Halal Investment Opportunities

Crowdfunding

Crowdfunding is a process of raising money for a business or idea. Unlike traditional methods of raising finance, crowdfunding is innovative and based on the concept of raising funding via crowds of people.

Some crowdfunding contributors will donate funds entirely altruistically, simply to support the business. Other crowdfunders will see their funding contribution as an investment into the business venture. In return, these investors will be rewarded with a return on their investment. The reason crowdfunding is so popular is that is has become a great way of raising money quickly. This means that no matter how ambitious or how small your project, there is a way to raise finance without resorting to asking financial institutions.

How Crowdfunding Works

Crowdfunding enables businesses and individuals to attract investors in the business through the practice of funding a project by raising sums of money from a crowd of people who are willing to invest in the business. Some of those offering funds will do so altruistically, expecting nothing in return, but for many of the donors they will expect a return on their investment. In order to start a crowdfunding campaign there needs to be a specific cause or project, and a specific goal amount in place. Businesses and entrepreneurs can then ask or invite a number of people to donate various sums of money (small and large) until the crowdfunding goal is achieved.

The unique part of crowdfunding is that it mainly takes place online. The digital revolution over the last decade, coupled with the increase in social media exposure and marketing means that crowdfunding campaigns can be widely shared and marketed. As crowdfunding tends to take place online, the use of social networks is key and makes it inherently easy for supporters of a crowdfunding campaign to share it widely, ensuring the project gains widespread exposure and funding.

Crowdfunding is used for all manner of projects, including charity projects, creative projects, start up businesses, entrepreneur ideas and small businesses. Crowdfunding is a great way for non-traditional businesses such as those businesses following Islamic finance principles, to raise funding in a Sharia compliant way.

Types Of Crowdfunding

The main types of crowdfunding models are as follows:

Investment Based Crowdfunding

This type of crowdfunding is often used by businesses looking to raise capital. Businesses will offer to sell ownership shares and stakes in return for a crowdfunding investment. Businesses will promise to use the funding to develop their business idea or product and in return the investor will receive a share of the business in return for the finance they provided. In this way, donors ultimately become shareholders of the company, with the possibility of owning some of the business equity. Often, these shareholders may also be provided with rights to be involved in the business process and project.

Donation Based Crowdfunding

Donation based crowdfunding is essentially a model where donors are asked to contribute to the project by way of a donation. Individuals will essentially donate funds with the aim of meeting the project finance goal, and in return the donors do not expect anything in terms of shares or financial returns. People who donate rather than invest are not backers of the business, they just offer finance on a not-for-profit basis.

Advantages Of Crowdfunding

For anyone looking to raise finance for their business or idea via crowdfunding, there are some important advantages you should be mindful of.Advantages:

• There are often minimal upfront fees or costs and this means there is some protection from risk when starting out
• There is little financial risk with almost no start up debt
• It's a great form of market testing and marketing research, seeking the opinion of your target audience
• Money can be raised quickly and campaigns can go viral
• Social networks, websites, and online platforms can result in speedy and widespread exposure
  
• You can use the crowdfunding campaign to gauge public perception, generate interest, and obtain feedback
• Investors and donors can become personally invested in campaigns and this will help you build loyalty programs and interest in your idea
• Crowdfunding enables start-ups, small businesses and innovative ideas to get financial backing
• It is a great way of raising finance and covering costs for those businesses without access to traditional forms of bank lending or in a difficult economy
• You can create community support for your project and build on these important relationships and customer loyalty
• Crowdfunding enables more effective risk management as there is often less risk for smaller businesses

Crowdfunding Tips

For a successful approach to crowdfunding you need to make sure you have a clear and strategic approach to the campaigns. The advice and tips will help you create a successful crowdfunding campaign:

• Pre launch: make sure you do your research, collate all the information you need, build email marketing lists and think of ideas for your campaign content
• Create compelling content: this could include a campaign video, written information relating to your goals and graphics/videos
• Tailor your PR: before your campaign goes live research your audience, find out where they hang out virtually (Twitter, Instagram, Facebook) and target them
• Strategic social media and influencer use: the greater your reach and the reach of the platforms you use the greater your chances of exposure and success. You don't have to limit your audience to the United Kingdom.
• Engagement: encouraging others to comment, share and post about your campaign will deliver your message to a wider audience
• Donations: don't ask for money immediately but do make sure you ask family, friends, colleagues to donate. Share your passion for your project and draw the reader in. Remember to also ask the right people for donations.

Crowdfunding Platforms

Some of the most popular crowdfunding platforms include the following:

• Kiva
• Kickstarter
• Patreon
• GofundMe
• Indiegogo
• Seedrs

All these platforms enable users to share the campaign and spread the word about your project on various social media platforms and via email.

Islamic car finance is available for Muslims wanting Sharia compliant options. What halal finance options do Muslims have and how do they work?

There is a huge array of car financing and leasing options on the market for those who do not want to buy a car outright. For Muslims, the car finance options available can be difficult to navigate, especially if they want finance and leasing options that are not in contravention of Islamic finance options.

Islamic car finance operates to enable people to use their money wisely, spread the actual cost of financing the car whilst ensuring that they do not pay interest on the finance option they have chosen. Drivers can take advantage of car finance deals whilst also adhering to Islamic Sharia rules relating to interest (the payment and receipt of which is prohibited) and speculation.

The halal car finance market is aimed at those people who want Sharia compliant finance options. Essentially, for those people who do not have the cash to buy a car outright, or those who do not want to buy a car paying cash, Islamic finance ensures that people can spread the cost of the car without breaching Sharia rules.

Islamic Finance Principles Applied To Car Finance

The main Islamic finance principles relating to car finance are:

1. Riba (Interest) - Islam prohibits the receipt or payment of interest. It is deemed to be haram. In car finance terms, this means that Muslims who want to remain Sharia compliant cannot borrow funds with an Annual Percentage Rate (APR) attached. An APR is an interest rate and is prohibited in Islam.
2. Simplicity of Contracts: Islamic Sharia principles dictate that transactions should always be honest, transparent and open. This means that if you enter into a contract for leasing a car you should make sure that there is no undue risk, speculation, or gambling involved. The contract should be fair for both parties and be simple to interpret.

Buying A Car Outright Without Car Finance

It goes without saying that buying a car outright with a cash payment is probably the best option for those wanting to remain strictly Sharia compliant. If you have savings that would cover the purchase of the car you can avoid interest payments and APR. However, not all Muslims have the option of paying cash outright for a car and this is where the market has developed to cater to the needs of those wanting Sharia compliant car finance options.

Car Finance Options - Leasing

Islam does not prohibit leasing (ijara). In fact, leasing is permissible and is compatible with Islamic finance principles. Payments for vehicles can be done via leasing contracts with car companies. Sharia does not prohibit car leasing agreements because the heart of the transaction relates to a tangible asset - the car. As long as the leasing contract sets out the terms of the lease, the details of the parties, and the payments it can be structured to be compliant with Islamic finance rules.HOW DOES HALAL CAR FINANCE WORK?

Halal car finance is actually straightforward, working on the basis of a loan being agreed between the parties. The buyer and seller in the transaction agree on the value of the car the seller is selling. The seller does not charge an interest rate for payment of the car as they would normally to make money on the finance arrangement. Instead, the seller increases the purchase price of the car to cover the interest payments they would have received. No interest is actually charged by a bank or the seller.

What this means for the buyer is that the deposit will be higher than a deposit they would pay on a non-halal car finance option, but for Muslims this is a halal way of obtaining car finance.

Halal Car Finance Options

Generally speaking, the traditional car finance options such as hire purchase agreement and personal contracts are always attached to an APR and this makes them non compliant with Sharia rules.

However, below is an example of how Islamic finance options can adapt the traditional car finance options to make them halal.

Hire Purchase Agreement (Hp)

HP financing means the buyer can spread the cost of the car over fixed monthly payments and the use of a deposit. Below is an example of an Islamic finance HP deal:

Example:

Price: £20,000

Contract Term: 12 months

APR: 6%

Total Cost to buyer: £21,200

Using an Islamic finance agreement, the seller/dealer would add the additional £1,200 to the price of the car. The buyer of the car would then pay £21,200 as fixed payments monthly for the contract term. When all the payments have been made, the buyer owns the car outright.

Personal Contract Purchase (Pcp)

PCP's are a common form of car financing option and act as a loan, with the buyer only paying off the full value of the car at the end of the contract term if they decide to keep the car. If the buyer does not pay off the full value of the car then they do not own the car at the end of the contract. PCP's usually always come with interest payments and are therefore not Sharia compliant.

However, there are sometimes some PCP finance deals available for new cars but these can be expensive and the requirements are often stringent.

Personal Contact Hire (Pch)

As PCH agreements are actually long-term hiring agreements they are normally deemed to be Sharia compliant. As you are simply renting the car from the owner or dealer you are simply paying for the use of the car for a specific duration.

Conclusion

Each contract and hire purchase agreement is different. The onus is on the customer to ensure that they have inspected the terms, and service fees of the agreement before they decide whether the option is Sharia compliant. There are various Islamic car finance options on the market these days, so it is always best to explore these options rather than using the traditional bank or dealer car finance options.

According to reports, global sustainable investment assets had exceeded $30 trillion by 2018, driven primarily by a surge in values-based investing [1]. The core concept behind values-based investing is that investments are made around a shared set of values present in an investment philosophy. This topic is even more prevalent now, as sustainable investing has been identified as key for the post-pandemic recovery. In this article, we provide an overview of a rapidly growing area within values-based investing called impact investing, that has grown to an estimated total market size globally of over $715 billion in 2020 [2]. We then compare the core values that are inherent in Sharia-compliant (i.e. Islamic) investing with those of other values-based investing strategies.

Overview of impact investing
The Global Impact Investing Network (GIIN) defines impact investments as "investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return".

Whereas financial returns are typically measured using commonly used metrics (ROE, ROI, etc.), what distinguishes impact investing is the measurement of social returns as well. Within this context, the main points to consider when measuring social returns are according to the United Nations Development Programme (UNDP) [3] are:

• Outputs are activities carried out by an organization or project. Outputs are meaningless without context. Let's take the example of building a solar power or solar farm to provide reliable power to communities for the first time.
• Outcomes on the other hand are short or intermediate-term, tangible effects observed by project beneficiaries. A tangible effect from the construction of the solar farm would be for example a reduction in energy costs for the project beneficiaries.
• Impacts are broader, more long-term and sweeping changes usually affecting a larger groups of people or community. Measuring impact in this sense is extremely difficult, particularly with regards to being able to isolate and quantify changes that are directly related to a project (i.e. holding all else constant).

Among all social returns impact is the most difficult to measure and hence there is an increasing focus in impact investing on measuring outcomes.

Foundations of Islamic finance
Islamic finance or Sharia-compliant finance involves financing activities that comply with the Sharia (Islamic law). For instance some prohibited activities include that financing must not involve:

• Riba or an increase in capital without any real services provided - akin to "usury" or unjust exploitative gains.
• Gharar or speculation or chance is not allowed - this includes for example excessive uncertainty regarding essential elements of a contract, such as price in a contract of sale.
• Haram (Forbidden) businesses or industries - This practically involves an exclusionary screening process as it is forbidden to finance companies that derive significant income from the sale of alcohol, tobacco, pork, weapons, gambling, pornography and interest-based financial institutions.

It is important to note that in Islam, money has no inherent value on its own. Money increases or decreases in value only when joined with other resources for the purposes of productive activities. All transactions must be based on real economic activity. Islamic finance also goes beyond the purpose of financing to cover the structure of financing. Contemporary Islamic finance incorporates these principles and others in a wide variety of products to meet the growing global demand for Sharia-compliant investment and financing.
Other values-based investing strategies
Socially Responsible Investing (SRI) also known as ethical investing, involves avoiding industries that negatively affect the environment and its people.This includes actively removing or choosing investments from a portfolio based on specific ethical criteria. SRI exclusionary screening avoids for example companies that produce or invest in alcohol, tobacco, gambling and weapons. Environmental, Social & Governance (ESG) investing grew out of investment philosophies such as SRI. ESG however is a framework for evaluating companies and not a standalone investment strategy. It is intentionally neutral - Not faith, country or industry specific.

Areas of overlap
Islamic finance & SRI show some similarities in their objectives (do good, avoid harm), methods (exclusionary screening) & claims (an emphasis on ethics). As mentioned earlier however, Islamic finance goes beyond the purpose of financing to cover the structure of financing as well. Islamic screening also goes over and above SRI screening to exclude other sectors such as interest-based financial institutions for example.

Similarities between impact investing and Islamic finance on the other hand stem from a a strong emphasis in Islam on social and economic justice as well as supporting any action with a view to protecting the planet and the environment. One area of overlap for example is around access to finance for the world's populations that are directly or indirectly kept out of formal financial sectors. Another interesting development is the issuance of green sukuks that are Sharia-compliant investments in renewable energy and other environmental assets. They address Sharia concerns for protecting the environment. It is however important to note that more has to be done in the Islamic finance space to measure impact and in particular measuring outcomes.

What is the role of Qardus?

Qardus is a social impact investment platform that promotes financial inclusion. The SMEs we finance in the UK were prior to this financially excluded due to the lack of financial products that conform with their ethics & values. Financial inclusion is positioned prominently as an enabler of other development goals in the 2030 UN Sustainable Development Goals (UN SDGs) such as regarding SDG 8 on promoting economic growth & jobs & SDG 10 on reducing inequality.

Along these lines, a recent report by Oxford Economics has also attempted to measure the outcome of lending on another crowdfunding (P2P) platform [4]. The report on page 9 indicated for every £1 million lent on their platform, there was a £2 million contribution to GDP, 37 jobs were supported, and £635k were generated in taxes.

[1] http://www.gsi-alliance.org/
[2] https://thegiin.org/research/publication/impinv-survey-2020
[3] https://www.undp.org/content/dam/istanbul/docs/Islamic_Finance_Impact.pdf
[4] https://www.oxfordeconomics.com/recent-releases/1074dfbd-d5e1-4498-abd3-95b399ad63fc