Halal travel industry and Islamic finance synergies

WHAT IS MURABAHA?Murabaha is an important concept of Islamic finance. Technically, murabaha refers to a contract of sale within which the seller declares the cost and any profit generated. This type of financing arrangement is also known as a costs-plus financing arrangement. This means that the murabaha contract is a contract for the sale of goods at cost price plus an uplift for any agreed profit.

The murabaha contract is essentially a contract whereby the Islamic bank is asked by a customer to make a purchase from a third-party supplier or seller and resell it to the customer.

Payment for the item can be done immediately or on a deferred basis.

Murabaha And Business Transactions

For many small businesses, murabaha financing arrangements have become an essential way to raise funds in a way that is compliant with Sharia rules.

As a form of financing, murabaha is used in many different types of transactions. These can include the purchase of goods for households, real estate, and business equipment.

What murabaha contracts facilitate is a structure whereby an interest free form of financing is available for those who need it.

Murabaha contracts also enable individuals and businesses to have help with making purchases from specialist markets they may not be familiar with.

For small to medium businesses, murabaha financing arrangements mean that capital assets can be bought without the business needing to take out loans to make the relevant purchases.

Murabaha As An Alternative Funding Option

Murabaha contracts have become increasingly popular in the United Kingdom in recent decades, as these types of contracts have become a viable Sharia compliant alternative means of finance.
In the current unpredictable economic market, murabaha arrangements are less risky and more ethical. Customers do not have to worry about fluctuating interest rates.

This form of financing arrangement and funding option is asset-backed and this makes it less tumultuous and risky for people and SME enterprises.

Murabaha Financing

Murabaha is a legal mode of financing structure that many Muslims are keen to use as it offers interest free financing. Many Islamic banks globally offer murabaha contracts to their clients and customers.

Murabaha contracts are used to purchase all manner of goods including raw materials, equipment, machinery, real estate, and exported goods.

This form of Islamic finance is an alternative to the debt based finance systems that have become synonymous in many economies throughout the world.

Murabaha And Sharia Rules

In order to comply with Sharia rules, murabaha contracts must:

• the product or subject of the murabaha must be owned by the bank or financial institution when the financial transaction takes place.
• the asset or goods must be of value (classified as property by Islamic finance rules).
• the goods cannot be commodities that are forbidden
• debt cannot be sold via murabaha contracts.
• there must be no interest payment at all, instead a set fee should be agreed.
• there is a requirement that the entire murabaha transaction should complete in two contract stages - the first being when the customer requests the murabaha transaction and promises to buy it from the bank. The second stage is when the bank purchases the commodity and the customer buys it back on agreed repayment terms.
• both contracts should be valid and enforceable.
• As with any Sharia based contract, the terms and conditions should be clear, concise and unambiguous especially when it comes to the terms relating to money and payments.
• the bank assumes the risk when they buy the goods requested
• the purchaser has the right to return the asset if there are any defects.

The two distinct contract stages (ie two definite and distinct sales) circumvent the Sharia prohibition on charging interest.

Murabaha Contracts - The Stages

There are 3 main stages of a murabaha contract:

1. Promise: this stage requires the parties to the contract to negotiate the terms and carry out any due diligence or credit checks that they need to. At this contract stage, the customer will promise the bank that they will purchase the goods the bank will acquire on their behalf.
2. Acquisition and Possession: at this stage of the transaction, the bank acquires the goods and keeps possession and takes on the risk of ownership.
3. The final stage is when the customer purchases the goods from the bank.

ARE MURABAHA CONTRACTS LOANS?The answer to this question is that murabaha contracts (as long as they are compliant with Islamic finance and Sharia rules) are not loans. There is no interest element at all, instead there is a mark-up based on profit, and this mark-up is agreed upon by the parties.

These types of contracts are contracts for the sale of commodities.

Instead of any form of loan agreement or loan repayment, murabaha contracts are based on the existence of two purchase contracts or agreements. The first agreement is the one where the bank purchases the asset, and the second relates to the purchaser buying the asset from the bank.

The risk of the ownership rests with the bank when they purchase the item. Murabaha contracts are not interest based. Instead, the parties negotiate the terms and the profit margin which should be based on the cost of the original purchase and a profit margin.

Murabaha contracts are increasing in popularity as they are a viable alternative to traditional contracts which are not compliant with Sharia rules. What this means for individuals and businesses is that they are able to finance their endeavours within the framework of Islamic finance.

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

The United Kingdom is going through a turbulent financial and economic situation. Coming out of the pandemic, navigating the financial landscape and the economy has resulted in the highest inflation we have seen in decades, alongside stagnant wages and rises in energy bills.

The cost of everything is increasing and it is ordinary people who are struggling. From the National Health Service, to the private sector, and across every community we are all feeling the pinch.

Whilst we expect the government to ensure there is sufficient funding and investment in communities, families, and industries, what is clear is that we all need to be taking steps to minimise the risk of financial losses.

Whilst the government seems more focused on climate action, decarbonisation, and reducing emissions than effective financial planning, as individuals we need to take responsibility for our own actions.

Now is the time for us to be examining out own finances and expenditure.

As we move forward into 2024 and beyond there are some key steps you can take to make sure you are in the best financial position you can be.

Get Informed

Before we move on to the steps we can take to improve our finances, we need to consider our own financial literacy.

As individuals and communities we need to prioritise learning about and understanding finance. Prepare for the future by taking the time to learn about the key principles around money and money management. Learn how interest works, and why it is deemed to be haram in Islam.

As consumers, we need to scrutinise and assess our impact on our finances and understand how we spend and save.

The more information you have the better. The worst thing you can do is bury your head in the sand.

Start by getting details of all your bank accounts, savings, direct debits and debts. Understand your incomings and outgoings and make sure you are living within your means.

One of the key principles of Islam is to live within your means. This encourages people to be mindful of how they consume and spend, and to avoid extravagance.

There are also stringent obligations to ensure that you stay away from riba (interest) and haram spending. You cannot do this properly unless you understand your finances fully.

Knowing your finances means you can avoid haram practices. Also, in order to plan effectively for the future you need to understand how your money is saved, whether it accrues interest, and how much you can save each month.

There is ample information and advice on this website to guide you along the way. In addition, technology is so advanced that these days we can check all our accounts and finances using our mobile phones. As a result, you can keep a close eye on your finances.

Focus On Sustainable And Responsible Consumption And Investing

Focusing on sustainable and responsible consumption is key for everyone, but especially Muslims who want to live in a Sharia compliant way. Islam encourages ethical and socially responsible behaviour in every area of life.

We are required to make a commitment to being sustainable and responsible. Over-consumption goes against Islamic finance principles.

Some of the best ways of achieving a more halal and sustainable level of consumption include:

• The concept of amanah
  • Islam considers money and wealth to be an amanah from Allah. What this means is that Muslims act as stewards of the wealth and will be held accountable for how they use and spend it. Sharia rules guide us to use the wealth in morally and ethically sound ways, and Islamic finance provides us with the structure in which to do this. The construction of Islamic finance principles helps us to make sure we operate within Islamic principles when it comes to our finances. In personal terms, it means that we should be more considered and careful with our finances, avoiding excessive spending, and always taking care to mind our money.

• Avoiding waste
  • Any kind of waste should be avoided, and this includes wasteful purchases and spending. Responsible consumption aligns with the principle of stewardship. Keep an analysis of what you spend on and how you spend and you will be able to identify and report on poor spending and then eliminate it.

• Avoiding haram but invest wisely
  • As Islam prohibits actions that cause harm to others, we need to be mindful of any spending that is deemed to be haram. This includes investing in industries that are haram such as gambling, alcohol and porn industries. Instead, we should look at halal investment options and services.
  • There is a huge social impact to investing in haram industries. Be mindful of where your sums are stored and being invested. The corporate world may be focused on profits, but there are socially responsible and Sharia compliant industries you can invest in. There is also increased regulation and protective policy of most investment options across the United Kingdom which means you can be assured that your money will be safe.

Think Long Term

As mentioned above, try and think long-term. When it comes to your finances, whilst it may seem like you are living from one pay day to the next, there are some small steps you can take to plan for the future. As the old saying goes - fail to prepare, prepare to fail.Planning ahead can relieve the pressure you face tomorrow. The market is fluctuating and temperamental now but it will not always be like this.

Planning ahead builds financial stability and means you can cope with emergencies when they arise. Think of the scenario of when you are much older and unable to work as hard.

Living from one pay day to the next can result in more and more people turning to debt and credit to cover their everyday expenses. Long-term financial planning helps break the cycle of debt. The UK has an ageing population, so it is even more important that we plan ahead and make the right financial decision for our future.

Here are some steps you can take to effectively plan ahead:

1. Set some financial goals: these do not have to be complicated or difficult. Instead, they should be realistic. For example, one goal could be to start saving for a home.
2. Create a budget: once you have a goal, go through all your financial data including incomings and outgoings. Try and track your spending to see where you can cut back and what you can do cheaper. This will help you identify any spare funds for saving. Even £5 a month will help.
3. Have an emergency fund: to stop yourself from falling into debt, try your very best to have an emergency fund.
4. Save and invest regularly: consistent investing, even with the tiniest amounts, can accumulate over time. When dealing with the increasing cost of living, we need to have some money set aside for emergencies.
5. Ditch the debt: overspending is one of the fastest ways to end up in debt. If you are in debt there is help and support out there, so reach out and see if you can reduce your debt and lower your spending.

For Muslims, financial literacy means they can plan and prepare responsibly. It also means they can account for their zakat payments which are obligatory.

Embrace Islamic Finance Principles

Muslims are obliged to follow the Sharia rules relating to finance. For Muslims, true success comes with pleasing Allah.

Embracing Islamic finance principles is extremely important for those wanting to be compliant with Islamic rules relating to financial dealings, but also for those wanting to live and manage their money responsibly.

Islamic finance prohibits any form of interest - that includes payment of interest or receipt of it. The whole idea behind avoiding interest is that this creates a fairer society and does not burden one group more than others. Interest is seen as being rooted in unethical and irresponsible economics.

Islamic finance is based on social justice and fairness. Islam places great emphasis on ethical behaviour, through choice. This means there is an obligation on Muslims to treat all their social and economic dealings with care.

Another key concept from Islamic finance is the idea of profit and loss sharing. Sharia rules encourage profit and loss sharing arrangements. This is to ensure that both parties are treated fairly.

For Muslims looking to save costs and stay away from debt, focusing on Islamic finance rules means they can operate Islamically but also in a way that maximises their money and makes it go further.

Establish Zakat And Sadaqa

Establishing zakat and sadaqa are critically important in Islam. Zakat is an obligation upon all Muslims, whilst sadaqa is voluntary but hugely encouraged.

In order to pay your zakat you need to understand your finances fully. Calculating and paying zakat on an annual basis is essential for Muslims.

Working out your zakat requires an important wealth assessment and analysis calculation. What it means is that through the whole year you are more conscious of your spending and you are making plans for the payment of zakat.

Zakat encourages people to be aware of their financial assets and situation. This prevents the problem of not knowing how much zakat you need to pay.

Understanding the importance of zakat and sadaqa actually encourages savings throughout the year. It also helps people to budget and plan accordingly. Also, by paying zakat people are able to understand the importance of distinguishing between needs and wants in their own lives.

Sadaqa, whilst voluntary, generates a feeling of generosity, compassion and empathy. By willingly sharing our wealth with others it means we are attuned to the needs of others and can budget accordingly.

Stay Away From Debt And Interest

Now is the time to really understand and analyse your spending habits. Make more informed choices about where to spend and save your money. This encourages a more balanced and moderate lifestyle.

Managing your debt is always a good risk management strategy. If you have a credit card then try and stop using it and clear any debt you owe. Credit card debt carries high interest rates and is deemed haram.

Staying away from debt is one of the best financial decisions you can make for yourself. Debt can lead to financial strain, and negatively impacted credit scores. It also means you have overall less disposable income from jobs, and this limits you being able to set goals, save and invest for the future. This will give you greater peace of mind when preparing for the future.

Qardus Ltd do not provide financial or investment advice. It is recommended that you seek your own independent advice from a qualified professional.