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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A timely injection of business finance
The problem: Bradford-based pharmacy business Biomed Care Services was facing high demand for their medicine management solution. Strong growth meant that in order to continue delivering a high quality of service their stock control systems had to be improved.
The company, founded in 2015, had developed a strong presence in the north of England and become a key supplier to the NHS, servicing around 200 care homes and residential homes, along with private hospitals.
The solution: To maintain its growth, the company sought to raise £50,000 of additional working capital through Sharia-compliant finance.
Biomed Care Services had previous positive experience of raising over £36,000 of working capital with Qardus. This provided the confidence that the new working capital target could be achieved in the necessary timeframe.
The outcome: The company now has a two-year unsecured amortising finance facility with Qardus, giving it the capital required to support their next phase.
“It was great working with Qardus for a second time to raise this working capital facility. The additional funding will help support stock control to service the high demand we are currently experiencing. Thank you for making the process from end to end seamless and straightforward, we highly appreciate it.”Shahid Khan, Director, Biomed Care Services
“Qardus is the first ethical and Sharia-compliant crowdfunding platform that offers businesses such as Biomed Care Services an opportunity to access fast and affordable financing that adhere to Islamic finance principles and has been certified by Sharia advisors. We are very happy that we were able to meet our target within a few weeks.”Hassan Daher, CEO & Founder, Qardus Limited
Please remember that when investing in the offers available on the Qardus platform your capital is at risk and returns are not guaranteed. Past performance is not indicative of future results.
In traditional and western retirement planning there was one main model used for investing and that was the one that created the most profit with any given risk tolerance. However, in recent years, the demand for Sharia compliant retirement planning has grown. This growth alongside the demand for more socially responsible investment means that Islamic finance has created Sharia compliant options for retirement planning.
Socially responsible investing is at the heart of Sharia law. What it means for those looking to build a halal retirement fund is that it limits an investor's portfolio to those kinds of investments that are deemed to be socially responsible.
Retirement Planning
Retirement planning is a key part of planning for the future. It is important for many different reasons including the following:
- Maintaining quality of life
- Facilitating financial independence
- Inflation protection
- Reducing financial stress in later years
- Managing longer life expectancy
- Covering benefits and pension gaps in later years
- Legacy planning
- Facilitating early retirement
Retirement planning ensures that you take a strategic and proactive approach in planning for your future. It is a means of securing your financial future with a roadmap for saving, investment and managing your finances.
WHAT IS SHARIA COMPLIANT RETIREMENT PLANNING?
Sharia compliant retirement planning refers to making financial arrangements for your future that do not contravene Islamic rules relating to financial transactions and savings.
Retirement planning in a Sharia focused manner refers to preparing for retirement whilst adhering to ethical guidelines outlined in Islamic finance.
Let's examine some of the key principles related to Sharia compliant retirement planning:
- Interest - the main rule for halal retirement planning is that you must avoid riba (interest). Islam strictly prohibits any form of interest. If you are planning for your retirement make sure that none of your investments and savings accounts are not linked to interest in any way. In fact, you should ensure that any product, service, or company you deal with does not include interest based products or the payment of interest.
- Risk and profit sharing: Islamic finance rests on the principle that transactions and deals should result in both parties sharing the risk and profit. This creates a more equitable relationship when dealing with money.
- Ethical investment: retirement planning that is halal encourages ethical and socially responsible investing strategies. This means that you should look to invest in industries and companies that lead to social benefit (ie education, healthcare, relieving poverty) and stay away from companies that are involved in haram industries such as gambling, war, and alcohol.
- Charity: although not necessarily related to retirement saving, ensuring you keep up with your zakat and sadaqah payments during your life is important. Not only does this form of charity enhance your adherence to Islam, but it also means that you can set aside money or a portion of your wealth for charitable purposes later on in your life.
- Avoidance of speculation: if you are retirement planning then you need to be choosing products and investment options that are secure. Avoiding speculative products and markets means your long term planning is on more stable ground. Islam seeks to minimise ambiguity and uncertainty in financial dealings. As an investor, you should seek those investments that are asset backed and tangible.
WHAT IS AN INVESTMENT?
An investment is something that you invest in to generate a return. When it comes to halal retirement planning, a halal investment is one that complies with Islamic rules.
There are more products, services and investment options on the market than ever before. Islamic finance is still a dynamic industry, so for anyone looking to plan for their retirement and future you should know that there are many products already on the market.
When it comes to stocks and equities, Muslim investors can construct a portfolio that is Sharia compliant by ensuring that they research the companies, choosing those investments that meet the Islamic finance criteria of being compliant.
Types Of Retirement Accounts
When planning for retirement there are a few different options. You can either use regular investment accounts and earmark part of the savings specifically for long-term investment. Or, you can use retirement accounts that are created for the sole purpose of future planning.
In the UK, there are Islamic pensions that do comply with Sharia principles. They focus on investing in halal industries and assets, using a halal investment plan.
Another form of long-term investment planning includes real estate. For many people, property is a means of planning for your retirement. There are many halal mortgage options in the UK and European markets for Muslims to access. These mortgages are structured to ensure the individual does not have to pay or be charged interest to the bank that provides the mortgage as a lender.
Sharia Compliant Pensions
As an employee in the UK, it is very likely that you are already paying into a workplace pension. In addition to this, you can also have a private pension to supplement your income in retirement.
There are various Islamic pension schemes available, alongside halal Islamic bonds called sukuk and other investments that are Sharia compliant.
Muslims can also look into having a halal SIPP which are self-invested personal plans. These plans are a type of pension that provide individuals with the flexibility to create their own pension portfolio. A halal SIPP is one where the requirement of the pension investments is that they are Sharia compliant.
SHARIA RETIREMENT PLANS - WHY HAVE THEM?
There are many reasons why you should have a Sharia compliant retirement plan, not least so that you adhere to Islamic rules.
As we become an aging population it is more important than ever to ensure we have the means to live and survive as we age.
Sharia retirement plans are necessary because they:
- are a form of voluntary Islamic pension so you can adequately plan for retirement.
- provide opportunity to manage the risk and return for the future
- create a flexible investment plan
- are Sharia compliancy
- lead to secure, halal financial planning
For anyone looking to build a secure halal retirement plan you need to research and make all the relevant enquiries as soon as you can. Look into banks, financial institutions and services that provide pensions and future planning.
Consult with Islamic scholars and financial advisors who are knowledgeable about Islamic finance and give you accurate information.
Remember, the Islamic finance offerings and landscape is ever-changing and growing and the value of its services should not be underestimated. As the economy continues to fluctuate it is important to understand the commercial and business process relating to retirement planning. Understand what it is you need for the future and start making plans now.
Determining Sharia compliancy is a critical part of halal retirement planning. You need to be able to evaluate an investment and eliminate any element of haram so that it aligns with your Islamic belief system.
WHAT IS A VENTURE CAPITAL TRUST?
A venture capital trust (VCT) is essentially an investment company. In the UK the government introduced VCTs in 1995 as a way of ensuring that investors could invest in start-up companies. The government was keen to encourage investment in entrepreneurial businesses by offering tax relief to investors. Recently there has been discussion and debate about whether VCTs are halal or haram.
For new businesses, VCTs are a great way of raising investment, and for investors they are an opportunity to invest in upcoming businesses.
For anyone looking for Sharia compliant investing, VCTs can be a good opportunity to invest in a halal way. Investing in VCTs can be halal, but you have to ensure that the VCT you invest in complies with Sharia rules about investment and financial transactions.
In recent years, as the Islamic finance market has expanded so too has the desire for Sharia compliant VCTs. The Islamic VCT market is innovative and presents a viable alternative to conventional investment models which are not always acceptable to Muslims who want to invest in line with Sharia rules.
Whilst it is always a personal choice as to where investors want to invest, for Muslims there are additional considerations that require them to be mindful of Islamic laws.
Let's have a look at how VCTs work and how they can operate in a halal way.
HOW DO VENTURE CAPITAL TRUSTS WORK?
VCTs work by raising money and then using the funds to invest in new and innovative companies. Usually these companies are innovative and privately owned. The idea is that the investment raised is then used to generate a profit and solid return for the investment.
The company can be dealing in products and services, offering employment opportunities, and/or meeting a need in the economy. The number of companies seeking investment is never-ending.
As an investor in a VCT, the investor becomes a shareholder of the trust. It is important to note that the investor does not become a shareholder of each individual company, rather the investor becomes a shareholder of the trust in its entirety.
Most VCTs will invest in different companies. This enables the VCT to keep its investment portfolio options diverse and spreads the risk. It is always important to ensure you have all the information you need about the VCT before investing.
When the companies within the trust return a profit, this is paid over to the shareholders.
WHAT DO VENTURE CAPITAL TRUSTS INVEST IN?
Most VCTs will invest in new, small, and entrepreneurial companies across a wide variety of sectors. These can include tech companies, retail, clothing brands, food outlets and many more.
Many of these companies will be privately owned, and some of them are quoted on the Alternative Investment Market or the London Stock Exchange.
Different Types Of Venture Capital Trusts
There are some different types of VCTs. What differentiates them from each other is the investment focus and area:
- specialist VCTs : these are VCTs that remain focused on a specific interest and sector. For example, there are VCTs that only invest in healthcare, or retail. Due to the lack of choice and sector diversification, this often means that they can carry more risk.
- Generalist VCTs : these types of VCT are wide-ranging when it comes to investment. They invest in companies across different sectors. The value to the investor is that there is diversification and less risk.
- AIM VCTs : the Alternative Index Market (AIM) VCTs invest in shares issued by AIM quoted companies. The AIM was set up by the London Stock Exchange in 1995 to ensure that there was a market for companies who can't (or won't) meet the demanding requirements for listing on the London Stock Exchange.
Venture Capital Trusts And Tax Advantages
One of the main reasons VCTs are popular is that they offer tax incentives. Investors can take advantage of:
- tax free dividends
- up to 30% income tax relief
- tax free growth
- capital gains tax exemptions and deferrals
WHAT IS VENTURE CAPITAL TRUST TAX RELIEF?
VCT tax relief can be claimed when an income tax return is filed with HMRC.
What this means for investors is that they can end up with a lower income tax bill, or even a refund if they have already paid their tax.
Islamic Finance And Venture Capital Trusts
Remember, one of the most critical elements of ensuring compliance with Sharia law when investing in venture capital trusts is that you need to work with a Sharia aware, and Sharia compliant, financial advisor.
This will ensure that the investment contract AND investment models are both compliant with Islamic finance rules.
Islamic Venture Capital Trusts Vs Conventional Capital Trusts
The main difference between conventional VCTs and Islamic VCTs is that Islamic VCTs must comply with Islamic finance rules relating to finance and financial transactions.
Islamic VCTs need to stay away from any form of investment in non-permissible, or haram, industries.
A very simple example of this would be as follows: a conventional VCT could invest in brewery shares. However, an Islamic VCT should stay away from any alcohol related industry.
Going further, anyone looking to invest in Sharia compliant VCTs should do additional due diligence and ask questions about the company they invest in. Does it operate ethically? Does it have conventional debts on its book that is interest-based? If so, then the VCT is not considered to be halal.
Advantages Of Investing In Venture Capital Trusts For Muslims
As long as the VCT is Sharia compliant, Muslim investors offer a diverse range of investment options. Muslim investors can take advantage of investing in other Muslim businesses and industries.
There are numerous ethical investment opportunities with halal VCTs that are attractive to Muslims. Socially responsible investing is a core principle of Islamic finance and there are VCTs out there that are ethical and socially responsible.
Halal VCTs also offer the potential for job creation with early stage companies. Supporting these businesses mean Muslims can indirectly be helping struggling economies and economic development. This aligns with the Islamic finance principles that relate to promoting economic wellbeing and financial inclusion.
WHAT IS WAKALA?
Wakala is a popular model Islamic VCTs when it comes to raising capital.
Wakala permits the asset manager of the trust (on behalf of the investor) to act on their behalf based on agreed conditions and terms.
Both parties then share the profits generated, and take on the risk of any losses together. This kind of profit and loss sharing arrangement aligns with Islamic finance principles.
Mudaraba And Venture Capital Trusts
When it comes to investing in start up companies, mudaraba is a common model that is used. The mudaraba contract is a contract that enables one party to the contract to bring assets in and for the other party to bring in effort and experience.
This means that investor provides the financing, and the entrepreneur takes responsibility for the day to day management of the trust. The contract outlines the respective responsibilities of each party and the profit sharing arrangement.
As already mentioned, despite the many advantages of halal VCTs, investors need to work with Sharia compliant advisors who can direct them to halal VCTs.
Consulting with knowledgeable advisors means you have specific guidance and adherence to Sharia rules.
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