Islamic Finance Guide to Investing Your Money Ethically

Green investments or sustainable investments are those that are deemed to be socially responsible with a positive impact on the environment and wider society. As a complete financial system, Islamic finance facilitates green investments and what this means for investors is an increase in sustainability growth. When green investment and Islamic finance come together they drive sustainable growth.

Islamic finance is growing in popularity and was a system devised many centuries ago. In comparison, the green industry is relatively new. Islamic finance's emphasis on economic justice and focusing on marginalised communities and organisations is the foundation of its principles.There are increasing collaborations between the green industry and the Islamic finance industry.

They complement each other and offer benefits for organisations, and both client and customer.

WHAT ARE GREEN INVESTMENTS?

Green investments are also known as socially responsible investments or sustainable investments. They are centred on those investments that positively affect society, organisations, and people.

Green investments range from renewable energy, to clean technology, sustainable agriculture, green bonds to impact investing.

Green investing aims to ensure that investors who want to align their financial transactions with their ethics can do so. That is not to say that green market investments do not provide good financial returns. On the contrary, like Islamic finance, green investing has proven to be revenue generating whilst also being eco-friendly.

Types Of Islamic Finance Based Green Investments

The kinds of Islamically compliant green investments are wide ranging. They cross various industries from agriculture, to environmental protection, to clean technology. Both Islamic finance and green investments focus on equity, regulation, risk management ,and understanding the needs of the parties.

ESG, that is environmental, social and corporate governance are all key considerations. Islamic finance is the financial tool that an institution can use to remain Sharia compliant and green focused.

With the alignment of both the green industry and Islamic finance, there are a great deal of products on the market now that are tailored to be green and Sharia compliant.

Let's have a look at some green products that are Islamic finance compliant:

• Ethical mutual funds: these kinds of mutual funds are managed in accordance with Sharia rules. When it comes to the actual investment, these kinds of funds only invest in projects and companies that meet both the Islamic finance and green criteria.
• Green sukuk: these sukuks are a type of bond that raise funds for projects that are environmentally sound and sustainable. The sukuks have to be Sharia compliant for them to be halal. Projects range from providing capital for clean water initiatives, decarbonisation, to renewable energy, technology, and agriculture.
• Real estate: green real estate funds invest in sustainable real estate projects and are financed by money that is generated and spent in accordance with Sharia rules. This means any loan comes without any interest payments being charged or paid. Often, ethical real estate investments take place in areas of crisis with a view to enabling local communities to transition away from the crisis in an affordable and ethical way.
• Microfinance: Islamic microfinance services and products are increasing in popularity. This is mainly due to them being regulated in the same way in the UK as other non-Islamic finance products (although, you must always do your own research - knowledge is key). Islamic microfinance can offer funding to SME businesses and individuals who are engaged in eco-friendly ventures and sustainable growth.
• Islamic stocks: if you look carefully you will see there are various Islamic stocks on the market that are green and sustainable. These stocks are usually in companies that are green focused and ethically sound.
• Islamic crowdfunding: when looking at sustainable and ethical finance models, then Islamic crowdfunding ticks all the boxes. For those with aspirations of raising funds for green projects, Islamic crowdfunding offers a great alternative for raising start-up funds.

Commonalities Between Islamic Finance And Green Investments

Both green investing and Islamic finance have many points of convergence and commonality. As models of investment, they complement each other. Both encourage and promote social responsibility and ethical investing.

It is important to remember that both green investment and Islamic finance have foundations in ethics, justice and social responsibilities. It therefore makes perfect sense that they are great partners in the financial world.

In addition, both Islamic finance and green investing principles share the following key principles:

• Prohibiting harmful activities and industries: one of the main rules of Islam is that we should stay away from harmful activities and industries. This means a prohibition in investing, managing or working in industries such as the porn industry, and the alcohol and gambling industries. Similarly, green investments tend to stay away from these industries as they serve no real green benefit to society.
• Sustainable development goals: Islamic finance and green investing play a significant role in promoting sustainable development goals. So, how is this achieved? it is done through the encouragement and support of economic growth, social wellbeing and environmental sustainability.
• Assessing the impact on society: both Islamic finance and green investments are focused on benefiting society as a whole. The aim is to positively impact society and sustainable development, whilst trying to ensure that wealth inequality is reduced and there is economic justice. Investing in industries that tackle climate change, poverty reduction, renewable energy, education, research, and innovation are referred over more profit based industries.
• Ethical screening behaviours and tools: in order to ensure that the investments are compliant with both Sharia laws and green principles, ethical screening is high on the agenda. Both the green investment industry and Islamic finance focus on ensuring that investments and industries are screened, their governance is clear, and policies are not exploitative.

HOW DOES ISLAMIC FINANCE RELATE TO SUSTAINABILITY?

Islamic finance is based on Sharia rules which provide the legal and financial framework within which to live, transact and behave. Islamic finance is more particularly focused on providing rules pertaining to the economy, business and finance.

Due to the very nature of the ethical way Islamic finance operates, this immediately irradicates the purely profit driven and interest based activities of conventional forms of finance.

Islamic finance has always been a key player in achieving and promoting sustainable development goals by:

• promoting poverty eradication
• promoting UN goals relating to sustainability
• Ensuring there is financial inclusion in all countries
• Holding banks accountable and insisting on interest free services and products
• promoting health and wellbeing including clean sanitation and renewable energy
• promoting better education and the eradication of interest based debt
• having strategies that focus on gender equality
• encouraging sustainable agriculture and food security projects

For anyone looking for green projects to invest in, in a halal way, then you must consult with financial advisors who are experienced and knowledgeable in both areas.

In the West investors are looking for more conscientious ways to invest. Neither green investment nor Islamic finance are taught at school or featured heavily in the news. However, the impact of the alignment of these 2 distinct industries is becoming more known in investment markets.

This strategic alignment is opening up major market opportunities for investors. ESG financing is expected to see huge growth in the next decade, as is investment in clean technology and net zero industries. There is clearly an appetite for financial products that are Islamically sound, but also sustainable and green.

Islamic finance, when coupled with green investment, is bridging cultures, finance models and inclusivity. It is an area of finance that is seeing exponential growth in major financial hubs such as London, Washington, Geneva, and Dubai.

Introduction

Progressing at pace, the already flourishing Islamic fintech (financial technology) sector, itself the embodiment of the evolution of existing Islamic financial services, now has a clear opportunity to further embed itself within the world of global finance. Islamic fintech can be defined as an offshoot of financial technology that is built on Sharia principles, prohibiting profiting from debt, interest payments and investing in businesses related to alcohol, tobacco and gambling amongst others.

With the socio-economic upheaval and geo-political changes brought about by the global COVID-19 pandemic and the ongoing war in Ukraine, Islamic fintech currently has the chance to become not only a game changing, disruptive force within global finance, but an influential driver of global financial inclusion.

2020 was a landmark year for Islamic fintech as it was the first time that a standalone Islamic fintech company purchased another, with the New York based ethical investment platform and global robo adviser Wahed acquiring the UK based, Sharia compliant digital banking operator, Niyah.

So if Islamic fintech continues along the same path of rapid growth that it has been travelling along on for some time, the sector will unquestionably emerge as a competitive selection of Sharia compliant alternatives to the wide range of innovative fintech startups and established fintech giants that have been a mainstay of Western, Asian and more recently African economies over the last quarter century.

This article explores the latest in Islamic fintech as well as forecasts of the sector’s huge future potential.

The Development Of Islamic Fintech

Islamic finance is one of the fastest growing sectors of the global finance industry. Catering to the financial needs of the 1.8 billion Muslims across the planet and a broader, international ‘ethical finance’ audience, Islamic fintech’s role holds greater significance now more than ever before, where the need for global investment and financing has never been greater, especially in terms of financing SDGs (Sustainable Development Goals) and ESG (Ethical, Social, and Governance) investments, both of which align closely with the Islamic concepts of social justice and zakat (charity).

(consultancy-me.com, jan2022)

The global fintech revolution is having a similar impact on Islamic finance through the evolution of a progressive, forward-thinking Islamic fintech ecosystem, with many Islamic fintech startups using existing, successful fintechs as loose models upon which to base their own, Sharia compliant fintech organisations on.

With the appropriate modification, many of the hugely successful fintech companies across the world could be used as a blueprint to help spawn their Sharia compliant counterparts.

Statistics On The Islamic Fintech Industry

Standard & Poor’s Head of Islamic finance stated that he believes the market will expand by approximately 10% in 2022-2023 after it expanded with a 10.2% growth in total assets in 2021. In 2020, the total combined asset value of the global Islamic finance market amounted to approximately 2.88 trillion U.S. dollars, with more than 200 million micro, small and medium-sized businesses that still require banking assistance.

Over three quarters of Islamic fintechs are active in more traditional areas related to raising funds, deposits and lending, wealth management, payments and alternative finance, meaning that the digital banking space is somewhat up for grabs.

(Global Islamic Fintech Report 2022)

Based on the 2022 Global Islamic fintech report from Dinar Standard and Elipses, the size of the global Islamic fintech market was $79 billion in 2021, although accounting for just 0.8% of the entire global fintech market. The Islamic fintech market size is expected to reach $179 billion by 2026 at a CAGR of 17.9% relative to the overall global fintech industry, which is expected to grow over the same period at a CAGR of 13.5%. The report also estimated that Saudi Arabia, the world's largest Islamic fintech market, is currently worth around $26bn and is projected to more than double in value in the next five years to $52.3bn.

75% of young Muslims want their banks to make investments that ‘do good in the world’, with 62% opposed to their bank lending to tobacco companies and 69% against their bank lending to gambling institutions. 74% of young Muslims said it’s important they can access their bank’s services via a mobile app and 80% said it’s critical they can access banking services anywhere, at any time.

Islamic Finance is currently estimated to be worth $2 trillion globally, at the very least. This figure is set to hit $3.8 trillion by 2023, as driven by high demand from millennial and Gen Z Muslims, who are confidently expected to account for upwards of 75% of Islamic banking revenue within the coming decade. Furthermore, with data from the ONS (Office of National Statistics) showing that by 2019 more than 90% of 16-24-year-olds were already managing their money online, it looks as if the Islamic fintech space will be a blessing for both consumers and providers.

In the UK, 4 million Muslims make up the second largest religious group in the country and according to the Muslim Council of Britain (MCB) contribute £31 billion to the UK economy and wield a spending power of £20.5 billion.

The UK had the third-largest number of Islamic finance education providers, only trailing behind Islamic finance powerhouses Indonesia and Malaysia. Furthermore, the UK leads the way with 27 Islamic fintechs, predominantly catering to the needs of British Muslims that want to bank with ethical financial institutions, which is more than the United Arab Emirates with its 15 Sharia-compliant fintechs.

(Global Islamic Fintech Report 2022)

Examples Of Leading Islamic Fintech Companies

Below is a selection of the most innovative and successful Islamic Fintechs currently operating around the globe:

• Qardus- The UK’s first ethical and Sharia compliant SME financing marketplace that offers up to £200,000 in working capital financing to eligible small businesses.
• Islamic Finance Guru - An online hub assisting Muslims with their investment, personal finance and entrepreneurial journeys.
• Path Solutions- Provider of Digital Banking, Risk Management/Compliance, and Banking software, serving over 150 Islamic institutions across 40 countries.
• Wahed- Ethical investment platform and the world's first global Islamic finance robo advisor. Launched the first exchange-traded fund in the United States that was compliant with Sharia law in 2019.
• P2P financier Amartha Mikro Fintek & Bank Sumut - Empowering women micro entrepreneurs through inclusive financial services including Islamic facilities to develop women-owned MSMEs in the region.
• Global Sadaqah - Award-winning, Kuala Lumpur based philanthropic fundraising finance platform, featuring CSR, Zakat and Waqf Management services.
• Yielders -UK based Islamic fintech and leading peer-to-peer property investment platform.
• PayHalal
• -
• World's first Sharia compliant e-commerce payments gateway and online ewallet issuance market. Owned by Souqa Fintech, PayHalal launched the world's first Islamic buy-now-pay-later (BNPL) platform in 2021
• MRHB DeFi Network - World’s First online, ethical / Halal DeFi Solutions platform for passive crypto Income, commodity exchange & staking. Blockchain services provider based in Sydney, Australia.
• coinMENA- One of the world’s first Sharia-compliant crypto-assets trading platforms offering non-traditional investment options in the MENA region. Licensed and regulated by the Central Bank of Bahrain (CBB).

Challenges For The Islamic Fintech Industry

• Investment capital for Islamic fintech is for now still typically scarce, and there is a need for a new generation of stakeholders aligned with the principles of Islamic finance. Although these realities are starting to change, many sources of venture capital are still far from Sharia-compliant, making it difficult for the up-and-coming entrepreneurs to fund the development and execution of their ideas.
• The Islamic fintech sector is arguably held back by inherent structural weaknesses within Islamic finance such as the complexity of transactions. This is especially true for those in the general public as well as those within the fintech/finance industry who are acquainted with the form of Islamic financial transactions or the processes involved in carrying them out.
• A barrier to the proliferation of Islamic fintech products comes from regulatory miscommunication. While the regulatory frameworks in the Middle-East and much of Asia manage to provide for Islamic fintech, those in charge of setting the rules (and in some cases, drafting the law) around the rest of the world are often poorly acquainted with Sharia compliant products and services, let alone the principles that underpin them all. Not to mention the fact that those regulatory systems were not designed with such principle-bound products and services in mind. As such, many of these countries have yet to make much effort to accommodate for Islamic fintech. This means that those in charge of building and applying the regulatory frameworks in countries on continents such as Europe and the US will need to implement what is necessary to make their markets both receptive and accommodating to such products and services. Although expert assistance is available through professional financial organisations such as the FCA in the UK, some of the most influential actors within finance such as academics, gatekeepers, and those in authority, frequently lack the necessary knowledge about Sharia compliance.
• A further challenge facing Islamic fintech products and services and another barrier to their more widespread use is a lack of awareness of their existence amongst the non Muslim global general public, along with a lack of the requisite knowledge surrounding the basic principles that are the foundation of Sharia compliant finance. This issue is frequently raised and not just in non-Muslim jurisdictions such as the UK, but also in many majority Muslim countries.
• Performing an unquestionably essential function in musharakah, takaful, and sukuk, the concept of profit and loss sharing looms large in Islamic finance, and is a concept that may be hard to align with traditional western financial and investment philosophy.

(Global Islamic Fintech Report 2022)

Adding Value And Innovation To The Global Finance Industry With Islamic Fintech

With a customer base not far short of 2 billion people, projected to reach around 3 billion people by 2060, Islamic finance and fintech has the opportunity to take the global finance industry beyond the time-honoured bottom line of profit, and offer both ethical and sustainable alternatives in terms of investment methodology and investment products. The increasing focus on sustainable/regenerative financial models and goals, along with the recent progression in financial digitalisation and e-commerce, provides the perfect foundation for Islamic fintech to positively influence the sphere of global finance and investment.

• Global financial inclusion
  
  • Through promoting risk-sharing contracts that provide a viable alternative to conventional debt-based financing, and also through specific instruments of redistribution of the wealth among the society based on Islamic principles such as zakat (charity).
• Addressing financial risk
  
  • The 2008 financial crash was brought about by fund managers and financial speculators making risky investments. Islamic investments by their nature mitigate much of this danger through the prohibition of riba (interest) and ghahar (risk), thereby eliminating any opportunities for short selling or uncertain contracts.
• Offering alternatives to traditional investments
  
  • The fact that Islamic fintech and finance are Sharia compliant does not just mean that they are acceptable to muslims across the globe, but that they offer a different choice in terms of the ethical and moral implications that come with investment choices.
• Reframing the corporate landscape
  
  • Islamic FinTech follows Sharia principles and is hence a type of technology that is ethical and religiously acceptable. Through its very nature, it embraces environmental, social, and corporate governance (ESG) elements. The alignment of certain Islamic financial products and environmental, social, and governance factors along with recent strides in digitalisation may allow Islamic fintech to makes a strong foothold in the market, perhaps even bringing about re-alignment of strict shareholder interest through increased focus on SDGs, ESG investments, and genuine, far reaching programs of CSR.

If your business is to grow, you need to invest in it. Whether the business is a start up, just getting going, or an established firm looking to expand, it needs cash to pay for recruitment, infrastructure, marketing, stock or whatever it is that you need for growth.

Choosing the way to fund your business growth can make a huge difference to your firm's future. While raising finance has one objective - to give you more working capital to invest in growth - the method you choose can have significant implications.

There are different routes for raising this finance. You can put money into the business yourself, take out a bank loan, receive capital from an external investor or take one of several other options. Factors that influence your choice include why you want the finance, the amount involved, your attitude to risk and business ownership, the assets available and your plan for repaying the funds.

How much and for how long

Before entering into a funding arrangement, it's important to be very clear on how much money the business needs and the plan for repaying it. You're investing in future growth, meaning potentially more sales and more profit, but how long will it take for these to come through? Preparing a detailed budget and cashflow gives you clearer visibility of how long it will be before you can repay. While you can't predict the outcome of your business growth activities, you can, using some reasonable assumptions, form a good idea of what's likely to happen.

Armed with this information, you're now in a better position to choose the right funding option for your business.

Debt finance

Raising money for your business can involve borrowing money from your family, a bank or other financial institution. Borrowing, or debt finance, can take the form of a loan, a credit card, invoice finance or some alternative mechanism, such as peer-to-peer borrowing. You're committing to make repayments over a period of time, usually paying interest on the amount borrowed.

Debt finance is either secured or unsecured. A secured debt is where the amount borrowed is linked with an asset, such as a building, and the lender has rights over that asset should you default on making the agreed repayments. You're giving the lender some security that they'll get their money back should your business become unable to repay.
An unsecured debt is not linked to an asset, making it harder for the lender to recover their money. As a result, the interest payments on an unsecured arrangement are often higher and the amount you can borrow is lower. Many financial institutions ask that a director signs a personal guarantee, making them personally responsible for ensuring that the debt is settled.

One risk of debt finance is that the business can become trapped in a debt cycle. You're continually borrowing and paying interest, which eats away at profits. Debt finance can be hugely useful, but its use should be planned and managed.

Equity finance

Equity finance means exchanging part of your business in return for a cash investment. This can be a popular approach for a startup company, particularly where high growth is anticipated, but it needs substantial investment to get going. Venture capitalists and angel investors are always looking out for investment opportunities like this - a business they can buy into that will give them a high return, years in the future.

Because equity capital means giving up ownership of part of your business, it can also mean handing over an element of control. The extent of this should be agreed in advance, in order to set clear expectations. Some investors are comfortable with leaving the founder to manage the business while others want some input into strategic decisions. This can be useful where the investment comes from someone with solid commercial knowledge and experience that they are able to share. Some angel investors want to provide mentorship as part of their investment.

Business angels and others willing to make an investment in equity will want some assurance as to how they will get their money back, and more besides. This could be in the form of dividends or as proceeds from the sale of the business.

The benefits of equity investments include access to larger sums of capital, and potentially, access to the expertise of their investor and their network of contacts. The downside can be loss of total control.

Asset finance

Your choice of funding is broader when your business has assets, such as property, equipment or non-tangible items such as intellectual property. An asset has intrinsic value and this value can be released by taking out finance that's secured on the asset. An example of this is a sale and leaseback arrangement, where the business effectively sells the asset, say a major piece of equipment, and then leases it back from the new owner. This ensures that you can still use the asset, but you also get a lump sum payment from the sale.

A related approach to raising money is invoice finance, also known as invoice factoring. This is often used to improve cash flow in a business that raises invoices on credit terms. The company gets paid almost as soon as it's raised an invoice, even though the customer may take 30 days or even longer to settle the bill. As with most such asset finance arrangements, the interest rate on the money borrowed will affect its cost and the impact on the bottom line.

Business finance can also be raised against the value of an asset in the possession of the business owner, typically a private property.

Crowdfunding finance

The sharing of the risks and rewards of doing business has been at the heart of commercial funding for hundreds of years. That's the principle behind the stock market. Today, crowdfunding is a popular solution to the problem of finding investment for your business growth plans. It comes in various forms, allowing you to raise either debt or equity finance. There are a number of crowdfunding platforms online, each of which offers a different approach to both risk and reward for their members.

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.