Is Investment Banking Haram?

Introduction

Islamic microfinance refers to financial transactions that are based on wider Islamic finance principles. These Islamic finance principles themselves are based on the teachings of the Prophet Muhammad (PBUH) and the Quran.

Islamic microfinance provides access to financial services for those who live in low-income households or economies.

The contractual terms of Islamic microfinance arrangements are not interest-based, but instead the terms are Sharia complaint. Islamic microfinance is viewed as a positive tool and concept for facilitating poverty alleviation and financial inclusion.

Research has shown that economies that operate or make available Islamic microfinance widen the market for any Muslim customer looking for structures that do not contravene Sharia rules and want a more ethical basis for their financial dealings.

WHAT IS ISLAMIC FINANCE?

Islam sets out principles that should govern financial transactions, especially commercial financial transactions. One of the main principles of Islamic finance is that the money itself does not earn - what this refers to is interest. Interest, or riba, is not permitted in Islam as money is not seen as an asset that earns in and of itself.Some of the main principles of Islamic finance are as follows:

• No interest (see above)
• Prohibition of involvement in haram industries and products
• Equity in profit and loss sharing
• Ethical and socially responsible investing
• Fairness and transparency
• Avoiding speculation or gambling

WHAT IS ISLAMIC MICROFINANCE?

Any Islamic microfinance product or service in any capital form cannot mirror conventional finance arrangements. Many conventional financial arrangements, although able to provide financial resource, are not Sharia compliant.

Let's examine some of the key features of Islamic microfinance:

• Any Islamic microfinance commodity or service must ensure that there is no element of riba whatsoever. No interest is attached to the debtor, the lender, or the debt.
• In addition, microfinance transactions should always be linked to tangible economic activity. This means there cannot be any financial speculation or uncertainty that is excessive.
• Any product that is bought or sold must be clear and tangible. You cannot trade in or sell something you do not own.
• If involving activities, then these should be socially responsible activities that do not exploit or morally harm others.

What this means for Muslims is that many of them stay away from the financial services on offer. Whilst the structure of conventional finance options may appeal to the masses, Islamic microfinance offers an alternative form of finance.

Key Principles Of Islamic Microfinance

One of the main objectives of Sharia law and Islamic finance is to alleviate poverty and empower people and communities.

Whilst we have looked at some of the key principles above, let's have a look at them in more detail:

• Asset backed finance: Asset backed finance encourages finance options that are backed by real and tangible assets.
• Profit and loss sharing: Islamic finance is focused on profit and loss sharing arrangements. This means that the risk is also shared between the respective parties to the contract and transaction. Common forms of profit and loss sharing arrangements in Islamic finance include mudaraba and musharaka arrangements.
• Social welfare: Promoting social welfare is a central tenet of Islamic finance. Providing and facilitating access to education, healthcare, and essential services is seen as the promotion of social welfare so any form of financial arrangement that enables this to take place is seen favourably in Islam.
• Ethical investing: as is the case with social responsibility, Islamic microfinance heavily favours ethical investments. What this means in principle is that any investments need to add value to others and society. Examples of projects and investments that are deemed to be ethical include community development projects, agricultural, and healthcare projects.
• Interest (riba) avoidance: riba is strictly prohibited in Islam so any form of arrangement where interest is paid or charged is impermissible. Islamic microfinance steers clear of interest-based products (often used by lenders in Western economies which are credit and debt based).

Social Responsibility

One of the main principles of Islamic finance is that finance should serve society. What this means is that financial transactions must be conducted in a socially responsible manner. The foundation and ongoing management of Islamic microfinance products (on paper and in practice) should be equity-based.

The idea underpinning Islamic social responsibility is that there is a balance between social objectives and financial objectives. What this ultimately leads to is more sustainable finance long-term as the scope for exploitation and inequality within transactions is minimised.

In many ways, Islamic microfinance is underpinned by principles of benevolence, morality, unity, freedom, and equilibrium. Muslims believe that they all have a responsibility to society and the environment. Therefore, they must embody this commitment to social responsibility through their words and actions.

In this way, they can contribute to social justice (as prescribed by Islam) and ensure populations across the globe are not adversely impacted.

Types Of Islamic Microfinance

Islamic microfinance is based on the foundations of Sharia law. Sharia rules place great emphasis on transparency, fairness, social responsibility, and ethical behaviour.

Let's have a look at some Islamic microfinance products:

MICROCREDIT

Islamic microcredit is a term used to describe small financial services relating to credit. Microcredit operates within Sharia rules and is designed to ensure that entrepreneurs and small businesses are able to access fair and equitable financing options.

Islamic microcredit does not include any riba and is asset-based finance. Any loan issued is backed by assets or productive ventures.

MICROLEASING

Islamic microleasing (also known as microfinance leasing), enables small businesses and entrepreneurs to lease assets for varying periods of time. The leasing arrangements are compliant with Islamic finance rules.

In Islamic microleasing arrangements, the lessor (lender) will retain ownership of the asset and grants the lessee a right to use the asset for a period of time. The lessee then pays the lessor lease payments for the use of the asset.

MICROINSURANCE

Islamic microinsurance is also known as takaful insurance. This type of insurance does not contravene Islamic finance principles. Takaful is a cooperative arrangement based on shared risk and mutual assistance between the parties.

What this means in real terms is that businesses and individuals are able to access insurance coverage whilst remaining Sharia compliant.

Islamic Microfinance - The Prospects

It is estimated that over 60% of Muslims who live in Muslim countries do not use formal financial service institutions and services. One of the main reasons for this is that many Muslims view conventional finance institutions as incompatible with aspects of Sharia law.

This has led to the emergence of microfinance services and products being developed both inside and outside of Muslim countries and economies.

Muslims are increasingly keen to engage with financial services that comply with Sharia law and the rules of Islamic finance. Since 2006, the Islamic finance market has seen a four-fold increase, and this is likely to continue growing in the future.

What Islamic microfinance represents is the merger of two quickly accelerating industries - Islamic finance and microfinance. Not only does Islamic finance meet the commercial business demands within global economies, but it also provides individuals looking with Sharia compliant funding options.

Unlocking The Potential Of Islamic Microfinance

Any financial transaction that meets Sharia rules is not only good for business, but it also means that transactions are socially and ethically considerate.

Islamic microfinance has the power and potential to operate in a fair, socially responsible and transparent way. What this means for businesses, the entrepreneur, individuals, and communities is that they too can access funding and enhance their ability to access finance and loans.

Providing financial access to poorer or marginalised communities who currently reject conventional, interest-based finance products means greater equity and economic development.

Islamic Microfinance And Poverty Reduction

Islamic microfinance is based on the foundations of equity and social and environmental responsibility.

One of the main advantages of Islamic microfinance is that it contributes to poverty reduction in various ways:

• Enterprise and entrepreneurship - Islamic microfinance supports individuals and businesses from low-income and under-developed communities. It enables these businesses and entrepreneurs to access capital for the ventures and establish sustainable and Sharia compliant livelihoods.
• Financial inclusion - as already mentioned, Islamic microfinance has become an important tool in encouraging and facilitating financial inclusion. Offering financial products that are not only accessible but also Sharia compliant means that marginalised groups can access funding for their start-ups.
• Skills growth - there are many Islamic microfinance organisations that offer training and skill enhancement programmes alongside their financial products and services.
• Community development - with a strong focus on equity and social responsibility, Islamic microfinance is committed to community development. This goes beyond offering financial assistance. Microfinance products can include access to healthcare, education, and a wide range of community benefits.

Islamic Microfinance - The Challenges

One of the main challenges for the Islamic microfinance industry is spreading awareness of the products and services on offer. Despite growing rapidly, this industry is still seen as being in its infancy.

Further advertising and outreach work is required to make sure that Muslims and socially responsible investors are aware of the microfinance options available to them.

The important thing to remember is that Islamic microfinance encourages and develops financial inclusion and freedom. Whilst the impact of Islamic microfinance funding options may vary depending on the regulatory environment, local economic conditions, and institutional capacity, Islamic microfinance is essential if we want to ensure the sustainability of Islamic finance initiatives and alleviate poverty.

Debt or Equity in Islam?Non-interest debt financing and equity financing have both been permitted in Islam. It is no surprise that there is no explicit or implicit text giving one form of financing preference over the other. Financing is part of business activity which is highly contextual and variable depending where the business is in its lifecycle. Whilst equity financing might be the only reasonable method for a start-up, an established business would generally seek debt-based financing.
It is from the beauty and comprehensive nature of Islam that no such stipulation to adopt a particular form of financing is found. If we were bound to get one type of financing only, it would put businesses into difficulty. Shariah has given us some principles with which we need to adhere to. Debt is discouraged when there is no strategy to service it. Likewise, taking on debt when it is unmanageable and beyond one's capacity to repay is also discouraged. Beyond that, it is an economic and business decision which the business can make considering what is in its best interest.Business ConsiderationsDebt vs Equity Financing – which is best for your business and why? The simple answer is that it depends. The equity versus debt decision relies on a large number of factors such as the current economic climate, the business’ existing capital structure, and the business’ life cycle stage. Some of the key factors to consider are[1]:

• The cost of finance: Debt finance is usually cheaper than equity finance. This is because debt finance is safer from a lender’s point of view. From a conventional perspective, interest has to be paid before dividend. From a Shariah perspective, debt and profit in Shariah compliant debt-based products is paid off first. In the event of liquidation, debt finance is paid off before equity. This makes debt a safer investment than equity and hence debt investors demand a lower rate of return than equity investors. Interest debt is also corporation tax deductible (unlike equity dividends) making it even cheaper to a taxpaying company. Arrangement costs are usually lower on debt finance than equity finance and once again, unlike equity arrangement costs, they are also tax deductible.
• The current capital gearing of the business: Although debt is attractive due to its cheap cost, its disadvantage is that an additional return has to be paid. If too much is borrowed, then the company may not be able to meet interest and principal payments and liquidation may follow. The level of a company’s borrowings is usually measured by the capital gearing ratio (the ratio of debt finance to equity finance) and companies must ensure this does not become too high. Comparisons with other companies in the industry or with the company’s recent history are useful here.
• Security available: Many lenders will require assets to be pledged as security against loans. Good quality assets such as land and buildings provide security for borrowing - intangible assets such as capitalised research and development expenditure usually do not. In the absence of good asset security, further borrowing may not be an option.It is also possible to offer unsecured financing. Unsecured financing is Shariah compliant as long as the other principles of financing are met. To mitigate the credit risk in unsecured financing, a director can give a personal guarantee.
• Business risk: Business risk refers to the volatility of operating profit. Companies with highly volatile operating profit should avoid high levels of borrowing as they may find themselves in a position where operating profit falls and they cannot meet the interest bill. High-risk ventures are normally financed by equity finance, as there is no legal obligation to pay equity dividend.
• Operating gearing: Operating gearing refers to the proportion of a company’s operating costs that are fixed as opposed to variable. The higher the proportion of fixed costs, the higher the operating gearing. Companies with high operating gearing tend to have volatile operating profits. This is because fixed costs remain the same, no matter the volume of sales. Thus, if sales increase, operating profit increases by a larger percentage. But if sales volume falls, operating profit falls by a larger percentage. Generally, it is a high-risk policy to combine high financial gearing with high operating gearing. High operating gearing is common in many service industries where many operating costs are fixed.
• Dilution of earnings per share (EPS): Large issues of equity could lead to the dilution of EPS if profits from new investments are not immediate. This may upset shareholders and lead to falling share prices.
• Voting control: A large issue of shares to new investors could alter the voting control of a business. If the founding owners hold over 50% of the equity, they may be reluctant to sell new shares to outside investors as their voting control at the AGM may be lost. This would make equity financing disliked for the current shareholders and debt would be preferred.
• The current state of equity markets: In a period of falling share prices many companies will be reluctant to sell new shares. They feel the price received will be too low. This will dilute the wealth of the existing owners. Note this does not apply to rights issues where shares are sold to the existing owners of the company.

ConclusionThese are some of the many considerations which businesses need to consider before raising equity or debt financing. This shows that the decision of debt and equity is not something set in stone from a Shariah perspective; as long as the debt-financing and equity financing are Shariah compliant, the business is at liberty to choose what is most favourable for their purpose and objective. From an investor’s perspective, they should ensure that the business is Shariah compliant and that it has passed the Shariah screening criteria. This can be ascertained by the review from a Shariah advisor.
[1]https://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-resources/f...

WHAT IS A PENSION?

A pension is effectively a savings plan that is long-term. It is designed to help you save for your retirement and ensure that you can maintain your standard of living once you are no longer working, without having to worry about finances and bills.

Halal pensions are a Sharia compliant investment option for Muslims who do not want to compromise on their religious beliefs.

Halal Pensions

A halal pension is long-term savings plan that is compliant with Islamic rules relating to saving. Halal pensions are Sharia compliant.

Muslims are required to ensure that their money is managed and invested in a way that does not contravene the Sharia rules relating to finances, and this is why they look for halal pension products.

Difference Between A Conventional Pension And Halal Pension

As mentioned above, halal pensions are specifically geared towards Muslims, but can be utilised by anyone.

Halal pensions are different from traditional pension schemes as they each have different underlying principles and different investment strategies.

Many conventional pension schemes are not compliant with Sharia law and therefore not acceptable to Muslim savers.Halal pensions must have the following elements:

• No riba (interest)
• No maysir (gambling)
• No gharar (uncertainty)

Most traditional pension schemes invest in schemes that will not meet the above requirements. However, halal pension schemes have a Sharia compliant investment strategy. This means that the funds should be invested in assets that are Sharia compliant including real estate/ property and Islamic bonds.

In addition, halal pensions have a different management and market approach than traditional pension schemes. Halal pensions have to be managed in accordance with Islamic principles. These principles centre on the concepts of social and ethical responsibility which we will examine below.

Conventional pensions are more driven and focused on generating revenue and profits. The wealth and revenue growth of conventional pensions are often generated from risky or interest-based investment strategies.

Key Features Of Halal Pensions

If you work in the public sector and pay into a workplace pension it is very likely that you have a defined benefit pension. You should ask your employer for information relating to your pension so you can assess whether it is a defined benefit pension. If it is, then the pension should be halal.

Always check to see what fund your pension monies are located in.The main features of a halal pension include the following:

• Compliance with Islam and Sharia rules: this is fairly obvious but any pension you have must not contravene any Sharia rules about finances. Whilst you have a choice about which pension fund to invest in, it is your responsibility to make sure you seek expert opinion and advice about the investment and the operations of the scheme.
• Prohibited investment: for a pension to be deemed to be halal, investors need to make sure the monies are not invested in haram industries (gambling, porn, alcohol etc)
• No interest: this is one of the underlying concepts in Islamic finance. Sharia rules and guidelines strictly prohibit the payment of receipt of any form of interest. You should be sure to avoid haram bonds or any other investment instrument that relies on interest.
• Ethics: investors are faced with the obligation to act in an ethical and socially responsible way. This means that investments must align with the core Islamic value of transparency and fairness. Investments must adhere to Sharia rules and guidelines relating to finances.

Ethical And Social Responsibility

Halal pensions are designed to ensure that any investment is socially responsible and ethical. This is a fundamental principle of Islamic finance and must be adhered to.

Anyone who manages a halal pension needs to ensure that they do not invest in any industry, economy, market or product that would deemed to be unethical or haram under Islamic rules.

This means the pension monies cannot be invested in industries that are involved with gambling, porn, alcohol, and any other activities not permissible under Sharia rules.

Any profit or return from investment in these industries is haram

Importance Of Having A Halal Pension For Muslims

For Muslims, having a pension is an essential part of ensuring that they plan for their future.

Not only will having a pension provide you with an income for your future, but ensuring the pension is halal will increase its value for those who wish to remain Sharia compliant.

Workplace Pensions

In the UK, you should have a workplace pension, and your employer is legally required to contribute to your pension fund.

In addition to this, it is always a good idea to think about having a private pension. The main benefit of this, other than having a second pension pot, is that you can direct which pension fund to invest in and you have more of a say about where your pension is invested.

Having a halal pension means you have a savings plan that aligns with the ethical and religious values of Islam.

Key Benefits Of Having A Halal Pension

Some of the benefits of having a halal pension include the following:

• Compliance with Sharia law
• Alignment of personal values with financial planning strategies
• Accessibility to ethical investments
• Saving for retirement

Halal Pensions In The Uk

The popularity of halal pensions is growing in the United Kingdom and the rest of the world. Not only are they aimed at Muslims looking for Sharia compliant saving and pension plans, but they also attract ethical investors.

The number of banks and financial organisations offering halal pensions is increasing. Before approaching any organisation offering halal pension products you should always satisfy yourself that they are sufficiently registered and regulated by the FCA. You should also make sure the bank is fully aware of the rules relating to Islamic finance.

Please note that Qardus Limited does not provide financial advice.