What role does sustainability play in Islamic finance?
WHAT IS ISLAMIC FINANCE?
Islamic finance at its very core is a way of managing money and financial transactions in a way that is compliant with Islamic rules and guidance. There is a significant interplay of sustainability and ethics in Islamic finance.
One of the foundational principles of Islamic finance is that money itself does not have any value. Instead, money is a means through which we can exchange products and services.
Islamic finance rules state that you should not use money to make money. This is why one of the most important Islamic finance principles is the one which prohibits interest in any form.
Paying or receiving interest is not seen as a permissible or equitable way of managing finances in Islam. You cannot make money by charging interest, this is seen as unethical and exploitative but also non-sustainable in the long-term.
Another important element of Islamic finance is that our transactions should not cause any harm to other individuals or wider society.
The focus should be on economic activities that are grounded in tangible assets and services, and partnership arrangements where each party shares in the profits and losses.
Ethics And Islam
Islam provides ethical guidelines within which to operate. These guidelines are based on the teaching within the Quran and from the experiences of the Prophet Muhammad (PBUH).
Underlying Islamic finance is a foundation based on integrity and fairness. The underpinning of Islamic finance with ethical considerations can be seen as contradictory to conventional business models, but ethical finance is a fast-growing industry.
Investors, individuals, and businesses are more socially conscious and want to operate in a more sustainable way.
It seems that everyone wants a more inclusive financial system where there is a real interplay between ethics and finance. Having witnessed the financial collapse of 2008 and the current global pandemic, existing Western finance models have proved to be volatile, unstable, and temperamental.
Islamic finance offers a sustainable, unique and viable ethical alternative. Applying normative ethics to financial and economic transactions brings more equality and sustainability to the table. This is mainly because operating from an ethical perspective is about duties and responsibilities rather than consequences.
Considering the consequences and impact of financial decisions means negative impacts can be identified and eliminated early. This leads to a more robust, fair, and resilient financial system.
Islamic finance recognises that finance has a useful role to play in economics. It requires overarching ethical considerations to be in place to ensure that there is intrinsic value in financial dealings, and these are supported by ethical and moral conduct.
Islam places a great deal of emphasis on ethical conduct. This is because Sharia rules derived from Islamic teachings are based on an ethical framework.
Islam requires us to align our values with the teachings of Islam in all areas of our lives. What this means for parties involved in any kind of financial deal is that the transactions are just, fair and equitable.
Islam And Wealth Distribution
Another important thing to note is that Islamic finance places emphasis on the concept of wealth distribution and social justice.
Practices including the payment of zakat every year, and regular charitable donations in the form of sadaqa aim to distribute wealth fairly. Sharing wealth is a key component of Islam, whether this is through donations or promoting those economic activities, projects, and practices that contribute positively to society.
Justice and fairness are fundamental concepts in Islam.
What Does Islamic Finance Say About Sustainability
When it comes to Islamic finance and sustainability, there is a unique interplay. Islamic finance principles are derived from Sharia law which places great emphasis on ethics and being socially responsible.
This social responsibility covers everything from wealth generation, wealth distribution, climate change, business, capital receipts, financial services, education, personal and business objectives, and education.
Sustainability in Islam must be viewed through the lens of being Sharia compliant in all dealings throughout life.
Adopting sustainable practices means you are promoting fairness and equality in every aspect of your life.
It has long been known that Islamic finance helps to divert capital into those environmental and social projects that benefit society.
There is growing recognition and support for the moral concepts of Islam and their link to global sustainability and development goals as set out by the United Nations.
Sustainable Development Goals
In 2015, the UN established sustainable development goals with the aim of achieving them by 2030.
These goals have common ground with Islamic finance as they both aim to promote social, economic, and environmental sustainability. In fact, there are several aspects of Islam and Islamic finance that align perfectly with the objectives within the UN's sustainable development goals:
- Zero hunger:
- Alleviation of poverty:
- Improving health and wellbeing
- Education
- Clean and affordable energy
- Industry, innovation and infrastructure
- Gender equality
- Clean water and climate action
- Reducing inequality
- Partnership arrangements
Role Of Islamic Finance In Sustainable Development Goals
Islamic finance is already playing a large role in contributing to the achievement of the UN's sustainable development goals. The foundations of Islam already align with these goals seeking to empower vulnerable communities.
Islamic finance initiatives such as zakat and sadaqa focus on poverty alleviation and working towards zero hunger. Islam promotes good health and wellbeing which is another UN sustainable goal.
Whether it comes to climate action, peace and justice, responsible consumption and sustainable cities, Islam is already ahead of the game.
With its emphasis on sustainable and ethical principles, Islam has been focusing on these kinds of goals for over 1400 years.
WHAT ROLE DOES SUSTAINABILITY PLAY IN ISLAMIC FINANCE?
Sustainability is a key concept in Islam, it therefore follows through that Islamic finance will also include elements of sustainability.
The Islamic finance and industry is well placed to support sustainability and sustainable development goals, whether that is individually or via collaboration.
Islam promotes social inclusion and socially responsible finance decision making. In today's global market where there is a wage labour crisis and worries about economic growth, sustainable Islamic finance is becoming more and more popular.
Research indicates that Islamic finance is one of the most sustainable and leading finance and funding models. Not only does Islamic finance base itself on ethics, it works with human beings to problem solve societal issues.
In the United Kingdom, the Bank of England recognises the significance of Islamic finance and the diversity it offers. Islam encourages inclusion and places great value in equality.
What this means for those using Islamic finance is that greater opportunities are available, and many argue that finance models based on Sharia principles will create ethical and socially responsible foundations.
Sustainability And Ethical Investments
Sustainable Islamic ethical investments are those investments that align with socially responsible and sustainable goals.
This interplay of finance and sustainability leads to positive benefits on an environmental, social and governance practices. Let's have a look at some sustainable and ethical Islamic finance investments:
- Green sukuk: green sukuks are Islamic bonds that invest in environmentally friendly projects. These projects can relate to renewable energy initiatives, climate action and other green policies.
- Islamic microfinance: Islamic microfinance provides financial services to people who may find themselves excluded from mainstream funding options.
Community development initiatives: these initiatives finance projects in agriculture, address the vulnerability in communities, and alleviate poverty.
Leveraging Islamic Finance To Build Sustainability
It is clear that Islamic finance has the potential to play an even greater transformative role in sustainability.
What is needed is for all stakeholders from individuals, governments, countries, and organisations to work together to maximise the impact of Islamic finance.
Some strategies that could achieve the synergy between Islamic finance and sustainable development goals include:
- Partnering with sustainability initiatives
- green sukuks
- sustainable investment vehicles
- support for socially responsible enterprises
- Increase in Islamic microfinance services
- Innovative finance models
- Using zakat for sustainable development
- International collaboration
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When it comes to business practices and growth, the world is moving towards more ethics based industries. This shift towards ethical business reflects the growing recognition and awareness of the wider impact of business on our economy, our health and addressing inequalities in the world. When businesses link in with the principles of Islamic finance, there is a perfect synergy of value and values.
Ethical businesses and markets grew by almost 35% in 2021-2022. The ethical finance market grew by 50.1% during the pandemic.
There are many different reasons for the growth in ethical business and banking industries. One of the main drivers is consumer consciousness. Consumers are seeking services and products that align with their own personal values and are drawn to companies that can demonstrate their ethical standing. Research shows that 84% of consumers consider the ethics of a business before spending. 63% of customers want to see ethical business practices.
Other reasons include:
- Environmental concerns and climate change awareness
- Social media influence and the spread of information
- Employee and stakeholder expectation
- Regulatory pressures
- Investor preferences
- Global inter-connectedness
- Long-term sustainability
The question arises, does ethical business conduct, especially within an Islamic finance framework, lead to success and growth in business? The answer is a definite yes.
The International Federation of Accountants has found that the business landscape is continuing to see growth and change. The pandemic and global recession have led to changes in the ethics of businesses and how they operate. This is driven by the increase in Muslim spending, investing and operations, but also due to the demand for ethical business principles following a very unstable financial period.
Islamic finance is based on ethics, so the alignment of ethical business growth and Islamic finance goes hand in hand.
Reports by TheCityUK have identified that the global banking assets within the Islamic finance sector totalled $2.8 trillion in 2022. This figure increased by 50% in the years between 2026 and 2022. In addition, by 2021 the UK Islamic bank's assets were in the region of $77.5 billion. The global sukuk insurance industry was worth $196.5 billion by 2021 and continues to see growth despite the pandemic.
Within Europe, excluding Turkey, the UK made up 85% of the European Islamic banking assets. the UK has always been ahead of the game when it comes to using Islamic finance to promote research into sustainable development options and ethical finance options. London continues to be one of the leading financial centres in the world.
This blog will examine the pivotal role of ethical business growth and Islamic finance, and how Sharia principles play a pivotal role in steering businesses towards long-term success.
Ethical Business
Ethical business practices themselves can be a huge catalyst for sustainable development and business growth. When combined with an Islamic finance funding model of management, that growth can be long-term and successful.
Islamic finance is rooted in ethics and Sharia principles that focus on the greater good of society over exploitation.
Aligning business operations with ethics ensures that businesses are able to create an environment where long-term success can be achieved.
Ethics And Islamic Finance
Both Islamic finance and ethics are inextricably linked. The foundational principles of Sharia rules relating to financial transactions guide how deals should be conducted. The emphasis is firmly placed on social justice, ethics, fairness, and equity.
One of the main principles of Islamic finance is the absolute prohibition on interest. This is a fundamental principle of the Islamic finance market. For the traditional corporate world, a move away from interest based lending and transactions seems at odds with their profits based perspective. Actually, the opposite is true.
Charging interest is seen is Islam as creating an extremely exploitative market and cannot lead to stable economics and transactions. Recent fluctuations in global interest rates demonstrate how variable and unpredictable interest based lending can be. Islam considers the charging and payment of interest to be an unethical and prohibited practice.
According to the Fitch Ratings, in 2023 the assets within UK Islamic funds were approximately $280.6 million, a growth of 2.9% from the previous year.
Profits With Purpose
Islamic finance champions the idea that you can achieve profits with purpose. Ethical practices might be the driving force behind the stability, but they can also lead to sustainable practices that can weather turbulent markets and governmental changes.
S&P Global Ratings believes that the Islamic finance market will continue to grow by as much as 10%. This is based on evidence that despite the global pandemic, the market grew 10.6% despite the double blow of the oil prices drop and the pandemic.
Navigating Ethical Business Practices
Navigating ethical business requires a considered approach. It is not enough to simply state that your business is ethical, but to be able to demonstrate that it practices what it preaches.
Taking a professional and intentional approach to ethics within business is fundamental. Businesses need to have an understanding of their impact objectives and sustainability.
Here are some steps businesses should take:
- Develop strong leadership
- Lead by example
- Understand ethics
- Curate your business practices
- Understand the environmental, societal, political and individual impacts your business has
- Review your investment strategy
- Train, teach and communicate with staff
- Embed ethics in decision making
Beyond Profit Margins
Islamic finance focuses on business potential beyond monetary profits. It places emphasis on social justice, sustainability, and community wellbeing. These demands are also now coming from consumers who want to see ethical business practices from the companies they spend with.
The perception amongst consumers is that companies should prove they are ethical and sustainable.
Remember, 40% of consumers now choose brands that have environmental sustainability within their practices and values (DigitallyAlex.com). Over 60% of consumers want an ethical service, and 34% will stop using a product or service if unethical practices within the business are uncovered.
The relationship between consumers and businesses has been evolving rapidly over the last few decades. The recent Marigold Report in 2023 found that 60% of consumers make less impulsive spending choices, and the ethics of a business feed into their decisions.
Conscious Capitalism
Younger generations including Millennials and Gen Z have increased spending power. As consumers, they are very conscious and globally aware of social justice issues. These groups are leading the demand from consumers for more ethical and conscious capitalism.
In 2022, 53% of young consumers said they were willing to spend more to pay for ethical products. Over 63% of consumers aged between 25-35 stated that they would like to have the ethical values of products listed on them.
50% of Gen Z and Millennials want to buy from more ethical brands, and over 54% will avoid brands they do not think are ethically minded.
These statistics all highlight the role of responsible and ethical business practices in driving success and retaining customers.
Ethical Funding And Islamic Finance
For businesses looking to operate within Islamic finance frameworks, they will find that these funding options are no longer exclusive to Muslim regions such as the Middle East and Saudi Arabia. The Islamic finance industry in the West continues to grow year on year.
In the UK alone, the Islamic finance FinTech industry was ranked the 5th in the world in the Global Islamic Fintech Index in 2021. The UK continues to invest in Islamic finance infrastructure and services in the UK continue to expand.
For businesses to truly see ethical growth and sustainability, they need to look beyond the traditional financial services on the market. More and more businesses are looking at Islamic finance lending and funding options to incentivise growth.
Whilst the Gulf region still accounts for the largest share of Islamic finance assets (over 45%, with the Middle East and South Asia at 25.9%), the Islamic finance industry in the West is growing at a fast pace.
As concepts relating to corporate social responsibility increase, and consumers move away from capitalist, wealth hoarding enterprises, it is clear that Islamic finance offerings will increase with the demand.
From Values To Value
Transitioning from business models that are not ethics based to those where ethics are at the forefront of operations may seem daunting.
However, as long as a considered and intentional approach is taken, businesses will find that ethical business practices not only lead to innovation but better results. Businesses can leverage ethical practices to enhance their own market standing and position.
Ethical businesses see better results overall according to an Institute of Business Ethics report. This includes ethical finance, ethical practices, and ethical business objectives.
Ethical businesses attract diverse clientele and foster prosperity which is long-term. Often, customers wanting a more ethical approach are also those with more money to spend. The partnership of business and ethics leads to growth and customer retention.
In 2022, Deloitte found that 48% of spending adults wanted to see more ethical and sustainable business practices. Over 76% of businesses in the UK now mark ethics as a high priority for their organisation. The business landscape is evaluating, navigating and changing as they understand customer choice and preference.
Ethics And Integrity
What Islamic finance aims to do is foster long term business growth in a sustainable and stable manner. The ethical framework is one which many businesses now rely on and promote.
In the dynamic and fast-paced world of Islamic finance, investing and operating ethically has been yielding great dividends for business. From 2017-2-21, assets under Islamic finance funds globally saw an average annual increase of 13%.
For any business, whether large or SME, the market currently offers dynamic and flexible Islamic finance options to scale growth.
Islamic Finance provides a financing mechanism without Riba (interest), Gharar (gross uncertainty) and Maysir (gambling). These three are the key to all economic oppressions, economic imbalances and instability. They give rise to micro and macro risks which impact the overall wellbeing of an economy. Islamic Finance offers alternative structures and products which are free from Riba, Gharar and Maysir. One of these products is Commodity Murabaha.
In minorities where it is difficult to get Shariah compliant working capital financing for SMEs, Commodity Murabaha is an alternative Shariah compliant product and financing mechanism. Commodity Murabaha is the most common Islamic money market tool that is used to provide liquidity in the short-term Islamic money markets. The AAOIFI Shariah Standards, the majority of global Shariah scholars and global Shariah boards approve of Commodity Murabaha if it is implemented correctly with the correct controls to overcome financing challenges. The classical jurists also approved of a Tawarruq or Commodity Murabaha structure. In fact, Mufti Taqi Uthmani has produced a detailed research paper on Commodity Murabaha outlining the views of classical scholars. Ibn Muflih from the Hanbali school, Imam Shafi’i, Ibn al-Humam and Ibn Abidin from the Hanafi schools have all permitted this product and narrate its permissibility from other classical jurists[1].
Working capital financing is used to cover a company's short-term operational needs and not to buy long-term assets or investments. Those needs can include costs such as payroll, rent and inventory and other costs associated with daily operations etc. Practically, business owners who are looking for shariah-compliant working capital financing to cover their short-term operational needs generally prefer entering a Commodity Murabaha Agreement where a fixed profit rate and corresponding deferred sales price instalments is specified in advance. This allows them to finance their growth at a lower cost of capital as compared to for example using profit and loss sharing (PLS) arrangements such as Mudarabah and Musharakah that result in a higher effective cost of capital. PLS arrangements are better suited for business ventures where there is a higher risk of loss. Profit and loss sharing refers to financing whereby parties enter into equity financing arrangements where the financier has a share ownership in the business.Furthermore, a stable business looking to finance their working capital might not want to dilute their ownership through equity financing. Stable businesses will not want to share their upside so would prefer debt-based financing. By doing so, they are happy to protect the financier from the downside and retain exclusivity to the upside. A PLS is favourable where there is greater risk of downside and therefore the business is happy to share the upside.
In the UK, the most direct and common way for a party to obtain working capital is to obtain an interest-bearing loan from a third-party finance provider. Since a conventional loan represents a purely monetary transaction—in essence, the use of money by a party in exchange for the payment of compensation based on the length of usage—this type of loan may not be given or received by Shariah-compliant investors. The Commodity Murabaha product allows Muslims to finance their working capital without being exposed to interest-based financing.
The Commodity Murabaha agreement has been conscripted to fill the void. A customer enters into a Commodity Murabaha transaction not to obtain a physical asset for its use, but to engage in a series of purchase and sale transactions that result in the customer obtaining working capital. In a basic Murabaha transaction, the customer receives assets in return for a deferred payment obligation, and then employs those assets in its business. In a Commodity Murabaha transaction, the customer takes the additional step of selling the assets to a third party for cash, which represents the working capital (or financing for an acquisition, as the case may be) required by the customer. Note that the customer would not necessarily be required to sell the Assets to a third party; it merely is allowed to do so, as owner of the assets. The sale of the assets to a third party is not an element required to make the Commodity Murabaha transaction a valid transaction under Shariah.
To ensure that this product is not a smokescreen for Riba (usury/interest), contemporary Shariah scholars have placed several controls. The AAOIFI Shariah Standard highlights these controls to ensure that Commodity Murabaha aligns with the principles of the classical jurists. These controls are as follows:
- Different brokers: The trades must involve the market and involve different brokers from the buy and sell side. This ensures that the trades are genuine and that the brokers are selling/buying the asset with an interest in the asset.
- Real asset :The trades must involve a real asset. A fictitious product cannot be sold. The asset transaction must impact the inventory of the seller and the eventual buyer.
- Real trades: All the Shariah requirements for trading must be met in terms of valid offer, acceptance, legal capacities of the parties, agreement on the commodity, agreement on price etc.
- True ownership: The traders should assume true ownership through true sales of the underlying commodity.
- Possession: The traders must assume possession; either physically, constructively or digitally. This possession must allow them to dispose of the asset or redeem the asset.
- Correct Sequence: The Commodity Murabaha must be performed in a correct sequence which further establishes and validates all of the above key elements.
- Discretion to not sell: The traders must have the discretion to not sell and hold. This ensures that the trade is not fictitious.
- Different agents: The financier should not be the sole agent for all the parties involved in the Commodity Murabaha.
By meeting the above principles, the Commodity Murabaha is a Shariah compliant, asset-backed financing mechanism which aligns with the principles of Islamic Finance. From a micro-economic perspective and for a Muslim minority in the UK context, this product provides a valid Shariah compliant alternative in a system where every corner and every offer are interest-based. An overview of the Commodity Murabaha facility used by Qardus for SME business financing can be found here.
You can contact Mufti Faraz Adam on sharia@qardus.com
[1] Uthmani, M.T. (1998), Buhuth Fi Qadhayah Fiqhiyyah Mu’asarah. Dar al-Qalam
In the fast-paced and dynamic world of cryptocurrency and blockchain, staking is emerging as a popular way to earn passive income. This has led to discussions and debate about whether staking crypto is halal.
This article will examine the concept of staking and the considerations relating to whether it can be deemed to be halal.
WHAT IS STAKING IN CRYPTOCURRENCY?
In cryptocurrency staking occurs when investors lock cryptocurrency for a specific period of time. This is done to support the blockchain operation. The investor will lock in their digital tokens to a specific blockchain network and in return, they will earn rewards.
For the blockchain network, it means that transactions can be validated and for investors and individuals it means they can earn rewards without having to sell their crypto.
In comparison, bitcoin and staking are not linked. Bitcoin tends not to use the staking mechanism. Instead, it uses the proof of work mechanism where miners compete with each other to problem solve maths puzzles to validate transactions.
Any locked up cryptocurrency acts as collateral to support the blockchain network. This means that it is no longer available for use and therefore staking reduces the liquidity of the asset that has been staked for any given project.
HOW DOES STAKING WORK?
Crypto staking is a consensus-based mechanism. It enables token owners to validate a crypto chain by adding blocks. Using existing crypto to validate holdings as proof of stake on a blockchain.
Any newer blocks are also validated using the proof of stake mechanism. As the crypto funds are effectively locked in for a period of time this supports the activity of the blockchain. For the investor or asset owner who are using the blockchain platform, they earn staking rewards which are similar to earning dividends on their assets.
There are two main forms of staking:
- Independent staking : this method is used when an individual deposits their crypto token as a single and sole validator on a blockchain. There is usually a minimum token threshold. For investors using this form of staking they aim to benefit from being the sole beneficiary of rewards earned.
- Staking pools: staking pools are when there are a group of people who effectively pool their crypto tokens. This is the preferred method for newcomers to staking who want to share the risk with others.
Staking involves contractual terms that identify the obligations and the rights of the parties in the staking process. These terms can vary depending on the nature of the staking.
Sharia Compliance And Staking Crypto
Islamic finance provides the conceptual and foundational basis for operating financial transactions in line with Islamic rules. Operating in an Islamic finance framework means you use your finances to ensure you manage funds in an ethical and socially responsible way.
When considering crypto staking, it is important that you do all your due diligence. Investors or those staking their crypto need to understand the mechanism of staking and screen it for Sharia compliance. You need to fully understand what happens once you deposit your crypto onto a blockchain network.
In a proof-of-stake system, any crypto being staked is used to strengthen the consensus based network and improve the integrity of it. The profit is made from the rewards you receive for investing in the blockchain's sustainability.
Always make sure you understand the level of risk involved, the projects involved and the legitimacy of the network before staking your assets. A problem could arise if the blockchain itself is deemed halal but further down the line it starts to become involved in haram industries. Management of your crypto wallet should follow the same Islamic principles as your physical wallet. This requires ongoing due diligence.
Considerations
As a starting point, you need to ensure that the blockchain is not associated with any haram industries such as gambling, alcohol and pork. Look for morally sound initiatives and well-researched projects that have already been screened.
Another important point to consider is riba / interest. Whilst earning rewards via staking is not considered to be riba, examine the structure and payment of the rewards you will be generating. For many, staking a deposit is not seen as a loan so interest cannot therefore be generated. The reward is seen as the benefit of a joint endeavour, as more people join the blockchain, more rewards are achieved. The purpose of the stake is to improve the legitimacy of the network and to maintain it.
Another consideration is the governance and the values of the blockchain platform. Make sure that the governing values are ethically sound.
IS STAKING HALAL?
Consider all the advice in this article, but in particular, if you want to determine if any staking activity is halal you need to evaluate the halal status by ensuring:
- there is no interest / riba involved in the staking or the investment of any capital
- There is no excessive uncertainty or ambiguity - the terms required must be clear
- look for ethical compliance
- focus on asset backed transactions and stay away from gambling
- seek an expert opinion
- review the market the blockchain might be linked to and evaluate it for Sharia compliance
- review the other users of the blockchain
- make sure any incentive being offered is halal
- check the governance, infrastructure, platform and protocols being used
- learn all you can about your stake and the price
Staking in its traditional form does not currently involve any kind of loan or interest. There is no borrowing of money or any interest payment. Essentially, the software involved generates tokens as rewards. These rewards do not impact or come from any other users currency so there is no exploitation of others via investment or trading.
Practical Steps For Muslims Considering Staking
For anyone looking to stake crypto, it is essential that you seek guidance from scholars who are fully aware of Islamic finance concepts and principles when it comes to money matters. Look for blockchain platforms that are already established within Islamic networks.
Some of the benefits of crypto staking include having the opportunity to earn additional tokens (passive income). Also, as you are contributing to the security and efficiency of the blockchain network this could be seen as strengthening the decentralized platform for others.
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