Islamic crowdfunding - what is it and who benefits

As e-commerce businesses and platforms continue to increase and develop, one of the main challenges these businesses face is securing financial backing. E-commerce platforms and websites such as Shopify have grown exponentially in the last decade, and this is in part due to the change in consumer behaviour with increasing amounts of money being spent on online shopping. As consumers have flocked online to purchase what they need, especially during the Covid-19 pandemic, the e-commerce market has grown quickly to meet the demand.

In addition to consumer demand, another reason for the growth in e-commerce ventures and transactions is the fact that e-commerce trading is accessible to all. Online businesses are democratised, enabling all entrepreneurs equal access to entry when it comes to selling products and services. However, like traditional businesses, e-commerce enterprises need funding in order to grow. Arguably, the financial world is still trying to catch up with the growth of e-commerce in terms of the funding options available. The finance world is continuing to evolve to ensure that it meets the needs of e-commerce retail businesses that operate via web pages and online sales.

Not having the capital funding and investment available is one of the main reasons that prohibit online ventures from succeeding. With consumers in the United Kingdom spending over £1 billion online every week, e-commerce funding has become a growing market. However, with less hard assets as traditional bricks-and-mortar businesses, e-commerce ventures may find it harder to find and secure the funding they need to expand and meet the needs of the economy.

When To Start Raising Funding

For any business venture, the best time to think about funding and finance is when the business idea is developed. Once you are clear about your business goals and aims, you should work out how much money you will need to achieve those goals. Securing funding not only enhances the chances of success, but also ensures you have the capital to build and execute your business strategy.

The type of funding you opt for depends on what type of business you have, your business needs, whether you want to ensure you keep full ownership, and what the funding is needed for.

Why E-Commerce Businesses Need Funding

You might be wondering whether a business venture that operates online requires funding? After all, many e-commerce businesses may not need the levels of inventory required by traditional businesses. Online ventures also do not have the extensive costs of property rental or asset management, but they do have the technology and software to function well on the internet and provide the best end user experience.

E-commerce funding is essential because it facilitates growth. Capital funding means the business can cover its expenses that can include marketing costs, operational expenses, and costs of operating via online platforms. E-commerce businesses have similar expenses and outlays to other businesses.

Many traditional funding options such as bank loans simply do not meet the needs of digital e-commerce business models and ventures. Online sales mean the logistics of e-commerce businesses are totally different from the needs of more traditional shopping and retail enterprises. E-commerce presents a different type of business opportunity that many people want to capitalise on using their sales skills and the newer forms of funding support e-commerce in a better way than bank loans.

The good news is that modern forms of e-commerce funding are becoming more prevalent. The most successful e-commerce ventures are those that appreciate what kind of funding they need, the financial rules and laws relating to their enterprise, and how best to leverage the funding to scale their business.

Below we will look at 6 of the most popular ways to fund e-commerce businesses.

Crowdfunding

The reason why crowdfunding is a great option for e-commerce businesses is that it follows a modern formula for financing a business. Crowdfunding works by essentially obtaining funding from a crowd. This entails raising awareness of the business, then seeking contributions from various funders (often individuals and members of the public). Crowdfunding platforms like Kickstarter and Gofundme facilitate the receipt and payment of the funding.

In essence, crowdfunding flips the conventional funding model over. Instead of starting with capital funding or a loan from a bank, and then taking the idea to the public. Crowdfunding starts with marketing the idea directly to the public and then raising the capital. For e-commerce enterprises this is especially useful as anyone with a good idea can gain traction on social media and acquire capital from investors.

Bootstrapping

Bootstrappers build their business with very little outside capital and investment. Instead, they self-fund their business idea and retain control of the business. Bootstrapping is a simple and flexible strategy but can lead to financial strains and high levels of stress. Normally, ventures that rely on bootstrapping will rely on personal funds and cash flow from the company to scale the business. A famous example of a successful bootstrapping business is Spanx. However, this funding option is not an option for all e-commerce businesses as it requires owners to have a large capital sum to invest in the business from the outset. Remember, not having enough working capital can be disastrous for sales and growth and can ultimately be detrimental to the health of the business.

Equity Finance

Equity financing is exactly what it says: finance in return for equity in the business. This is a very traditional form of financial investment and is utilised by many startup businesses. Equity financing can be difficult to secure as new businesses do not have the evidential documentation a successful business will have. For online businesses, they may often find that trade is variable and there are no fixed assets or real estate property to secure any financing against. For anyone considering equity finance it is important to evaluate the level of funding that you can raise, and the extent of equity you will be handing over.

Grants

Grants are a great way to fund an e-commerce business, as they are usually non-returnable and act as a great investment into the business without losing control. However, if you want to apply for grants successfully you need to make sure you meet all the relevant criteria for the grant. As expected, grants are fiercely competitive and depend on what kind of business you have. You might find there are more grants available for those types of businesses that support socio-political issues, such as sustainability, green initiatives and charity functions.

The main benefit of grant funding is that you do not need to pay it back, it is capital that is free from interest and costs. Applying for grants is a lengthy and complex process and there is no guarantee of success. It is always best to research fully any grant opportunities and fine tune your business model and documentation before any application. Bear in mind that some grant funding also requires match funding from the business.

Revenue Sharing

Revenue sharing is a fairly new funding model that is particularly popular with e-commerce businesses that operate via websites across different territories (ie United Kingdom, United States, China etc). The way revenue sharing works is that funding is provided, and in return the business offers the financier a share of future revenues. Repayments are tied to the level of revenue to be generated. So, if revenue increases so too the repayments increase, and if the revenue falls the repayments also come down. The reason many e-commerce businesses like the revenue sharing model is that there is no requirement to give shares or equity to the investors and the business owners can retain full control of the venture.

Bank Loans

Bank loans are the traditional form of funding businesses have always used. They facilitate raising capital funding via borrowing. Usually, the loan is repaid via regular repayments that include interest and other fees. The difficulty with this model of funding is that it is prohibitive to those who adhere to Islamic finance and do not want to incur interest charges, and also bank loans are not always accessible for new e-commerce businesses. This means that the terms on offer are not always competitive. For anyone considering a bank loan, you need to make sure you research what the terms and conditions of the loan are and think about what level of debt you are comfortable with.

Whatever funding option you decide to pursue, you need to make sure that the capital raised meets the needs of the e-commerce business and that you do not fully lose control.

Islamic Finance And Money Management

Islamic finance sets out principles for Muslims to follow when it comes to managing their money, investments, and assets. Managing money in a Sharia compliant way is not part of the ethical framework of Islam, but also serves as a guideline for Muslims to follow when transacting and managing finances.

The aim of Islamic finance is to ensure that financial dealings are not speculative, exploitative, or unfair. Instead, the focus is on creating an ethical financial economic system and markets that promote equality, social welfare, and justice within the economy and outside of it.

Every Muslim, business, and industry should follow Islamic finance principles when dealing with money. This is not only a religious requirement, but also an ethical one.

Traditional methods of money management focus on growing wealth and often this is based on interest and speculative investments. Islam is the opposite. It teaches people to manage their money in a reasonable and ethical way.

Islamic Finance - The Holistic Approach

Islam encourages a holistic approach to life. This includes having a wide lens when it comes to financial transactions and wellbeing. When it comes to money, Islam takes a holistic approach that goes far beyond focusing on the economy and markets.

Instead, the Sharia approach aims to emphasize socially responsible, ethical, and spiritual dimensions that align with the wider principles of the faith.

Let's have a look at the aspects of the holistic approach taken by Islamic finance:

• Social responsibility: this is key for Muslims in all aspects of their lives, but especially when it comes to money, payments, economic growth, and activity. The focus is placed on ensuring that people behave in such a manner so as to alleviate poverty and redistribute wealth.
• Ethics: like social responsibility, ethical conduct is a key component of the holistic approach of Islamic finance. Honesty, fairness, and transparency are widely encouraged when it comes to money management. Islam aims to ensure that people and societies as a whole benefit from money (hence the reason interest is strictly prohibited as it is seen as being rooted in the concept of unfairness).
• Intention: the niyyah (intention) behind money management decisions is important for Muslims. The aim is for transactions to be carried out with intentions that focus on ethical conduct and fairness. The idea behind this is that wealth comes from Allah so it should not be used to produce unfairness.
• Consumption and lifestyle: Islamic finance is not simply about how we manage money. Islam requires us to carefully consider our consumption, to avoid over consumption, understand the concept of wealth management, and to behave ethically. Muslims should make mindful and meaningful purchases and not spend frivolously.
• Wealth distribution: an important element of Islam is education and understanding in relation to the principle of sharing wealth. Through the obligations of zakat and charitable paying, Islam places great emphasis on ensuring that wealth passes from the rich to the poor.
• Real economic activity: investments in Islam cannot be speculative or ambiguous. Transactions must be based on a fair agreement with real asset backed and tangible items.

Trends In Islamic Finance

As the landscape of the globe changes with the introduction of digital banking and mobile banking, so too the Islamic finance landscape is changing. More and more people want to save, invest and store money in an ethical way and Islamic finance offers this ethical approach.

Sharia compliant money management offers people with a conscience the opportunity to manage their finances in a way that not only benefits themselves but also those around them.

There is currently an upward trend in the demand for ethical financial services, and Islamic finance is built on ethics and socially responsible finance.

In the UK, The Islamic finance industry is growing fast. This industry not only serves Muslims as individuals and business owners, but also serves Muslims from across the world including the Middle East and other Muslim territories. The Muslim fintech market is growing fast, and research indicates that this will be a key growth area in the coming decade with the fast rise of digital banking.

In addition, the green and sustainable industry is also seeing huge growth. Incorporating Islamic finance with green investment is the perfect alliance as both industries offer each other the perfect ethical partner.

Money Matters In Halal Business Ventures

When it comes to managing finances in business in a Sharia compliant way, it requires more than financial acumen. What is needed is a good understanding of Islamic finance principles. This includes knowing why interest is haram, and how to run your business so it is compliant with Sharia rules.

From opening your business bank account, to making deposits and withdrawals, there are many Islamic finance options available to people. Financial institutions understand the need to cater to those wanting to manage money in a Sharia compliant and ethical way.

Problem Solving Strategies In Islamic Money Management

The starting point is to always ensure that you live a Sharia compliant lifestyle. Whether you are a consumer, customer, business, corporation, or homeowner, there are principles set out to guide you.

Other strategies to help you include:

• Follow the Islamic finance principles when it comes to all and any financial dealings. When in doubt, seek guidance from scholars and financial advisors who are knowledgeable about Islam and Sharia rules.
• Review and adjust accordingly: assess and review your investments and finances regularly and don't assume everything you do is compliant.
• Address debts quickly: it is very easy to take out a loan and fall into debt. Debt that is interest based should be avoided at all costs. Think about the need and value of the purchases you make and do not rely on security that is interest based.
• Zakat: plan and prepare for your zakat payments. This will ensure you are constantly reviewing your finances and preparing for your zakat payments through the year.
• Income: ensure any income generated is halal.

Balancing Money And Morality In Islam

Balancing money and morality in Islam is not difficult. The Islamic finance principles give you a great foundation from which to align your finances with Islam. Make sure you understand these rules and apply them.

The main thing you can do is to avoid interest. It is strictly forbidden. In addition to this, you should prioritise halal earnings and avoid engaging in activities that are deemed to be forbidden.

Fulfilling your zakat obligations is a means through which you can fulfil your rights as a Muslim and share your wealth ethically. Practice disciplined budgets to ensure that your finances do not run away with you and you have the financial security you need through the year.

Always avoid excessive risk and speculation. Be cautious when engaging in any financial dealings that include any element of speculation of gambling.

Instil and teach Islamic values to those around you and ensure that those in your life, whether on a personal or professional level, share your values.

Banking Solutions For Muslims

Look out for banking solutions, products, and services that offer Islamic finance options for Muslims. These days it is not hard to find Sharia compliant bank accounts, mortgage products, loans, and investment options.

There are even Islamic insurance services and wealth management services. So, there is no reason to not do your research and ensure that your money management aligns with the teachings of Islam.

Qardus Ltd do not provide financial or investment advice.

WHAT IS BANKING?

When we talk about banking, we are discussing the products and services offered by the financial industry including lending money, facilitating payments, and managing accounts. Banking services are available to individuals, companies, and governments. There are some key differences between commercial banking and Islamic banking.

Banks and financial institutions play an important role in the economy. Not only do they facilitate financial transactions, but they also act as intermediaries between businesses, between borrowers and savers, and between lenders and businesses.

Banks facilitate transactions and manage credit and debit accounts. The role in the economy goes beyond managing money. They are also responsible for ensuring the financial systems remain stable, and they are therefore subject to regulation and oversight by central banks.

The regulation of banks ensures that there is ongoing prudent financial management, and risk mitigation in addition to compliance with legal standards.

COMMERCIAL BANKING - HOW DOES IT WORK?

Commercial banking is a traditional form of banking used across the globe, especially in Western economies. In its very basic form, commercial banking relates to the services and activities that banks can provide to individuals, entrepreneurs, businesses and governmental organisations.

Commercial banks undertake various activities, including:

• Payments: commercial banks facilitate incoming and outgoing payments, transfers, cheques.
• Debit and credit cards: commercial banks provide customers with debit and credit cards
• Trading: banks also facilitate national and international trade by enabling international payments and foreign exchange transactions.
• Investment services: commercial banks offer brokerage services and accounts, advisory services, and information about investment options.
• Corporate banking: commercial banks offer the corporate world specialised corporate services to encourage and facilitate corporate trade and transactions.

Main Principles Of Commercial Banking

One of the main underlying principles of commercial banking is the payment and receipt of interest. A commercial bank makes money by earning interest on loans and financial instruments that it provides to businesses, individuals, and large corporations.

Commercial banks also make money from the fees they charge for their products. For example, when offering loans and mortgages, the bank will usually charge a fee for this service.

Commercial banking rests on the following main principles:

• Profitability - as with any commercial business, the banks main focus is on profitability.
• Liquidity - liquidity refers to the ability of assets to be quickly converted into cash/ money.
• Solvency - commercial banks need to be solvent at all times. What this means is that they have financial sufficiency and capability. This level of solvency enables banks to remain in competitive markets with enough capital.

ISLAMIC BANKING - HOW DOES IT WORK?

Islamic banking is very different to traditional commercial banking. Islamic banking is based on Islamic finance principles and guidelines. These guidelines follow Islamic Sharia law. Sharia law prohibits the receipt or payment of interest, as this is considered to be deeply unethical and exploitative.

Sharia compliant banking, underpinned by Islamic finance principles, does not charge or pay any form of interest. This does raise the question of how do Islamic banks make a profit if they do not charge interest to the customer.

The answer to this lies in the structure and the practices within Islamic finance institutions. Instead of making profit through interest, Islamic banks profit through equity sharing and partnership arrangements. These arrangements ensure that the profits and losses are shared between the parties.

Let's have a look at the way Islamic banks operate and how they make a profit:

• Profit and loss sharing - Islamic banks rely on Sharia concepts such as musharaka (cost-plus financing) and mudaraba (partnership based financing). The former requires both the customer and the bank to contribute capital and share in any profits arising from the investment. Mudaraba is a slightly different arrangement where the bank provides the capital and the individual manages the running of the business. Both these arrangements facilitate profit sharing in an equitable way.
• Asset-backed finance - Islamic banks rely on asset-based finance arrangements. Often, this means that the bank or financial institution will purchase an asset at the request of the customer and then sell it back to them. The sale back is at a higher price which is usually paid back in instalments.
• Investments - Islamic banks are permitted to engage in investment activities. However, the difference between Islamic banks and conventional banks is that Islamic banks retain control over the industries they invest in. They do not invest in industries that are deemed to be impermissible in Islam (ie, gambling, porn, alcohol). Additionally, any investment activity is not interest based and is not speculative or uncertain. This means the level of risk is often lower than the investment activities of commercial banks.

Key Principles Of Islamic Banking

As already mentioned above, the main principles relating to Islamic banking are derived from Sharia law. Sharia law guides Islamic finance and differentiates it from conventional commercial banking.

The key principles of Islamic banking are:

• No interest - there is a strict prohibition on interest (riba). This means that any deposit or payment does not accrue or attract interest in any form.
• Profits and losses - Islamic finance centres on the notion of equitable relationships and non-exploitative relationships. This means that there has to be equitable sharing of profits and losses between the parties.
• No uncertainty - excessive uncertainty is not permissible in Islamic banking. This means that any investor, entrepreneur, business, or leader looking to engage in activities needs to ensure that the trade or investment is not uncertain or ambiguous. Financial transactions should be transparent and solution based.
• Ethical and social responsibility - Islamic finance is underpinned by the key concepts of ethical behaviour and social responsibility. There is an onus on those with control to ensure that the parties engage in activity that does not adversely affect others and that benefits society as a whole.
• No speculation - it is important for Islamic banking to ensure that financial activities are based on real economic transactions, not hypothetical or speculative activities.
• No excessive debt - again, to ensure there is equity and transparency, Islamic finance requires that excessive debt is avoided. Islam promotes responsible borrowing and lending practices.

Commercial Banking Services Vs Islamic Banking Services

The main difference between commercial banking and Islamic banking are the main principles which guide the banking activities. As already discussed, Islamic banking does not rely on interest payments or interest based activities.

Whilst commercial banks rely on interest as a fundamental component when it comes to lending and borrowing, Islamic banks are more focused on a profit-loss sharing arrangement.

Whilst both commercial and Islamic banks offer a variety of financial products and services, Islamic banks have to ensure they are compliant with Sharia rules about financial activities. Islamic banks provide similar services to commercial banks (loans, mortgages, savings accounts etc) but the key difference is that they offer Sharia compliant alternatives to their clients.

Islamic banks actively avoid financial deals and transactions that are deemed to be risky and speculative such as derivatives and trading securities. The ethical and social responsibility element of finance is not something that features as heavily in commercial banking as it does in Islamic banking.

Commercial banks aim to generate and maximise profits through interest that is earned on lending and other banking services. For Islamic banks, interest is prohibited, so they look to Sharia compliant ways of generating profits.

It is important to remember that both Islamic and commercial banking aim to offer financial services to meet their clients needs. Islamic banking is favoured by Muslims because the principles of Islamic finance mean they remain compliant with their religious obligations. However, Islamic finance has a much wider appeal to customers across the Muslim and non-Muslim world.

The Regulatory Framework For Banking In The Uk

In the United Kingdom, the regulatory framework is managed by the Financial Conduct Authority.

As part of its supervisory and regulatory role, the Financial Conduct Authority aims to protect the customers of financial institutions that offer any form of financial product or service. The Financial Conduct Authority also ensures that it promotes healthy competition between financial service providers.

Risk Management In Commercial Banking

Risk management and mitigation are essential tasks for banks. Not only does risk management ensure that banks have a risk management strategy in place, but it also ensures banks remain compliant with the relevant regulatory regime in place.

Commercial banks assess risks on an ongoing basis to ensure that they can maintain their financial stability. Risk management also prevents unexpected losses that could occur and help the bank prepare for long-term viability and market fluctuations. Ultimately, commercial banking is arguably more volatile that Islamic banking as it places itself in a more fluctuating, interest and economy based market.

Islamic banking mitigates risk by avoiding interest based transactions, and discouraging speculative behaviour. The risk and reward is shared between the parties, this leads to shared responsibilities when it comes to risk.

Risk Management Is Islamic Banking

Risk management in Islamic banking is different from the risk management in conventional commercial banks.

Islamic finance promotes the forecasting of financial risks and ensures the necessary risk mitigation strategies are in place from the outset. Under Sharia rules and guidelines, Islamic banks manage risk via practices which actively mitigate risk. These practices include ensuring that is an equitable profit and loss sharing arrangements. Islamic finance also requires that parties to a transaction share the risk, so one party is not left dealing with huge losses.

Through intense screening and due diligence, Islamic banks assess feasibility in a more rigorous way than commercial banks. This helps them identify potential issues before they arise and mitigate risks early on.

Islamic banks will usually have Sharia compliant scholars and boards working with the bank and ensuring it is compliant and regulated. These boards provide Islamic guidance on complex transactions and reduce the risk exposure. Many Islamic banks will also ensure they have contingency funds and reserves to deal with unexpected events and losses.