Is staking crypto halal?

In this week’s Company Focus segment,JEVITHA MUTHUSAMY shines the spotlight on Qardus, a new Islamic fintech start-up aspiring to close the SME financing gap in the UK.

The beginning
It took the Qardus team 10 months to conceptualize, build, test and launch its Shariah compliant peer-to-peer financing platform on the 3rd July 2020. “I wanted a platform that offers fast and affordable Shariah compliant business financing to SMEs,” Hassan Daher, the founder and CEO, tells IFN. Qardus offers SMEs a chance at alternative financing as they believe many SMEs are not eligible for bank financing.

Market Insiders reported that the funding gap in the UK has grown to US$77 billion as of 2019. The largest hurdle the start-up faced was securing the right approvals. The firm is an appointed representative of Share In which is regulated by the UK’s Financial Conduct Authority while Qardus’s Shariah compliance is monitored and approved by Amanah Advisors.

“It is important for us to be Shariah compliant as there are over 950,000 SMEs in the UK that are financially excluded due to the lack of financial products that conform to their ethics and beliefs,” notes Hassan.
The presentQardus currently offers Shariah compliant working capital financing up to a maximum of GBP100,000 (US$125,640) and is targeting small businesses with GBP100,000 in revenues or assets.
“Due to the pandemic we are focusing on recession-proof industries. If you look at the small business on our site, it is essentially pharmacy and pharmaciesare doing really well right now, food manufacturing companies are also one of the sectors that are doing well,” explains Hassan.
While market opportunities are immense, Hassan acknowledges that it is a competitive segment especially with the emergence of new government initiatives in response to COVID-19 such as the Bounce Back Loan Scheme and the coronavirus business support loans.

The futureNevertheless, Qardus is working on distinguishing itself by being able to predict credit risk better than its competitors by using machine learning algorithms.
Over the next year, Qardus is looking to onboard around 150 SMEs with financing totaling an estimated GBP15 million (US$18.85 million) and within the nextfive years Qardus is looking to reach GBP500 million (US$630.19 million) in financing.

The platform is also looking to tap asset financing and possibly property financing. Aiming higher, Qardus is looking to provide its own technology solutions to existing lenders in the market and in turn, Qardus will do the sourcing, risk profiling and pricing of SMEs on their behalf.

Currently, Qardus is focused on making a mark in the UK and European markets but is also looking to expand to Southeast Asia and the Middle East in the future. As part of its expansion plan, the platform is also planning to become an Islamic challenger bank in the near future.

Capital at Risk. Returns are not guaranteed

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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.

Introduction

Forex trading refers to foreign exchange trading where one currency is traded into another. Forex trading is important in the global markets and economy because it not only facilitates international trade, but is also the biggest financial market globally.

A common question is why does forex matter to the global markets? Not only does forex enable international investment and trade it also leads to financial stability. In order to conduct cross-border and cross-country financial transactions, governments and businesses rely on forex. One example of this is where a European company that is importing goods from the USA is able to exchange euros into dollars.

Central banks use forex to stabilise economies when currencies weaken or inflation increases. Forex ensures that money is able to flow across borders.

To decide whether forex trading is haram or halal depends on the the circumstances of the forex trade. We know that any forex trade that includes interest (riba), gambling (maisir) or uncertainty (gharar) could be deemed to be haram. However, when using interest-free accounts, Islamic forex accounts, and Sharia compliant strategies, forex trading can be done in a halal way.

Key Principles of Islamic Finance

What are some of the key Islamic finance principles to be mindful of when examining forex trading?

The main principles you should know about are:

• Prohibition of riba (interest): any kind of interest element attached to a trade is not permissible under Islamic finance rules. Riba is seen as unjustified financial gain and is haram. In forex trading watch out for overnight interest (swap fees) or interest earnt on sums held overnight.
• Avoidance of gharar (uncertainty): any significant uncertainty could render the forex trade haram. Avoid high-risk and speculative trades especially where traders gamble on price movements that have no real economic value. Similarly, avoid traders who trade without any underlying asset (see below). Uncertainty also applies to contract terms. If a trader has hidden fees or complex conditions then this needs to be challenged.
• Avoidance of maisir (speculation/gambling): Islam prohibits gambling and this also applies to trades where financial gains are linked to luck and unearned income. High-frequency and high-risk trades are best avoided.
• Ethical trading: trades and transactions that happen instantly such as spot forex trades (T+ 0 rule) are better than derivatives and futures that relate to settlements in the future.

The Halal Perspective

Forex trading is considered halal when conducted through Islamic accounts with zero interest. There are Islamic forex traders who adopt ethical practices in line with Islamic finance rules, ensuring adherence to Sharia law. The benefit for Muslims is that they can participate in investing and trading without breaching Islamic rules.

As a simple exchange of currencies, the following conditions can render a forex trade halal:

• Islamic swap-free accounts: these accounts are not interest-based and adhere to Islamic finance principles.
• Clear contracts: ensure you have transparent contract terms and pricing with real market involvement.
• Avoid gambling on price movements and work with experienced knowledgeable traders who understand Islamic finance and who are not single-mindedly focused on the margin or return for the parties.
• spot-trading: focus on actual asset ownership and immediate settlement rather than delayed settlements.
• Make sure your dealings are not gambling, but based on legitimate business trades.
• Day trading vs swing trading: day trading includes buying and selling on the same day. No positions are held overnight therefore the chance of incurring interest fees or swap fees is eliminated. Swing trading involves holding positions for many days at a time and this can include interest fees which are haram.

The Haram Perspective

Conventional forex trading is considered to be haram where there is interest payable/charged, and where there are elements of gambling or uncertainty. Always find out as much information you can about the broker, account, process and industry you are engaging with before starting any trading activity.

There are many Islamic brokers and experts that can help you navigate away from haram practices when it comes to currency trading and markets.

Avoid the following practices

1. interest payments.
2. hidden fees.
3. sudden changes in price.
4. manipulations by the brokers
5. excessive uncertainty and ambiguity
6. swap fees (eg overnight payments)
7. exploitation of others in trades
8. trades on market movements without understanding the fundamentals of the market
9. borrowing large amounts of money/ loan (leverage) which is often linked to riba and increased risk

According to Islamic scholars and the Fiqh Council, conventional forex trading is haram when rooted in traditional trading practices. Conventional trading practices go against Islamic beliefs and values relating to financial activities.

However, forex can be halal if:

• you use transparent traders and brokers with Islamic finance knowledge
• you use Islamic accounts with no interest (swap-free accounts)
• you conduct trades on real economic analysis and foundations
• pick Islamic-compliant brokers and organisations
• you avoid speculation, gambling and deception,
• you focus on immediate settlement and future payments
• your trades are based on real asset ownership
• trade using your own capital and not borrowed sums

Frequently Asked Questions

● Is forex trading a form of gambling?

Unless forex trading takes place within an Islamic finance framework (using Islamic accounts and knowledgeable brokers who understand the religious principles of Islam) then it could be deemed to be gambling. When conducted within Sharia rules, forex can be halal.

● How do Islamic accounts work?

Simple speaking, Islamic forex accounts avoid interest payments and interest rate calculations, and are created specifically to comply with Sharia rules about financial transactions.

● Is leverage allowed in Islam?

Leverage refers to traders borrowing money from other brokers to increase their potential profits. In traditional forex trading accounts leverage often includes interest payments on borrowing. Is Islam, leverage is allowed as long as there is no interest payable on leveraged funds.

● Can I trade forex without interest?

Yes, of course. Islamic forex accounts enable Muslims and ethical investors to trade without receiving or paying any interest. Islamic swap-free accounts were created as a solution for Muslim customers and are available on the market that are tailored to ensure they comply with Islamic finance principles.

Conclusion

Ultimately, whether or not forex trading is halal or haram depends on whether the trade itself complies with Islamic finance principles. Islamic scholars and experts can provide guidance and specify trading practices that are haram to help clarify if trading is halal or haram. However, by choosing Sharia-compliant brokers and accounts and focusing on ethical trading there are many ways of engaging in forex trading in a halal way.

There are obvious red flags to avoid for any Muslim (riba being one of them), but there are ways of ensuring that trades are halal. One of the best things you can do before any kind of financial investment or trade is to seek the advice of Islamic scholars and then speak to Muslim forex traders. These people are best placed to ensure that any trade you undertake is halal and remains compliant.

Remember, even Islamic accounts change over time so you need to ensure that there are proper risk management and risk mitigation strategies in place. Exercise caution, if something looks like it is too good to be true then the onus is on you to dig deeper.