Halal Investment Opportunities

Islamic Finance provides a financing mechanism without Riba (interest), Gharar (gross uncertainty) and Maysir (gambling). These three are the key to all economic oppressions, economic imbalances and instability. They give rise to micro and macro risks which impact the overall wellbeing of an economy. Islamic Finance offers alternative structures and products which are free from Riba, Gharar and Maysir. One of these products is Commodity Murabaha.

In minorities where it is difficult to get Shariah compliant working capital financing for SMEs, Commodity Murabaha is an alternative Shariah compliant product and financing mechanism. Commodity Murabaha is the most common Islamic money market tool that is used to provide liquidity in the short-term Islamic money markets. The AAOIFI Shariah Standards, the majority of global Shariah scholars and global Shariah boards approve of Commodity Murabaha if it is implemented correctly with the correct controls to overcome financing challenges. The classical jurists also approved of a Tawarruq or Commodity Murabaha structure. In fact, Mufti Taqi Uthmani has produced a detailed research paper on Commodity Murabaha outlining the views of classical scholars. Ibn Muflih from the Hanbali school, Imam Shafi’i, Ibn al-Humam and Ibn Abidin from the Hanafi schools have all permitted this product and narrate its permissibility from other classical jurists[1].

Working capital financing is used to cover a company's short-term operational needs and not to buy long-term assets or investments. Those needs can include costs such as payroll, rent and inventory and other costs associated with daily operations etc. Practically, business owners who are looking for shariah-compliant working capital financing to cover their short-term operational needs generally prefer entering a Commodity Murabaha Agreement where a fixed profit rate and corresponding deferred sales price instalments is specified in advance. This allows them to finance their growth at a lower cost of capital as compared to for example using profit and loss sharing (PLS) arrangements such as Mudarabah and Musharakah that result in a higher effective cost of capital. PLS arrangements are better suited for business ventures where there is a higher risk of loss. Profit and loss sharing refers to financing whereby parties enter into equity financing arrangements where the financier has a share ownership in the business.Furthermore, a stable business looking to finance their working capital might not want to dilute their ownership through equity financing. Stable businesses will not want to share their upside so would prefer debt-based financing. By doing so, they are happy to protect the financier from the downside and retain exclusivity to the upside. A PLS is favourable where there is greater risk of downside and therefore the business is happy to share the upside.

In the UK, the most direct and common way for a party to obtain working capital is to obtain an interest-bearing loan from a third-party finance provider. Since a conventional loan represents a purely monetary transaction—in essence, the use of money by a party in exchange for the payment of compensation based on the length of usage—this type of loan may not be given or received by Shariah-compliant investors. The Commodity Murabaha product allows Muslims to finance their working capital without being exposed to interest-based financing.

The Commodity Murabaha agreement has been conscripted to fill the void. A customer enters into a Commodity Murabaha transaction not to obtain a physical asset for its use, but to engage in a series of purchase and sale transactions that result in the customer obtaining working capital. In a basic Murabaha transaction, the customer receives assets in return for a deferred payment obligation, and then employs those assets in its business. In a Commodity Murabaha transaction, the customer takes the additional step of selling the assets to a third party for cash, which represents the working capital (or financing for an acquisition, as the case may be) required by the customer. Note that the customer would not necessarily be required to sell the Assets to a third party; it merely is allowed to do so, as owner of the assets. The sale of the assets to a third party is not an element required to make the Commodity Murabaha transaction a valid transaction under Shariah.

To ensure that this product is not a smokescreen for Riba (usury/interest), contemporary Shariah scholars have placed several controls. The AAOIFI Shariah Standard highlights these controls to ensure that Commodity Murabaha aligns with the principles of the classical jurists. These controls are as follows:

1. Different brokers: The trades must involve the market and involve different brokers from the buy and sell side. This ensures that the trades are genuine and that the brokers are selling/buying the asset with an interest in the asset.
2. Real asset :The trades must involve a real asset. A fictitious product cannot be sold. The asset transaction must impact the inventory of the seller and the eventual buyer.
3. Real trades: All the Shariah requirements for trading must be met in terms of valid offer, acceptance, legal capacities of the parties, agreement on the commodity, agreement on price etc.
4. True ownership: The traders should assume true ownership through true sales of the underlying commodity.
5. Possession: The traders must assume possession; either physically, constructively or digitally. This possession must allow them to dispose of the asset or redeem the asset.
6. Correct Sequence: The Commodity Murabaha must be performed in a correct sequence which further establishes and validates all of the above key elements.
7. Discretion to not sell: The traders must have the discretion to not sell and hold. This ensures that the trade is not fictitious.
8. Different agents: The financier should not be the sole agent for all the parties involved in the Commodity Murabaha.

By meeting the above principles, the Commodity Murabaha is a Shariah compliant, asset-backed financing mechanism which aligns with the principles of Islamic Finance. From a micro-economic perspective and for a Muslim minority in the UK context, this product provides a valid Shariah compliant alternative in a system where every corner and every offer are interest-based. An overview of the Commodity Murabaha facility used by Qardus for SME business financing can be found here.

You can contact Mufti Faraz Adam on sharia@qardus.com

[1] Uthmani, M.T. (1998), Buhuth Fi Qadhayah Fiqhiyyah Mu’asarah. Dar al-Qalam

WHAT IS STUDENT FINANCE?

Student finance in the United Kingdom is funding that is available for students to access to help cover the cost of their further education. The organisation that is responsible for administering and calculating the extent of the student loan payment is the Student Loans Company.

The Student Loan Company was founded in 1990 and was created to provide students with financial support towards their further education. Currently, student finance can be applied for by students to pay for their university tuition fees and living costs while they are studying.

Every student in the UK is entitled to a loan to cover tuition fees. Tuition fees tend to be decided by the universities and the Student Loan Company will make the payment direct to the educational establishment. Currently, in the UK those studying full time can receive up to £9250 per annum towards tuition fees, and additional funds for living costs known as the maintenance grant.

Repayment Of Student Loans

Student loans need to be repaid in full whether or not the student completes the university course or not. The amount you repay depends on your income and is deducted from your salary in the same way National Insurance and tax are deducted.

You become eligible to repay your student loan (with interest) once your income exceeds a certain threshold. In the UK this threshold is currently around £25,000 per year. Repayments are calculated at 9% on sums over the threshold, and the repayment is subject to interest charges.

WHAT IS MEANT BY HALAL STUDENT FINANCE?

Halal student finance in the UK refers to those financial arrangements that students can access to advance and fund their further education. Any halal student finance or loan needs to be compliant with Islamic finance and Sharia principles relating to money.

Specifically, Islamic student finance means that there should be no interest payable or charged on the loan or fees associated with education. Islamically, interest is considered to be haram and should be avoided at all costs.

The concept of halal student finance is structured to ensure that is adheres to Sharia rules and that the financing of education is compliant with ethical and religious rules. The main principle to be aware of is that the arrangement must not involve any form of interest and the transaction should be non-exploitative and transparent.

For many Muslim students, not having access to halal student finance via the Student Loans Company means they do not pursue their further education goals. The main reason for this is that the current student loan system is based on interest repayments.

Student Loans And Interest

Interest on student loans is an integral part of the system that funds further education. This is generally how student loans operate:

1. Student applies for university, is accepted on to the course, and then makes a student loan application.
2. There are two main elements to the student loan:
3. Tuition fees that cover the cost of the course tuition
4. Maintenance loan that is aimed to help with the living costs including rent, and books.
5. To be eligible for a student loan you need to be resident in the UK and have been accepted on to a course.
6. Repayment of the student loan includes interest and the rate of interest depends on factors such as when you took out the student loan. Repayment only begins post graduation and once you earn over a certain threshold.
7. Interest on the loan accrues from when you receive the funds until the full loan is repaid.

In addition to student loans, there are also scholarships and bursaries available for some students. Postgraduates can also apply for student finance but whether they receive it or not depends on their circumstances.

Before considering any form of loan it is important for you to gather all the information relating to the loan and how it impacts you now and in the future. Whilst many see student loans as an investment in the future, there have been concerns raised about the inability of Muslim students to access student finance.

WHY IS IT IMPORTANT FOR MUSLIM STUDENTS TO ACCESS HALAL STUDENT FINANCE?

Muslims want to be able enter and partake in higher education without breaching Sharia rules. Currently, as the UK student loan system is interest-based, this precludes many Muslims from being able to access the funding they need to study further.

Islam prohibits interest and at the moment there is no interest-free funding option for students. There is a need for student finance based on Islamic finance principles that form part of the student loan scheme in the UK.

It's not only the interest element that is a problem for Muslim students. The existing student loan system is subject to change and this could fall into the remit of gharar (uncertainty) in Islam which is discouraged.

Without doubt, a halal payment system for Muslim students will facilitate greater inclusion in the education system.

Islamic Finance And Student Loans

Some key features of a halal student loan include the following:

• interest free loans: it goes without saying that any form of student finance must ensure there is no interest being charged or paid in order for the loan to be deemed halal. Instead, what is expected to happen is that the lending institution or bank charges fees or alternative structures to fund the transaction.
• Ethical: halal student finance cannot be unethical. This goes against the basic Islamic finance principles. Any halal form of finance or funding needs to steer clear of haram industries such as gambling, porn, and alcohol.
• Transparent: for a student loan arrangement to be compliant with Sharia rules, it must be transparent and clear. Both parties in the transaction should fully understand the terms which themselves should be clear and non-ambiguous.
• Risk and profit sharing: a key component of Islamic finance is that there is adequate profit and risk sharing between the parties. The student should not bare all the responsibility and risk in this kind of arrangement.

Consultation On Halal Student Finance

In 2014 the government launched a consultation relating to Islamic finance based student loans. What they found was that of the 20,000 respondents, over 90% stated that there was a demand for Sharia compliant student finance.

In March 2023 the government in the UK (having consulted on lifelong loan entitlement) confirmed that although a Sharia compliant student finance product was not available, it was committed to funding an alternative form of finance for students.

The government discussed several criteria that should be applied in a halal student finance system including:

• repayments should be easy to make
• any alternative system should be operated through the student loans company
• debt and repayment levels should be the same as they are for other students
• the service should be easy to use and transparent

Halal Student Finance And The Takaful System

At the time they were considering halal student finance options, the government concluded that a takaful system would be most appropriate. In Islam takaful refers to Islamic insurance and is based on cooperation and mutuality.

Takaful systems operate without insurance or gharar.

Unfortunately, no halal student finance option ever really emerged. Instead the government focused on other areas of student finance and simply concluded that they would continue to consider halal student loans.

Whilst government controlled and regulated student loans may not be available as yet, there are still halal finance options available. Some financial institutions are offering Sharia compliant loans that could be used for education.

Tips For Students Who Want Halal Student Finance

For students who are looking for halal student finance alternatives, here are some options you can consider:

• Research Islamic finance products and services
• Look into Islamic scholarships
• Speak with Islamic finance advisors
• Speak to your university finance team and ask them for details of hardship funds or grants
• Consider interest-free loans from family

None of the above are ideal for Muslim students but could provide alternative halal funding for further study.

The future of halal student finance is dependent on many factors including the demand, the economic landscape, and the continued growth of Islamic finance. The Islamic finance industry is innovative and dynamic and could partner up with educational establishments in the future.

Increased awareness and education about the need for halal student loans is also something that could potentially speed up the availability of halal loans. Muslim students need to stay informed and alert and always explore all the options available to them before deciding against pursuing further education.

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.