Is Investment Banking Haram?

Nothing good can be said about a global pandemic and to even look for a silver lining can at times just feel wrong. However, as humans we are programmed to look towards the future and to make the best of changing situations in our lives and in the world around us.

While the shift towards remote work is perhaps the most notable and obvious lasting social change brought on by COVID-19 the data clearly shows that there was also an equally seismic change in people’s spending habits over the past two years. For millions of people the forced reduction in travel, meals out and just about everything else we consider to be fun in life has lead to a substantial increase in their bank balance and household savings.

Research by the Institute for Fiscal studies shows that the household savings rate peaked at 23% during 2020.

Put simply, for every pound that people had leftover after bills, rent and other essentials, households have on average been saving almost a quarter of it. This has been an unexpected yet very pleasant surprise for anyone looking to buy a house, put money aside for their child’s future or even just to take a long overdue holiday in 2022.

What is perhaps even more surprising is that people haven’t been showing any signs of ‘blowing it’ now that pandemic restrictions are easing up and workplaces, entertainment venues and restaurants are opening their doors to the public.

There is a clear trend it seems to not let this once in a lifetime financial windfall go to waste, yet for many people who have for years struggled to save anything at all there is also uncertainty about what to do with their newfound ‘nest egg’ and how to best use it to help them achieve their financial goals.

3 Ways To Make The Most Of Your Pandemic Savings

1) PUT YOUR MONEY TO WORK

Having money stashed away under your mattress or in a savings account is nice and can give you peace of mind about your financial security, but it doesn’t actually help you to build a better, brighter future for you and your loved ones. The average savings account with a high street bank typically pays you an interest rate of less than 1% per year. That means for every £1 you hand over and let them use for loans to other customers, you earn 1 single penny each year. This is not great, especially when you stop and think about how much banks earn on those loans they make with your savings, as the interest rates they charge for overdrafts, credit cards and personal loans can often be as high as 10% or even 25% APR.

In the past it was simply not possible to do anything else than keep your money at the bank, but the rapid growth of new innovative FinTech platforms like Qardus mean this is no longer the case. Our investors have earned over £285,000 through their investments on our platform, through lending their money directly to verified, high growth UK businesses that are aligned with their ethics and values. By cutting out the middleman - your bank - and letting our smart technology do the hard work for you, it is truly possible not just to enjoy the security of the money you’ve saved up during the pandemic, but to actually make it work for you!

The compounding nature of rates mean your modest savings can turn into something that you can truly use to build a brighter future for you and your family.

2) HELP PEOPLE AND SOCIETY

Having money is good, having more money is even better, but the hardships endured by all during the recent pandemic have truly brought life to the phrase - ‘money can’t buy you happiness’.

The pandemic brought out the best in our society, as people worked together both on the frontline in hospital A&E departments, as well as on the ‘home front’, delivering food to elderly neighbours who could not leave their homes for months on end. This is another trend that looks set to continue, as people seek out different ways to make the world a better place one day at a time. Investing is no exception, as when you make values based, ethical investment choices you can not only grow your own future, but help others to build theirs at the same time.

Unlike your savings deposited in a low-yield high street bank’s vault, on platforms like Qardus you can choose where your money goes, who you invest in and for what purpose. We only allow verified, robust businesses to obtain funding on our platform, to mitigate the risk of your investments, and to increase the potential returns on your money. However, unlike other p2p lending platforms we actually allow you to choose which specific businesses you want to fund and invest in, so that you can be sure your money is being invested according to your beliefs and values.

Each investment opportunity on our platform provides you with not only the financial details about the business you are funding, but also their story so you can get to know the people behind the business and make investment choices that make the world a better place £1 at a time.

3) PROTECT YOUR FAMILY AND YOUR FUTURE

If the events of the past 24 months have taught us anything it is that we all need to do a better job of planning for the unexpected and ensure we have the financial resilience to live happily during the good times and the bad.

In fact over 8 million people have no savings at all to rely on in the event of illness, job loss or anything else life might throw at them.

While investing can seem risky and may not be something you have done before it doesn’t have to be. We have created the technology, investment screening processes and legal contractual structures to allow you to invest with confidence in a diverse portfolio of ethnical opportunities with high returns. By investing regularly and diversifying your investments you can grow your ‘rainy day savings’ into a solid financial future for you and your family.

Introduction

Progressing at pace, the already flourishing Islamic fintech (financial technology) sector, itself the embodiment of the evolution of existing Islamic financial services, now has a clear opportunity to further embed itself within the world of global finance. Islamic fintech can be defined as an offshoot of financial technology that is built on Sharia principles, prohibiting profiting from debt, interest payments and investing in businesses related to alcohol, tobacco and gambling amongst others.

With the socio-economic upheaval and geo-political changes brought about by the global COVID-19 pandemic and the ongoing war in Ukraine, Islamic fintech currently has the chance to become not only a game changing, disruptive force within global finance, but an influential driver of global financial inclusion.

2020 was a landmark year for Islamic fintech as it was the first time that a standalone Islamic fintech company purchased another, with the New York based ethical investment platform and global robo adviser Wahed acquiring the UK based, Sharia compliant digital banking operator, Niyah.

So if Islamic fintech continues along the same path of rapid growth that it has been travelling along on for some time, the sector will unquestionably emerge as a competitive selection of Sharia compliant alternatives to the wide range of innovative fintech startups and established fintech giants that have been a mainstay of Western, Asian and more recently African economies over the last quarter century.

This article explores the latest in Islamic fintech as well as forecasts of the sector’s huge future potential.

The Development Of Islamic Fintech

Islamic finance is one of the fastest growing sectors of the global finance industry. Catering to the financial needs of the 1.8 billion Muslims across the planet and a broader, international ‘ethical finance’ audience, Islamic fintech’s role holds greater significance now more than ever before, where the need for global investment and financing has never been greater, especially in terms of financing SDGs (Sustainable Development Goals) and ESG (Ethical, Social, and Governance) investments, both of which align closely with the Islamic concepts of social justice and zakat (charity).

(consultancy-me.com, jan2022)

The global fintech revolution is having a similar impact on Islamic finance through the evolution of a progressive, forward-thinking Islamic fintech ecosystem, with many Islamic fintech startups using existing, successful fintechs as loose models upon which to base their own, Sharia compliant fintech organisations on.

With the appropriate modification, many of the hugely successful fintech companies across the world could be used as a blueprint to help spawn their Sharia compliant counterparts.

Statistics On The Islamic Fintech Industry

Standard & Poor’s Head of Islamic finance stated that he believes the market will expand by approximately 10% in 2022-2023 after it expanded with a 10.2% growth in total assets in 2021. In 2020, the total combined asset value of the global Islamic finance market amounted to approximately 2.88 trillion U.S. dollars, with more than 200 million micro, small and medium-sized businesses that still require banking assistance.

Over three quarters of Islamic fintechs are active in more traditional areas related to raising funds, deposits and lending, wealth management, payments and alternative finance, meaning that the digital banking space is somewhat up for grabs.

(Global Islamic Fintech Report 2022)

Based on the 2022 Global Islamic fintech report from Dinar Standard and Elipses, the size of the global Islamic fintech market was $79 billion in 2021, although accounting for just 0.8% of the entire global fintech market. The Islamic fintech market size is expected to reach $179 billion by 2026 at a CAGR of 17.9% relative to the overall global fintech industry, which is expected to grow over the same period at a CAGR of 13.5%. The report also estimated that Saudi Arabia, the world's largest Islamic fintech market, is currently worth around $26bn and is projected to more than double in value in the next five years to $52.3bn.

75% of young Muslims want their banks to make investments that ‘do good in the world’, with 62% opposed to their bank lending to tobacco companies and 69% against their bank lending to gambling institutions. 74% of young Muslims said it’s important they can access their bank’s services via a mobile app and 80% said it’s critical they can access banking services anywhere, at any time.

Islamic Finance is currently estimated to be worth $2 trillion globally, at the very least. This figure is set to hit $3.8 trillion by 2023, as driven by high demand from millennial and Gen Z Muslims, who are confidently expected to account for upwards of 75% of Islamic banking revenue within the coming decade. Furthermore, with data from the ONS (Office of National Statistics) showing that by 2019 more than 90% of 16-24-year-olds were already managing their money online, it looks as if the Islamic fintech space will be a blessing for both consumers and providers.

In the UK, 4 million Muslims make up the second largest religious group in the country and according to the Muslim Council of Britain (MCB) contribute £31 billion to the UK economy and wield a spending power of £20.5 billion.

The UK had the third-largest number of Islamic finance education providers, only trailing behind Islamic finance powerhouses Indonesia and Malaysia. Furthermore, the UK leads the way with 27 Islamic fintechs, predominantly catering to the needs of British Muslims that want to bank with ethical financial institutions, which is more than the United Arab Emirates with its 15 Sharia-compliant fintechs.

(Global Islamic Fintech Report 2022)

Examples Of Leading Islamic Fintech Companies

Below is a selection of the most innovative and successful Islamic Fintechs currently operating around the globe:

• Qardus- The UK’s first ethical and Sharia compliant SME financing marketplace that offers up to £200,000 in working capital financing to eligible small businesses.
• Islamic Finance Guru - An online hub assisting Muslims with their investment, personal finance and entrepreneurial journeys.
• Path Solutions- Provider of Digital Banking, Risk Management/Compliance, and Banking software, serving over 150 Islamic institutions across 40 countries.
• Wahed- Ethical investment platform and the world's first global Islamic finance robo advisor. Launched the first exchange-traded fund in the United States that was compliant with Sharia law in 2019.
• P2P financier Amartha Mikro Fintek & Bank Sumut - Empowering women micro entrepreneurs through inclusive financial services including Islamic facilities to develop women-owned MSMEs in the region.
• Global Sadaqah - Award-winning, Kuala Lumpur based philanthropic fundraising finance platform, featuring CSR, Zakat and Waqf Management services.
• Yielders -UK based Islamic fintech and leading peer-to-peer property investment platform.
• PayHalal
• -
• World's first Sharia compliant e-commerce payments gateway and online ewallet issuance market. Owned by Souqa Fintech, PayHalal launched the world's first Islamic buy-now-pay-later (BNPL) platform in 2021
• MRHB DeFi Network - World’s First online, ethical / Halal DeFi Solutions platform for passive crypto Income, commodity exchange & staking. Blockchain services provider based in Sydney, Australia.
• coinMENA- One of the world’s first Sharia-compliant crypto-assets trading platforms offering non-traditional investment options in the MENA region. Licensed and regulated by the Central Bank of Bahrain (CBB).

Challenges For The Islamic Fintech Industry

• Investment capital for Islamic fintech is for now still typically scarce, and there is a need for a new generation of stakeholders aligned with the principles of Islamic finance. Although these realities are starting to change, many sources of venture capital are still far from Sharia-compliant, making it difficult for the up-and-coming entrepreneurs to fund the development and execution of their ideas.
• The Islamic fintech sector is arguably held back by inherent structural weaknesses within Islamic finance such as the complexity of transactions. This is especially true for those in the general public as well as those within the fintech/finance industry who are acquainted with the form of Islamic financial transactions or the processes involved in carrying them out.
• A barrier to the proliferation of Islamic fintech products comes from regulatory miscommunication. While the regulatory frameworks in the Middle-East and much of Asia manage to provide for Islamic fintech, those in charge of setting the rules (and in some cases, drafting the law) around the rest of the world are often poorly acquainted with Sharia compliant products and services, let alone the principles that underpin them all. Not to mention the fact that those regulatory systems were not designed with such principle-bound products and services in mind. As such, many of these countries have yet to make much effort to accommodate for Islamic fintech. This means that those in charge of building and applying the regulatory frameworks in countries on continents such as Europe and the US will need to implement what is necessary to make their markets both receptive and accommodating to such products and services. Although expert assistance is available through professional financial organisations such as the FCA in the UK, some of the most influential actors within finance such as academics, gatekeepers, and those in authority, frequently lack the necessary knowledge about Sharia compliance.
• A further challenge facing Islamic fintech products and services and another barrier to their more widespread use is a lack of awareness of their existence amongst the non Muslim global general public, along with a lack of the requisite knowledge surrounding the basic principles that are the foundation of Sharia compliant finance. This issue is frequently raised and not just in non-Muslim jurisdictions such as the UK, but also in many majority Muslim countries.
• Performing an unquestionably essential function in musharakah, takaful, and sukuk, the concept of profit and loss sharing looms large in Islamic finance, and is a concept that may be hard to align with traditional western financial and investment philosophy.

(Global Islamic Fintech Report 2022)

Adding Value And Innovation To The Global Finance Industry With Islamic Fintech

With a customer base not far short of 2 billion people, projected to reach around 3 billion people by 2060, Islamic finance and fintech has the opportunity to take the global finance industry beyond the time-honoured bottom line of profit, and offer both ethical and sustainable alternatives in terms of investment methodology and investment products. The increasing focus on sustainable/regenerative financial models and goals, along with the recent progression in financial digitalisation and e-commerce, provides the perfect foundation for Islamic fintech to positively influence the sphere of global finance and investment.

• Global financial inclusion
  
  • Through promoting risk-sharing contracts that provide a viable alternative to conventional debt-based financing, and also through specific instruments of redistribution of the wealth among the society based on Islamic principles such as zakat (charity).
• Addressing financial risk
  
  • The 2008 financial crash was brought about by fund managers and financial speculators making risky investments. Islamic investments by their nature mitigate much of this danger through the prohibition of riba (interest) and ghahar (risk), thereby eliminating any opportunities for short selling or uncertain contracts.
• Offering alternatives to traditional investments
  
  • The fact that Islamic fintech and finance are Sharia compliant does not just mean that they are acceptable to muslims across the globe, but that they offer a different choice in terms of the ethical and moral implications that come with investment choices.
• Reframing the corporate landscape
  
  • Islamic FinTech follows Sharia principles and is hence a type of technology that is ethical and religiously acceptable. Through its very nature, it embraces environmental, social, and corporate governance (ESG) elements. The alignment of certain Islamic financial products and environmental, social, and governance factors along with recent strides in digitalisation may allow Islamic fintech to makes a strong foothold in the market, perhaps even bringing about re-alignment of strict shareholder interest through increased focus on SDGs, ESG investments, and genuine, far reaching programs of CSR.

Since student loans were first introduced in the United Kingdom in the 1990s they have proven to be problematic for Muslim students. The primary reason for this is that student loans incur interest - something that is prohibited in Islam under Sharia rules.

For many Muslim students who want to be compliant with Sharia laws relating to financial transactions, taking out a student loan is not seen as a viable option.

Riba In Islam

The literal Arabic meaning of the word riba is 'increase', 'growth', 'excess', or 'addition'.

According to Sharia laws, an increase of a debt owed or repayment of a loan is considered to be riba, or interest. This is strictly forbidden in Islam. Both the payment of interest and the receipt of interest payments are considered to be contrary to Islamic Sharia rules.

The reason Islam does not permit interest is that it is considered to be a means through which the poor remain poor, and the rich get richer. There is considered to be an inequality between the parties and within the transaction.

Riba is generally deemed to increase the gap between the poor and the rich in society and this goes against Islam and the social responsibility message that permeates Islam.

Student loans within the UK are currently repayable with interest, so this creates a dilemma for Muslim students.

Interest And Student Loans

As student loans require repayments that incur interest, many Muslims deem them to be an unacceptable way of funding their higher education goals.

There has been a great deal of debate within the Muslim community about student loans and the issue of riba.

Islamic Concept Of Finance

One important thing to note for anyone considering taking out a student loan is that traditional western banks and lending organisations treat money solely as a commodity in business.

By contrast, in Islam, money is considered to be a medium of exchange with a measure of value only.In Islam, money performs a social role.

The value of the money is stored within it, not outside it. This is one of the primary reasons riba / interest is not permitted.

Student Loans - History

Student loans have had a variable history. In the 1960s, 12% of school leavers went on to university. This represented 1 in 10 students. There was no such thing as student loans in the 1960s. University fees were actually paid fully by local education authorities. Students left university with little to no debt.

In addition to having fees paid, university students could also apply for a means tested annual grant to cover their living costs.

In the 1970s the number of school leavers attending university increased slightly to one in seven. By the end of the decade, this figure had dropped again as there was a squeeze on university funding.

The 1980s saw a huge increase in the numbers of students wanting to go on to higher education. The then education secretary, Kenneth Barker, pushed for higher numbers of young people to attend university and increase their skill sets.

By 1990, one in five school leavers was attending university. However, the maintenance grants had not increased by much, so in 1989 the Tory government introduced student loans akin to mortgages. These loans were to account for having no increase in the annual student grants and were intended to bridge the gap between the funds available and the increased cost of living. Grants of up to £2265 were available on a means tested basis.

Higher education and university entry really saw a boom period in the 1990s onwards. More and more young people were going to university and the number of courses available increased.

The Labour government got rid of the grant in 1997 and replaced it with a new policy and system whereby a £1,000 means tested tuition fees was available, alongside low cost loans.

By the early 2000s, many more young people were attending university. The Labour government pledged to raise the percentage of young people going to university to 50% and they wanted to make sure students had an incentive to study further. Tuition fees amounted to £1,100 per year, and this was offset by loans of up to £3,950.

In 2006, tuition fees were raised to £3,000 per year which become payable once students graduated and were earning above £15,000 per annum. Students were informed that the repayments were to be made on the 9% of income over the relevant threshold, with inflation-only interest rates.

Coming to modern day student loans, tuition fees are currently £9,000 per year and additional loans are available that could amount to over £12,000. This means that an average university student who undertakes a 3 year degree will come out of it owing a considerable debt. This debt accrues interest.

In the United Kingdom, it is the Student Loans Company that administers and monitors student loans. The Student Loans Company is the organisation that calculates the amount payable to individuals and ensures the payment reaches the right bank account.

INTEREST ON STUDENT LOANS - IS THIS RIBA?

Opinion is divided about whether student loans are considered to be halal or haram.

There are some Islamic scholars who believe that student loans are inherently haram and non Sharia compliant as they incur interest. However, there are also scholars who have the opinion that student loans are halal.

Let's have a look at the arguments for and against student loans.

Fatwas That Deem Student Loans To Be Haram

The Al Qalam Institute did its own research and issued a fatwa relating to student loans and their permissibility for Muslim students. The issue they looked at in detail was whether the repayment of the student loans was commensurate with inflation rates, or whether the repayments incurred 'bolt on' interest payments.

The research the Al Qalam institute undertook concluded that the student loans at the time of the fatwa (2013) were deemed to incur riba. This meant that student loans were contrary to Islamic laws relating to finance and loans.

The reasoning behind the judgement was that student loans DID attract riba and were not simply attracting inflation based increases in repayments.

According to the Institute, irrespective of the need for the loan (ie to further a person's education, knowledge, and prospects), if a loan incurs interest then it is prohibited.

There is still a great deal of ongoing debate amongst scholars about whether the loans are strictly linked to index price/inflation raises or whether they do actually incur interest outright.

It is likely the debates will continue for some time until any consensus is reached.

Arguments And Fatwa In Favor Of Permitting Student Loans

There are, however, other schools of thought that have the opinion that by their very nature, student loans do not fit the traditional definition of a loan.

Some Islamic scholars have raised the question of whether student loans do in fact incur riba and whether they should fall under the definition of what a de-facto loan is.

The reasoning behind this argument is that any student who obtains a student loan will never fully take ownership of the loan amount.

The student loan itself is seen as an investment towards a future of learning.

As the bulk of the student loan is given straight to the university or institute of higher education, the student never actually receives full ownership of the money. Without ownership it is questionable as to whether student loans are actual loans under Islamic finance principles.

In addition to the above, it can be argued that as the loan only becomes repayable once a student earns over a certain threshold, there is no automatic interest based repayment.

Shaykh Dr. Haitham al-Haddad has issued his own fatwa relating to student loans. It is his opinion that taking out a student loan is permissible. He maintains that no riba is involved in the student loan transaction.

Shaykh Dr Haitham al-Haddad has researched this issue at length and concluded that student loans within the UK are permissible under the rules of Islam.

The Shaykh raises the following points to note when arguing that student loans are halal:

• the student never receives the full loan amount
• the student does not have full control of where the money is spent nor is there any element of profit
• the loan is eventually written off (cancelled if you die)
• the minimum earning threshold applies before any repayment is due

According to the Shaykh, the points mentioned above render the student loan as an entity that is different from the traditional loan, or qard.

The element of human ownership is not fulfilled as the monies are paid (mostly) directly to the university in lieu of tuition costs.

Of course, opinions on this issue continue to remain divided.

Students are encouraged to undertake their own research and due diligence.

Want Versus Need

Some scholars are of the opinion that there will never be a clear cut answer on whether student loans are considered to be halal or haram.

However, students should always consider whether their desire to pursue further education is a want or a need. If university is seen as a want - that is, it is not essential - then taking out extensive student loans might not be a good idea.

However, for those people who have no choice but to go to university such as doctors, lawyers, and dentists, perhaps there is an argument to say that there is a real need.

Not everyone who attends university is entitled to a bursary or scholarship and it would be a shame for these students to miss out on learning or advancement.

What is clear is that many Muslim students (and parents of students) have felt unable to access Sharia compliant and appropriate student finance. This has affected their employment prospects and their career progression.

Whatever your view of student loans, the UK does need to identify and create solutions that are accessible for Muslim students.

Conclusion

Ultimately, when deciding if student loans are halal or haram. students should be doing their own research on whether they feel comfortable taking out student loans.

Always seek out the knowledge of experienced and knowledgeable scholars. Use a website that you trust to find out more information, and read the opinions and advice of scholars who have researched the topic extensively.

Whilst not all Islamic scholars agree on whether student loans are halal or haram, what is clear is that the subject is still open to debate. Perhaps this is the reason that more and more universities are directing their Muslim students towards Sharia compliant loans and finance options.

In addition, the Federation of Student Islamic Societies, and the National Union of Students have been working collaboratively with the government to find alternative finance solutions for Muslim students who do not want to go down the traditional student loans route.

In the meantime, it is worth having a look at the various scholarships and bursaries available. These could be an alternative form if financing but it is rare to find one that will cover a full university course plus living costs.

In addition to this, many UK banks offer interest free current accounts up to a certain limit so it is also worth checking these out.

The UK government has been looking into having an alternative financing option for Muslim students to ensure that they have access to higher education.

In 2014, the government approved a non-interest based student loan model, and this is still under review.

However, in June 2022, the Federation of Student Islamic Societies reported that a date has been finalised for the non-interest based student loan and it would be available in 2025.

Until then, of course, the most beneficial course of action would be to seek out halal funding options. There are service providers available who provide Sharia compliant loans and products. In addition, there are some Muslim charities who will fund higher education.