Interest And Inflation
WHAT ARE INTEREST RATES?
Interest and inflation rates are linked and affect our daily lives from the cost of our weekly shop to how much money we can borrow. Interest rates are essentially the amount borrowers are charged for borrowing money. Most banks will show the interest rate as a percentage of the total loan amount. This means that the higher the percentage, the more interest you will pay back over the term of your loan.
If you are not a borrower and you are a saver, then the interest rate will inform you how much money you will accrue in your account. the higher the interest savings rate you have the more money you will be paid into your bank account.
Interest rates vary depending on who you are borrowing from, the amount of your borrowing, the level of risk involved, and the terms of your loan.
If a lender thinks lending you money is high-risk then it is likely they will charge you a higher interest rate. In this way, the economics of a country are impacted by the interest rates.
HOW CHANGES IN THE INTEREST RATE AFFECT US?
One of the most obvious impacts of a changing interest rate is that it affects the amount of interest we are paid (as savers) or pay (as borrowers).
Any time there are changes in interest rates you should examine your savings and lending to see if you will be affected.
For those looking to borrow money, whether that is to buy a house, invest in business, or even just for the purposes of education (such as a student loan), the cost of borrowing will increase when interest rates are raised.
Current economic uncertainty means that businesses, individuals, corporations, and almost everyone in society are impacted.
For homeowners, an increase in interest rates means an increase in repayments (unless the mortgage is based on a fixed rate). Ultimately, this will result in a squeeze on household income and budgets at a time when the UK is dealing with an energy bills crisis and an increase in fuel costs.
To summarize the main effects of rising interest rates:
- increase in mortgage repayments
- increase in the cost of borrowing
- reduced consumer and business confidence
- increased incentive to save more to take advantage of the improved interest rates (but this depends on the rate being offered by banks on savings accounts)
- slower economic growth
- possible rise in unemployment
WHAT IS A BANK RATE?
A bank rate is set by the Bank of England. Arguably, it is the most crucial interest rate and is also sometimes known as the base rate.
The base rate is controlled by the Bank of England and is the rate paid by the Bank of England to businesses and banks that borrow from it.
The Bank of England is known as the central bank of the United Kingdom. They not only set the bank rate, which is currently 1.25%, but they also undertake the regulation of the banking industry, and financial business services, and they oversee the country's monetary policy. This then goes on to affect the economy including employment, wages, spending, and borrowing.
When banks set an interest rate they consider many factors in addition to the bank rate.
However, if the Bank of England changes the bank rate, then banks will also change their interest rate for both borrowers and savers in the market.
WHAT IS INFLATION?
The word inflation describes rising prices. If prices of goods and services are rising quickly then this is referred to as the rate of inflation.
Currently, in the United Kingdom the rate of inflation is 9.4%.
The rate of inflation is worked out by comparing the cost of products today and comparing the price against what the same products cost a year ago. The Office for National Statistics is the organization that is responsible for checking the price of goods and services.
If the price of production, imports, and raw materials increases then it is very likely that the rate of inflation will also increase. In addition, any increase in demand from consumers also causes the inflation rate to increase.
This is what is currently happening in the UK with the cost of living crisis.
WHAT CAUSES INFLATION?
As mentioned above, inflation is caused by various factors. The main drivers of inflation rates going up are the increased cost of production, and increases in raw materials and wages.
If inflation rates begin to increase it means that the cost of basic necessities including food and household items also rises. This can adversely affect society as many people will struggle to afford the basics and fall into debt. Inflation rates could also affect employment rates as employers also face cuts to their budgets and increased costs of operating.
Inflation does not only affect the basic necessities such as food. As we have seen recently in the UK, inflation also affects utilities, fuel costs, clothing, luxury goods, and cars.
Some of the main factors causing the rising prices in the UK, and thereby affecting the rate of inflation, include the following:
- increase in energy bills
- high fuel prices
- the war in Ukraine
- the rising cost of car prices (according to the Office for National Statistics)
- increased costs of household goods and furniture
- increased costs of food
- higher interest rates impacting homeowners
Whilst the cost of goods is rising, the wage increases are not rising in line with the cost of living.
HOW ARE INTEREST RATES AND INFLATION CONNECTED?
Theoretically, interest rates and inflation rates have what is considered to be an inverse relationship. This means that when interest rates are low, inflation is expected to rise, and when interest rates are high inflation rates should go down.
When interest rates are lower, the borrowing power of consumers is increased.
If consumers are spending but the prices of goods are going up faster than wages are increasing, then inflation rates increase. In order to encourage borrowers to borrow less and encourage them to save more the Bank of England increased the interest rate.
The aim is to slow the economy down enough to decrease inflation.
WHY HAVE INTEREST RATES GONE UP?
The Bank of England has increased interest rates so that it can reduce the rate of inflation. If the rate of inflation continues to go up in the UK then this can have many negative effects on UK residents. Currently, the inflation rate in the UK is at a 40 year high.
For example, people will have to pay more and more for goods and services. Property could lose some of its value, and fuel prices could continue to rise.
If inflation rises too high then this is called hyperinflation. This can result in a full economic collapse and devalue the currency.
WHY DID THE BANK OF ENGLAND RAISE INTEREST RATES?
The general view is that if the Bank of England raises interest rates they want people to spend less money.
When interest rates increase the Bank of England hopes that people begin to spend less and save more.
The Role Of The Bank Of England In The Economy
The Bank of England was established in 1694 as a private bank that lent the UK government money.
In 1997, the Bank of England was granted independence so that it could set the interest rates without any form of political affiliation.
The Bank of England is not connected to the Chancellor of the Exchequer as it it is important for it to base its interest rates on economic factors rather than political ones.
Not only does the Bank of England set the base rate, but they also:
- forecast the inflation rates
- issue coins and bank notes
- act as a lender of last resort for UK banks
The Current State Of The Uk Economy
According to PWC, the UK economy was recovering well from the global pandemic.
Unemployment rates were low and the labour market and service industry was recovering well.
However, the war in Ukraine was a shock to the UK economy (and economics globally), impacting it in many different ways including:
- disrupting supplies and services for all industries including retail and construction,
- leading to higher commodity prices and less revenue for businesses
- lower trade levels
- less investment flow
News agencies and websites are reporting that the UK growth outlook for the next 12 months does not look promising.
KPMG has agreed with this analysis stating that the GDP growth this year will halve and slow further in 2023 (UK Economic Outlook Report, KPMG, 2022).
According to KPMG, they predict further interest rate increases from the Bank of England. This is based on data from economic forecasts, consumer spending, interest rates, and the unemployment rates.
WHAT IS HAPPENING IN OTHER COUNTRIES?
Many other countries around the world are dealing with similar problems that the UK economy is dealing with.
According to the Office for National Statistics, the European Union is facing similar rates of inflation as the UK.
The United States is reporting inflation levels of 9.1%.
DO INTEREST RATE AND INFLATION RISES AFFECT INVESTOR BEHAVIOR?
The basic answer to this question is yes. Interest rates and inflation rates affect investor behavior. In fact, changes in inflation and interest rates affect everyone.
What it means in real terms is that any money you have saved could be worth less today than it was yesterday. High inflation rates impact the purchasing power and confidence of consumers and their spending.
Inflation rates and interest rates affect investment portfolios. If investors are finding it more expensive to borrow funds to invest then it is very likely that investments overall will reduce.
Investor Risk
Investors aim to increase their wealth and minimize their risk and tax liabilities. In an economy where interest rates and inflation are rising, there is normally an impact on portfolios and investments.
Rising inflation not only affects stocks and bonds it also affects property prices. Of course, all investment comes with a risk of losses.
Any investor with inflation-indexed assets or liabilities needs to be particularly aware of the changes in their portfolio.
Also, as interest rates rise this affects borrowing. As borrowing becomes more expensive, this leads to investors having less money available to invest.
Rises in interest rates also affect the stock market and the impact of the rise is usually felt quicker than in the general economy.
Normally, when interest rates fluctuate investors should expect the market rate of their bonds to also fluctuate. However, not all bonds are equally affected. Bonds that have short maturities may not be as impacted as bonds with longer maturities.
For investors who have a long-term outlook and planning when it comes to their portfolio, short-term changes to the interest rate should not significantly impact them.
For an investor who is looking at the long-term goal and who has a mix of assets, the long-term outlook of their portfolio should be fine.
To summarize, when interest rates increase the impact on investments includes the following:
- a rise in mortgage rates
- affect on the price of commodities
- Fall in bond prices
- Potential losses in the stock market
- fluctuations in real estate values
- increases competition between banks
Interest Rates And Islamic Finance Customers
For many borrowers, any increase in interest rates will affect how much they pay back to the bank they have borrowed from. The exception to this is those with fixed rate loans or mortgages. As the interest rate on these loans has effectively been 'fixed' for a specific period, then interest hikes or drops will not affect the repayments. Make sure to check when your fixed rate period comes to an end so you can plan accordingly.
In theory, for customers of banks who want Islamic Finance and Sharia compliant services, changes in the interest rate should not adversely affect borrowers or savers. This is because banking services based on Islamic Finance principles do not rely on interest or include any form of interest payment.
Conceptually, Islamic banking customers are not motivated by profits or gains. Therefore, changes to the interest rate should not affect them.
However, on a wider scale, any changes to the interest rates and inflation will affect all lending institutions in some way. Many Islamic Finance lenders use the base rate of the country to benchmark their repayment calculations. This means any increase to the base rate could affect the repayments for customers of Islamic finance products.
However, for economies where the interest and inflation rates and subject to fluctuation, this could lead to more people being interested in the interest-free products offered by financial institutions that offer Sharia compliant services. A research study in Malaysia found that any increase in base rates increased consumer interest in Islamic mortgages.
Ultimately, how you are affected by increased interest rates and inflation rates depends entirely on your financial circumstances and the management of your investment portfolio.
More on ethical finance
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Sharia-compliant finance operates within the Islamic finance financial model. What this means is that any financial product or service must adhere to Islamic rules relating to financial transactions.
The increasing popularity of Sharia-compliant finance is being driven by the growth in the global Islamic finance industry. However, many businesses and individuals are looking to Sharia-compliant finance to provide them with ethically based options and solutions. Ethical investors and the growing trend for socially responsible investing means Sharia compliant services are aligning with the values of many people across the world.
Sharia-Compliant Finance
Sharia-compliant finance must have the following qualities:
- Aligns with Islamic values
- Prohibition on interest/riba
- Ethics and morality screening
- Social responsibility
- Risk management
- Profit and loss sharing
- Ongoing monitoring and compliance
- Asset backed finance
- Avoiding speculation and ambiguity
Promoting Inclusion
Sharia-compliant finance is a great draw for ethical investors in the market looking to invest their money in ethical enterprises that promote individual inclusion and diversity. By providing equitable access to financial services, Sharia-compliant finance serves underprivileged communities who may not previously had access to products and services.
The focus on building inclusion and equity through transparency, information, and sharing of profits enables Sharia-compliant finance to promote inclusion.
There are several ways in which Sharia-compliant finance promotes inclusion.
- Prohibition of interest: the charging or receiving of interest is seen in Islam as an exploitative practice that is unjust and unfair.
- Avoiding speculation: keeping transactions transparent and equal makes them more inclusive.
- Ethical investment screening: screening for industries such as gambling and alcohol means that more focus is placed on environmental, social, and corporate governance.
- Asset backed finance: having transactions backed by assets leads to more clarity and equity between all parties.
- Risk sharing: this leads to greater inclusion as it removes the respective power of each party when coming into the financial deal. It also means that payments owing to the parties are fair and proportionate.
- Socially responsible investing: the onus on being socially responsible when investing or managing a portfolio places a responsibility on the investor to be conscious of working with marginalised groups.
- Sustainability: having a future focus on long term goals is a key element of Islamic finance.
- Fairness in contracts: Islamic finance emphasises the importance of having fair contracts and contract terms. Parties to a contract should act with integrity, honesty, and mutual consent.
Microfinance In Islamic Finance
Islamic finance recognises the importance of supporting small and medium businesses. Investment in these sectors and industries is encouraged.
Sharia-compliant finance understands that microfinance for small businesses is imperative for growth and sustainability. Often, small businesses can struggle to secure funding and capital. Islamic microfinance offers SMEs a lifeline with Sharia compliant finance solutions that are tailored to the business needs.
For investors, it means they can invest ethically, enabling entrepreneurs to access capital for business growth.
Risk And Profit Sharing
Risk and profit sharing is a key element of Islamic finance. What it means in principle is that partnership models such as Mudarabah and Musharakah are encouraged.
These partnerships enable entrepreneurs and financiers to agree on the terms of any profit sharing in a fair and transparent way.
Community Development Initiatives
Islamic finance encourages community development initiatives through mechanisms that align with Islam. The central principles of social responsibility and ethical investing mean that investors are required to act in a philanthropic way for the greater good of society. The outcome is that society benefits from the actions of the individual.
Sharia-compliant investments are directed towards the type of fund and project that positively impacts society. Investors looking for Sharia compliant investors prioritise investments in sectors that require funding such as healthcare, education, renewable energy, housing, and poverty alleviation.
These sectors have seen huge growth in recent years, so investing in them is often a win for the socially conscious investor and the initiative.
Staying Stable In Volatile Markets
Sharia compliant finance has demonstrated resilience and stability in volatile markets. This is due to its core principles of risk sharing, asset backed finance, and avoiding interest. Ethical investors are not looking for a quick and easy return, instead they want to invest in a stable and ethical sector.
As changes in interest rates affected the global markets in recent years, the Islamic finance investment market remained relatively stable as it is not dependent on interest backed lending or borrowing.
The value of the assets the finance is backed against provides some stability when the market becomes unpredictable.
Global Growth
Islam encourages a long term approach when it comes to investments. The focus is not on immediate profits, but long term sustainability and societal benefit. The principles of sabr (patience) and fairness in Islam mean that ethical investors investing using a Sharia-compliant framework are not always looking for an immediate return on investment. The aim is long term benefits and stable returns.
As the Islamic finance industry continues to grow, so too do the Sharia compliant finance options. Ethical investors from all backgrounds are pushing the drive for ethical and socially responsible investments.
The current cost of living crisis in the United Kingdom is affecting everyone. For many households, this is the highest squeeze on their finances that they have experienced. Many people are being forced to take measures in order to stay afloat. The cost of food, goods, and utilities are continuing to rise at an alarming rate, and people are having to make smart financial decisions.
According to recent statistics, up to 18 million households could face fuel poverty by January 2023 due to the ongoing energy crisis. Many of these families will have to decide between heating and eating. Investment bank Citi estimates that the UK consumer price inflation could reach 18% by early 2023. This will not only affect the finances of couples, and families with children, but almost everyone in the country.
This is why it is vital that you make smart financial decisions that could help you ride out this current cost of living crisis.
Let's have a look at some of the ways in which you can make your money go further.
Plan And Budget
One of the best things you can do is prepare a spending and budgeting plan. This will help you identify if you are overspending and examine those areas where you can cut back and save costs.
For example, do you still need to have a full Sky TV package? Can you get a cheaper broadband deal? Do you have any subscriptions that you no longer need or use?
Go through each direct debit and see if you can reduce or remove it. Check what you are paying for your smartphone packages and see if these can be reduced in any way. Ring your providers and ask them if they have any better deals on offer that could lower your costs.
Track all of your expenses and payments. This is the only way that you can successfully budget. Information and knowledge are power so use them to your advantage. Create a spreadsheet or table that lists all your incomings and outgoings, and then have a close look at where your money is going.
Muslims will already be used to the concept of planning and budgeting as they have to reconcile their finances and accounts every year in order to calculate their zakat calculations.
However, it is a good idea to keep a more regular eye on your finances, and remember that any drop in your income and savings may also affect your zakat and sadaqa payments.
Live Within Your Means
This is really important. It sounds so simple, but many people in the UK live beyond their means and this means they will struggle during the recession.
Having debt is not so much of a problem when times are going well. However, if you fail to make your repayments things could go wrong very quickly.
There is a famous Arabic proverb that states 'cut your coat according to your cloth'. Essentially, this encourages us to live within our means and not overstretch ourselves financially.
Islam does not look favorably on those who spend excessively and keep increasing their debt. We should all be looking at how we make use of our resources and expressing empathy for those less fortunate. Managing our finances well is something everyone needs to do, and needs to learn to do better.
Pay Off Debts
It might sound obvious but it is vital that you pay off any debts that you are able to. There are many online debt advice helplines that offer you recommendations and a guideline to help you reduce your debts.
You should prioritize paying off any debt, especially if it is a debt that accrues interest. Interest is not only strictly prohibited in Islam, but is also detrimental on your finances as the interest rates are likely to continue to increase.
If you can, pay off your debts.
Do Not Accrue New Debt
If you are thinking of taking on a new loan or new debt then think twice. Especially if the debt will be accrued due to a purchase that you do not necessarily need.
The same applies to buying things using your credit card. Now is not the time to be accruing more debt that incurs interest.
Start Saving Now
If you can, start saving now. It is never too late to start saving. Good financial management not only means monitoring your spending habits, it also means looking at your savings strategies.
You may need to undertake an evaluation of all your incomings and outgoings to see if there is anything you have left to save. If you do, even if it is a small amount, it is never too late to start saving.
If you do not have an ISA now is a good time to find information about what savings products are out there. For Muslims, there are some halal savings accounts that do not pay interest.
These halal savings accounts offer the same banking services as conventional savings accounts without interest.
Set Savings Goals
Set savings goals for yourself. This could be as little as saving £10 a month, to saving much more.
If you are saving to buy your first home, then you will likely be impacted by the increase in interest rates.
Look for banks and lenders that offer halal mortgages based on Islamic finance principles. Halal mortgages tend not to be as dependent on standard interest rate fluctuations and offer more stable repayment options.
Invest
Many people are scared of investing during a recession or economic crisis, but there are some good investments out there that can generate revenue and income.
Do your research and have a look at what investment opportunities are out there for you.
Investing in the right funds, stocks and bonds can be inflation busting. If you do your research you could find investments that offer a good rate of return. For Muslim investors, there is a range of halal investment options on the market which tend to be more stable than the conventional stocks and shares.
If you want to minimise the risk when it comes to investing, then try not to be too exposed to a limited number of sectors or assets. Diversifying your portfolio via investment is a good way to spread your money with less risk.
Think About Side Hustles
Side hustles have become popular in recent years when it comes to generating additional monthly income. Some low cost side hustles that have been successful in recent years include the following:
- Amazon selling
- Etsy selling
- Selling digital art and services
- Creating a website
- Freelance graphic designing
- Freelance writing
- Blogging and vlogging
- Social media influencing
- Shopify
- Dropshipping
- Creating online courses and offering advice
- Affiliate marketing and advertising services
- Starting a podcast
- Using comparison and cash back websites
These are just some side hustles that require very little financial outlay at the start.
Undertake Due Diligence Before Making Big Financial Purchases And Decisions
If you are thinking of making a big purchase such as a home or a car then make sure you do all the necessary research. Use comparison websites to find the best prices for things like electrical goods and holidays.
When it comes to home purchases, remember the housing market is likely to undergo some change in the coming months.
It might be better to sit tight to see if there is a fall in house prices. You should also look at different funding options such as halal mortgages. These types of mortgages tend not to have fluctuating rates as they are not interest based loans.
Take Your Time - Don'T Be Hasty
This is important. Now is not the time to make rash decisions or rush into big purchases or commit to long-standing and expensive monthly subscriptions.
Whether it is a smartphone or a new streaming service, take your time in deciding whether you definitely want to commit some of your monthly income to it.
WHAT IF YOU ARE SELF-EMPLOYED?
For the self-employed there are some additional concerns during a recession. For a start, whilst you may already be accustomed to fluctuating monthly income, you may see a drop in overall income as your customers feel the pinch and cut back on their spending.
Rising inflation is likely to affect all businesses, irrespective of size and industry.
Now is a good time to look at your personal finances, and check to see that you can:
- meet your mortgage repayments or rental payments
- meet all your essential direct debit payments for things like utilities
- have enough money to cover food and groceries for at least 3 months
- have some savings to fall back on in case your monthly income drops
- cut back on any non-essential items of expenditure
Some Ways You Can Protect Your Money
The Bank of England recently raised the interest rates. When this happens, it is usually an indication that the Bank of England wants people to start saving more and spending less.
Some ways to future-proof your money and savings include the following:
- Pay off as much of your existing debt as you can
- Make changes to your living standards that would bring your costs down
- Check to see if you can consolidate any of your debts
- If you have investments, check up on them and see how they are performing
- Save for a rainy day - even a few pounds a month will soon add up
- Track your spending by separating your wants from your needs
- Limit spending on gifts
- See if you can fix your mortgage if you are currently on a variable rate, there are some deals to be had out there
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:
- 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.
- 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.
- 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.
- True ownership: The traders should assume true ownership through true sales of the underlying commodity.
- 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.
- Correct Sequence: The Commodity Murabaha must be performed in a correct sequence which further establishes and validates all of the above key elements.
- Discretion to not sell: The traders must have the discretion to not sell and hold. This ensures that the trade is not fictitious.
- 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
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