Islamic crowdfunding - what is it and who benefits
Crowdfunding
For new businesses, entrepreneurs, and those with creative ideas, finding the appropriate finance to fund their ideas and projects can be difficult. It is even more difficult for those who are looking for funding options that are Sharia compliant. Without the necessary funds, creating a successful business or launching an idea is near impossible. Crowdfunding has emerged as a great way to raise capital and find the financial backing you need.
For Muslims, crowdfunding can be viewed as a halal way to raise funds, without having to resort to conventional funding options which are interest-based.
Crowdfunding facilitates economic growth for many companies, startups, medium enterprises, and individuals. In return for the investment, investors aim to receive a return from the profits generated.
This article will examine what crowdfunding is, who benefits from it, why more and more Muslims are using crowdfunding platforms, and what you need to look out for if you want to keep your money halal.
Basic Concepts Of Crowdfunding
The very basic concepts of crowdfunding revolve around raising funds from a crowd of people - hence the name crowdfunding. Essentially, it is the crowd that funds the project.
This is an alternative to going to a bank for a loan and securing funding that is essentially a debt.
Some of the key concepts that crowdfunding is based on include:
- the project: a creator or company starts the crowdfunding campaign based on a project or idea. The idea is presented via the online crowdfunding page coupled with a request for for investment and financial backing.
- the platform: the crowdfunding platform is the means by which creators are connected to the angel investor, venture capitalists, potential donors, investors, companies, and backers. Some popular crowdfunding platforms include Indiegogo, GoFundMe, and Crowdfunder.
- Investors: the investors or backers are the individuals or companies that contribute funds to the campaign. In return, they can either receive rewards, equity or just the satisfaction of knowing they have made a contribution to a campaign they believe in.
You can see why any startup company or entrepreneur would look to crowdfunding as a viable way of raising funds.
A crowdfunding campaign should include full details of the project and present it well on the relevant platform or website. The details should be precise and include:
- the project details (including the industry, the market targeted, services on offer)
- the funding goal
- what the money will be used for
- timeline of the deal
Conventional Crowdfunding Types
Some conventional crowdfunding types include the following:
- Donation based crowdfunding: this is where donors contribute to the campaign without expecting anything in return. Many charitable causes raise money this way, but it is also used by individuals for personal fundraising.
- Reward based (equity crowdfunding): this type of crowdfunding is when backers contribute funds to a particular project in exchange for non equity rewards. These can include incentives, early access offers, or special merchandise.
- Debt based crowdfunding: this is the type of crowdfunding where backers lend money to the crowdfunder on the understanding that the money will be repaid (this usually includes interest repayments).
Crowdfunding - Islamic Finance
Some of the basic Sharia rules relating to finance must be complied with if any crowdfunding campaign is to be considered halal. As a financial model, Islamic finance has been successful for many decades. Not only does it facilitate financial inclusion for marginalised communities, but also ensures that small and medium sized businesses have accessible finance.
Islamic crowdfunding aligns with the ideals of Islamic finance, with the focus on the development of society and individuals whilst meeting Sharia goals.
Conventional finance and management has not been able to support small and medium Muslim businesses in the way that crowdfunding has. This is because conventional financial transactions relating to funding are based on interest and debt repayments. For Muslims, this is a price they are not willing to pay.
Crowdfunding is a public-private collaboration, and when done in a Sharia compliant way, it can offer Muslims a viable way of raising money whilst also delivering economic growth.
In fact, crowdfunding as a concept is not unfamiliar to Islamic finance. The current crowdfunding concept can fund its roots in the concept of Islamic microfinance which aims to bring social justice and equity into financial transactions.
IS CROWDFUNDING SUITABLE AS A HALAL FORM OF FINANCING?
To answer this question we need to examine whether crowdfunding can be compliant with Sharia rules, and what Sharia rules state in relation to crowdfunding. Crowdfunding at its very essence is a social collaboration idea, and this fits with Islamic finance principles.
The idea is that individuals collaborate and donate resources to a project, service, or trade that they believe in. With Islamic finance's emphasis on equitable wealth distribution, crowdfunding certainly meets this focus.
Wealth distribution in a fair way is a core principle of Islamic law, and what better way to flow funds from one person to another than crowdfunding. Crowdfunding enables the public to help private sector companies and individuals to grow their enterprises in a socially responsible way.
Another important aspect of Islamic finance to mention here is the focus on ethical responsibility and profit and loss sharing (risk taking). This is pretty much what crowdfunding does. It allows companies and individuals to share in the risks being faced as well as the opportunity to share in the rewards and returns that are generated.
Of course, not every form of crowdfunding model is halal. For example, any form of crowdfunding that includes interest payments or haram industries or enterprises is not permissible and not Sharia compliant. In fact, any crowdfunding model involving interest or speculation is prohibited.
It is important to ensure you do your research and find a project and platform that works within the parameters of Islamic finance rules.
Islamic Crowdfunding
Islamic crowdfunding enables investors to support small and medium businesses in their economic activities via a distribution of wealth. Look out for projects that have an element of social and economic justice attached to them.
There are many crowdfunding projects out there which aim to relieve poverty and to provide financial aid to the poor based on charitable donations and these projects always do well.
Mudaraba contracts can be used in Islamic crowdfunding. They work on the basis that:
- profits from the projects are distributed between the creators and the investors.
- predefined percentages are used in relation to profits
- Investors do not influence the project or have veto powers
- the contracts are beneficial for startups with innovative ideas
In addition, having a zakat based crowdfunding project would also be a concept that is compliant with Sharia rules. Those in need of zakat can set up campaigns asking for zakat money or charitable donations.
Sharia Rules And Regulations
As already mentioned, any crowdfunding project must be Sharia compliant if it is deemed to be in accordance with Islamic finance rules. This means:
- the project, goods, or services must not be involved with any haram industries (porn, alcohol, gambling).
- the capital used to finance the project must be halal
- no interest can be paid or charged
- a Sharia supervisory review should be in place to monitor and track the crowdfunding campaign
Challenges For Those Offering Islamic Crowdfunding
Despite their popularity, crowdfunding campaigns also have their own unique challenges.
Some of the challenges include:
- Generating public interest: one of the main reasons crowdfunding campaigns fail is that they do not generate enough interest from people. Getting the attention of potential funders and investors is key to a crowdfunding campaign.
- Trust: with so many crowdfunding campaigns live at any given moment, some investors shy away from crowdfunding. Before you try and raise any money via crowdfunding, it is important to be able to tell the story of the project and why funding is needed.
- Ideas protection: as with anything these days, once a crowdfunding campaign does well, 10 similar projects will come forward. When presenting your project on any platform you need to ensure that you provide enough information to garner interest from backers, but also keep enough back so you can protect your idea.
- Risk management: as Sharia rules state that profits, losses and risks should be shared equally it is important to ensure that the crowdfunding arrangement meets these goals.
- Technology: in many countries around the world, electronic payment methods are still not common. This means crowdfunding still has limited availability to the poorest in our society.
Overcoming Challenges
The best way of overcoming the challenges relating to crowdfunding is to make it more accessible. By its very definition, crowdfunding is a concept that relies on the crowd to forward fund projects.
Due to the importance crowdfunding places on sharing and participation, crowdfunding platforms across the world are demonstrating cultural and social benefits. As a new platform, there is still more regulation and development to come, but for Muslims it is an innovative approach to raising finance in a halal way.
One of the most fundamental points to remember with crowdfunding is that crowdfunding itself is not automatically deemed to be halal. Each crowdfunding investment opportunity of project needs to be evaluated by the investor or creator to make sure the investment complies with Islamic finance rules.
In addition, the crowdfunding platform and the project need to be assessed on an ongoing basis. Do not assume that once a project starts it will remain halal. Muslims who want to use crowdfunding to raise funds or to invest must ensure that they continue to ask questions, undertake due diligence and consult with scholars and financial advisors who understand Islamic finance.
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Halal investment opportunities are those financial products and services that comply with Sharia rules about transactions. Investment is permitted in Islam, but the way you invest is important. Halal investments can span different products including stocks, real estate, commodities and business-to-business investment.
Types Of Halal Investments
There are many different types of halal investments available on the market today. Previously people may have questioned whether specific investment vehicles such as bonds, stocks, cryptocurrencies, and real estate are permissible Islamically.
However, there are now many Islamic and halal alternatives to these investment options that are Sharia compliant and screened for compliancy with Islamic rules about finance.
Let's have a look at some of the most common halal investment vehicles:
- Property/ real estate: property has always been a good investment opportunity but often these opportunities come with interest based products. Investing in real estate using Islamic finance vehicles (interest free) is a great way to grow a portfolio and build tangible assets with potential rental value.
- Islamic bonds (sukuk): sukuks are essentially financial certificates that represent ownership. The returns on sukuks are based on performance rather than interest, and often a fixed return is available.
- Islamic mutual funds: as the name suggests these kinds of funds are halal. The way they operate is that multiple investors pool funds into a diverse portfolio of halal stocks, bonds, and assets.
- Venture capital and private equity: investing in Sharia compliant companies can grow wealth in a halal way.
- Precious metals (gold, silver): you can hedge against inflation and unpredictable market conditions and fluctuations by investing in precious metals that hold their value.
- Halal crypto: As the Islamic finance market has grown, so too has the availability of halal bitcoin and crypto.
ARE INDEX FUNDS HALAL?
Whether an index fund is halal or not depends on how it was formed and how it operates. There are halal index funds available to those who want them. Any index fund that is Sharia compliant should have the following components:
- avoiding haram industries (gambling, pork, interest)
- be Sharia screened by experts in Islamic finance
- avoid debt leverage and riba
- have thresholds relating to revenue and debt
ARE ISAs HALAL?
ISAs (individual savings accounts) are a very popular saving account in the UK. They enable people to save money without paying tax on the interest or gains. You can specifically look for halal ISAs and if you do then look out for the following:
- If you are looking for a stocks and shares ISA make sure the stocks and shares are not linked to haram industries.
- Ensure there is no riba attached to the ISA - cash ISAs tend to be interest based which is not permissible in Islam.
- Search for halal funds that are available.
HOW CAN I GROW WEALTH AND INVEST WITHOUT ENGAGING IN INTEREST?
This is a common question many Muslims ask themselves. The answer to this question is simple - it is possible to grow wealth and invest without breaching Islamic rules.
The very first step is to seek our Islamic finance organisations, banks, lending institutions, services and products.
Make use of halal investment products already on the market. If you have non halal investments currently, these can be transferred to halal investment options with the right guidance and support.
There are many alternative finance and investment vehicles including peer to peer lending and crowdfunding. In addition, Islamic banks are now offering interest free services.
The most important thing would be to educate yourself on Islamic finance and what halal investment entails.
Avoiding Interest
One of the best places to start when wanting to grow and develop your halal investments is to avoid interest. Interest is strictly prohibited, and Muslims should do everything they can to avoid any financial vehicle that includes interest.
If you can actively avoid interest then you are on your way to long-term financial compliance with Islamic finance. This not only aligns with the teachings of the Quran but enables Muslims to fulfil their Islamic duty to remain Sharia-compliant.
Some people worry that avoiding interest will limit the growth of their investments but this is not the case. You can grow your portfolio of investments AND remain compliant with Islamic rules. In fact, there is evidence available that demonstrates that the growth potential of Islamic finance products matches that of more conventional investment models and is actually more sustainable.
Invest Ethically
Halal investments are centred on the notion of investing ethically. In fact, faith based investments not only lead to material growth but also spiritual growth. Ethical investment aligns itself with Islamic principles.
Ethical investments are not only Sharia compliant, but they also avoid harmful industries and practices. This not only supports ethical businesses but leads to greater social responsibility. The ethical investment market is growing fast as the demand for ethical investment opportunities continues to grow across the world.
Islamic banks in the UK and abroad offer ethical investment opportunities. When determining if a bank or products is Sharia compliant it is always important to ask the experts and scholars. In the UK the Islamic finance market is regulated, but you should always ask your own questions if you have any doubts.
Halal Investment Strategies
For those looking for halal investment strategies, the best place to start is always with a reputable Islamic finance organisation. Once you have found the bank or platform to use the following strategies will help you:
- Screening - make sure you screen products and services to ensure they are Sharia-compliant.
- Filtering - if you have any doubts about compliancy then remove these investments from your portfolio.
- Ongoing assessment - keep reviewing and assessing your investments for Sharia-compliancy.
- Diversify - keep your portfolio diversified and apply your capital to different sectors.
- Long-term planning - focus on the long-term and don't expect quick short-term gains.
- Focus on profit and loss sharing arrangements to spread the risk.
- Remain engaged - stay actively engaged with your investments.
- Education - awareness is key.
- Ethical evaluations - make sure you check the ethical valuation of your investments.
- Reinvestment - use returns well!
Debts And Leverage
When it comes to debt, Islam focuses on ensuring that debt is riba free. What this means is that no interest is charged in debt and no interest is paid. In the context of conventional mortgages and loans this can create issues for Muslims as many mortgages in conventional markets are based on interest.
However, there are an increasing number of halal mortgages available on the market. These halal mortgages help Muslims get onto the property ladder without breaching Sharia rules.
Halal mortgages operate without any form of interest. Usually a bank will buy the property outright and sell it back to the purchaser at a marked up price. The purchaser will then pay the price over a series of instalments.
Another version of the halal mortgage is where the bank will lease the property back to the buyer for a specified time until the buyer buys out the bank.
Halal Investment Opportunities
The important thing to note with halal investments is that no investment activity can involve any form of interest (riba).
Any form of investment instrument that includes interest is not permissible.
The division of profit should be equitable between the parties. The profit and loss sharing elements of the investment should be based on a joint venture structure. No one party to the transaction should have an excessive benefit.
Investment activities must stay clear of haram industries such as the pornography, gambling, alcohol, and pork industries.
Investments should not be speculative or uncertain (gharar). Uncertainty in investments goes against the Islamic finance notion of fairness and transparency between the parties. This means that investment activities such as options and futures are prohibited.
Investments should operate within a real and functional economy. Look for the following when investing:
- Fair trade enterprises
- Renewable energy
- Environmental projects
- Waste reduction
- Healthcare
- Education
- Affordable housing
- Social welfare projects
- Community development
Avoid the following:
- Stocks that are based on interest/ riba
- Stocks or companies/ businesses with high levels of debt
- Any haram business or product
- Mismanagement or poor corporate governance
- Exploitation within society
- Poor distribution of wealth and profits
- Poor performance when it comes to demonstrating ethical adherence.
- Adherence to Sharia rules relating to financial transactions and investments. Invest your money now
WHAT IS ZAKAT?
Zakat is one of the five pillars of Islam. It is an obligatory act of worship and is also a mandatory form of charity for Muslims. It has always been seen as a means by which people can achieve social impact through the redistribution of their wealth. The five pillars of Islam are the absolute fundamentals of Islam and include the following:
- Faith (shahada)
- Prayer
- Zakat
- Fasting
- Hajj
Every Muslim is expected to fulfil these five pillars of Islam which serve as the very fundamental acts of worship prescribed by the Islamic faith.
Paying zakat, sometimes referred to as almsgiving, is an obligation for every Muslim who is able to and serves to bring economic equality, fairness, and to rebalance societal injustice.
The Obligations Of Zakat
Muslims who have the financial means and capability are required to pay zakat. They must donate 2.5% of their wealth (see our zakat calculator to work out how much you need to pay). The 2.5% is calculated on money and assets.
The aim of zakat funds is to ensure that they are used to provide the basic necessities for families and communities in need. These needs can include the provision of food, shelter, clothing, education and healthcare.
One of the most important elements of zakat is that payment of it is seen as a means of purifying your wealth whilst demonstrating empathy and compassion for others. In fact, the word zakat actually means 'cleansing' or 'purifying'.
The whole concept is based on the idea that once an individual donates a percentage of their wealth to charitable causes, they fulfil their moral obligation to serve others and build stronger communities and economies. Zakat is particularly important in times of crisis, as it can be used to alleviate hardship via the distribution of wealth.
Zakat is not the same as sadaqa which is encouraged but not obligatory. Zakat is an annual payment that is worked out in a specific way and spent in a specific way.
The Exemptions From Zakat
There are some important exemptions to be aware of when it comes to zakat.
Firstly, there are exemptions for those people who do not have to pay zakat and these include:
- children
- the mentally ill
- the infirm and elderly
- slaves
- Non-Muslims
- the very poor
WHO CAN RECEIVE ZAKAT?
Islamic finance principles set out clearly who can receive zakat. Those eligible to receive zakat include the following:
- Poor people
- The needy
- Debtors who cannot repay their debts
- Orphans
- Widows
- The stranded and destitute
- Travellers
- Slaves or captives
- New Muslims
- Those fighting a just cause
It is very important that when you pay zakat the recipients meet the eligibility criteria set out in Sharia law. Always make the intention of helping those who are in need and adhering to the principles of Islamic finance.
WHAT ROLE DOES SOCIAL JUSTICE PLAY IN ISLAM?
Social justice is one of the fundamental principles of Islam and Islamic finance. The Islamic framework is centred on social justice in all aspects from individual behaviour, to financial transactions, to how we behave in relationships with others.The teachings of Islam place great significance on ethical and moral behaviour. Islam promotes social justice by emphasizing the importance of the following concepts:
- Anti-discrimination: all humans are seen as equal in Islam and discrimination in any form is prohibited. In fact, the Prophet Mohammad's final sermon reiterated how important it was to treat everyone equally and fairly.
- Economic equity: Islam promotes economic justice by ensuring there are frameworks in place for wealth distribution. Zakat plays a key role in the distribution of wealth. Furthermore, the prohibition on interest further prevents exploitation and inequality.
- Charity: as already mentioned the concept of charitable giving is an essential element of Islam. Charitable giving takes place via zakat and sadaqa (amongst other forms of donation). Muslims are encouraged to consistently donate to the poor.
- Gender equality: as mentioned above, Islam believes that men and women are equal and it actively promotes gender rights (particularly those of women) and equality. The Quran consistently mentions treating people with respect and fairness.
- Legal justice: Sharia rules set out the legal framework within which Muslims operate and these rules focus on justice, fairness, and equity. The legal judicial system in Islam operates to ensure that justice and fairness are implemented.
- Ethical behaviour.
The Potential Of Zakat
The actual potential of zakat is large, and estimated to be valued in the region of $200 billion - $1 trillion (this is according to research from the Institute of Development Studies and the World Bank). It is difficult to estimate the exact amount paid each year, but it is clear that Muslims who pay zakat on an annual basis are some of the biggest and most consistent charity givers in countries across the world.
Whilst the Western world is still learning about the impact and potential of zakat, Muslim economies have harnessed the potential of zakat for many decades by establishing leadership institutions to manage and distribute zakat. In addition, Muslim countries have had discussion and debate with scholars relating to zakat and how best to use it, incorporating it into fiscal policy.
HOW DOES ZAKAT HAVE A SOCIAL IMPACT?
- Empowers individuals and communities
- Alleviates poverty
- Optimisation of social good
- Social cohesion building
- Wealth distribution
- Funding charitable projects (such as climate and environment change programmes, education, and healthcare initiatives and practices)
- Economic development
- Promote social justice
An underlying philosophy of Islamic finance and Zakat is the concept of mobilising finance for the greater good. Islamic finance embodies socially responsible actions whether from companies or individuals.
Zakat And Sustainable Development Goals
As zakat is applicable to all Muslims across the globe, it is one of the largest and most successful forms of philanthropy. It acts as one of the largest methods of wealth transfer from the rich to the poor that takes place consistently and with clear guidelines.
Inspired by the Islamic faith, zakat is taking on relevance in countries throughout the world including the UK, United States, Australia and beyond.
Alleviating poverty, inequality, and hunger are not only central tenets of Islam and Islamic finance, but they are also part of the UN's sustainable development goals. According to the Quran there are 8 categories eligible for zakat (see above) and these all align strongly with sustainable development goals.
Some countries such as Indonesia have started collaborating with zakat donors to achieve partnership working towards sustainable development goals. This is a win-win for Muslims as Islam and Sharia rules relating to financial transactions state that every person should seek to work collaboratively and fairly for the good of society.
Conclusion
The power of zakat to harness social impact through charity is undeniable. When you clearly understand what zakat is and its function in society it becomes clear that zakat has the power and potential to alter lives and bring equity.
Islamic car finance is available for Muslims wanting Sharia compliant options. What halal finance options do Muslims have and how do they work?
There is a huge array of car financing and leasing options on the market for those who do not want to buy a car outright. For Muslims, the car finance options available can be difficult to navigate, especially if they want finance and leasing options that are not in contravention of Islamic finance options.
Islamic car finance operates to enable people to use their money wisely, spread the actual cost of financing the car whilst ensuring that they do not pay interest on the finance option they have chosen. Drivers can take advantage of car finance deals whilst also adhering to Islamic Sharia rules relating to interest (the payment and receipt of which is prohibited) and speculation.
The halal car finance market is aimed at those people who want Sharia compliant finance options. Essentially, for those people who do not have the cash to buy a car outright, or those who do not want to buy a car paying cash, Islamic finance ensures that people can spread the cost of the car without breaching Sharia rules.
Islamic Finance Principles Applied To Car Finance
The main Islamic finance principles relating to car finance are:
1. Riba (Interest) - Islam prohibits the receipt or payment of interest. It is deemed to be haram. In car finance terms, this means that Muslims who want to remain Sharia compliant cannot borrow funds with an Annual Percentage Rate (APR) attached. An APR is an interest rate and is prohibited in Islam.
2. Simplicity of Contracts: Islamic Sharia principles dictate that transactions should always be honest, transparent and open. This means that if you enter into a contract for leasing a car you should make sure that there is no undue risk, speculation, or gambling involved. The contract should be fair for both parties and be simple to interpret.
Buying A Car Outright Without Car Finance
It goes without saying that buying a car outright with a cash payment is probably the best option for those wanting to remain strictly Sharia compliant. If you have savings that would cover the purchase of the car you can avoid interest payments and APR. However, not all Muslims have the option of paying cash outright for a car and this is where the market has developed to cater to the needs of those wanting Sharia compliant car finance options.
Car Finance Options - Leasing
Islam does not prohibit leasing (ijara). In fact, leasing is permissible and is compatible with Islamic finance principles. Payments for vehicles can be done via leasing contracts with car companies. Sharia does not prohibit car leasing agreements because the heart of the transaction relates to a tangible asset - the car. As long as the leasing contract sets out the terms of the lease, the details of the parties, and the payments it can be structured to be compliant with Islamic finance rules.HOW DOES HALAL CAR FINANCE WORK?
Halal car finance is actually straightforward, working on the basis of a loan being agreed between the parties. The buyer and seller in the transaction agree on the value of the car the seller is selling. The seller does not charge an interest rate for payment of the car as they would normally to make money on the finance arrangement. Instead, the seller increases the purchase price of the car to cover the interest payments they would have received. No interest is actually charged by a bank or the seller.
What this means for the buyer is that the deposit will be higher than a deposit they would pay on a non-halal car finance option, but for Muslims this is a halal way of obtaining car finance.
Halal Car Finance Options
Generally speaking, the traditional car finance options such as hire purchase agreement and personal contracts are always attached to an APR and this makes them non compliant with Sharia rules.
However, below is an example of how Islamic finance options can adapt the traditional car finance options to make them halal.
Hire Purchase Agreement (Hp)
HP financing means the buyer can spread the cost of the car over fixed monthly payments and the use of a deposit. Below is an example of an Islamic finance HP deal:
Example:
Price: £20,000
Contract Term: 12 months
APR: 6%
Total Cost to buyer: £21,200
Using an Islamic finance agreement, the seller/dealer would add the additional £1,200 to the price of the car. The buyer of the car would then pay £21,200 as fixed payments monthly for the contract term. When all the payments have been made, the buyer owns the car outright.
Personal Contract Purchase (Pcp)
PCP's are a common form of car financing option and act as a loan, with the buyer only paying off the full value of the car at the end of the contract term if they decide to keep the car. If the buyer does not pay off the full value of the car then they do not own the car at the end of the contract. PCP's usually always come with interest payments and are therefore not Sharia compliant.
However, there are sometimes some PCP finance deals available for new cars but these can be expensive and the requirements are often stringent.
Personal Contact Hire (Pch)
As PCH agreements are actually long-term hiring agreements they are normally deemed to be Sharia compliant. As you are simply renting the car from the owner or dealer you are simply paying for the use of the car for a specific duration.
Conclusion
Each contract and hire purchase agreement is different. The onus is on the customer to ensure that they have inspected the terms, and service fees of the agreement before they decide whether the option is Sharia compliant. There are various Islamic car finance options on the market these days, so it is always best to explore these options rather than using the traditional bank or dealer car finance options.
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