comply with Sharia law and the rules of Islamic finance. Since 2006, the Islamic finance market has seen a four-fold increase, and this is likely to continue growing in the future.

What Islamic microfinance represents is the merger of two quickly accelerating industries - Islamic finance and microfinance. Not only does Islamic finance meet the commercial business demands within global economies, but it also provides individuals looking with Sharia compliant funding options.

Unlocking The Potential Of Islamic Microfinance

Any financial transaction that meets Sharia rules is not only good for business, but it also means that transactions are socially and ethically considerate.

Islamic microfinance has the power and potential to operate in a fair, socially responsible and transparent way. What this means for businesses, the entrepreneur, individuals, and communities is that they too can access funding and enhance their ability to access finance and loans.

Providing financial access to poorer or marginalised communities who currently reject conventional, interest-based finance products means greater equity and economic development.

Islamic Microfinance And Poverty Reduction

Islamic microfinance is based on the foundations of equity and social and environmental responsibility.

One of the main advantages of Islamic microfinance is that it contributes to poverty reduction in various ways:

• Enterprise and entrepreneurship - Islamic microfinance supports individuals and businesses from low-income and under-developed communities. It enables these businesses and entrepreneurs to access capital for the ventures and establish sustainable and Sharia compliant livelihoods.
• Financial inclusion - as already mentioned, Islamic microfinance has become an important tool in encouraging and facilitating financial inclusion. Offering financial products that are not only accessible but also Sharia compliant means that marginalised groups can access funding for their start-ups.
• Skills growth - there are many Islamic microfinance organisations that offer training and skill enhancement programmes alongside their financial products and services.
• Community development - with a strong focus on equity and social responsibility, Islamic microfinance is committed to community development. This goes beyond offering financial assistance. Microfinance products can include access to healthcare, education, and a wide range of community benefits.

Islamic Microfinance - The Challenges

One of the main challenges for the Islamic microfinance industry is spreading awareness of the products and services on offer. Despite growing rapidly, this industry is still seen as being in its infancy.

Further advertising and outreach work is required to make sure that Muslims and socially responsible investors are aware of the microfinance options available to them.

The important thing to remember is that Islamic microfinance encourages and develops financial inclusion and freedom. Whilst the impact of Islamic microfinance funding options may vary depending on the regulatory environment, local economic conditions, and institutional capacity, Islamic microfinance is essential if we want to ensure the sustainability of Islamic finance initiatives and alleviate poverty.