Qard Al-Hassan - Benevolent Lending

The current cost of living crisis in the United Kingdom is affecting everyone. For many households, this is the highest squeeze on their finances that they have experienced. Many people are being forced to take measures in order to stay afloat. The cost of food, goods, and utilities are continuing to rise at an alarming rate, and people are having to make smart financial decisions.

According to recent statistics, up to 18 million households could face fuel poverty by January 2023 due to the ongoing energy crisis. Many of these families will have to decide between heating and eating. Investment bank Citi estimates that the UK consumer price inflation could reach 18% by early 2023. This will not only affect the finances of couples, and families with children, but almost everyone in the country.

This is why it is vital that you make smart financial decisions that could help you ride out this current cost of living crisis.

Let's have a look at some of the ways in which you can make your money go further.

Plan And Budget

One of the best things you can do is prepare a spending and budgeting plan. This will help you identify if you are overspending and examine those areas where you can cut back and save costs.

For example, do you still need to have a full Sky TV package? Can you get a cheaper broadband deal? Do you have any subscriptions that you no longer need or use?

Go through each direct debit and see if you can reduce or remove it. Check what you are paying for your smartphone packages and see if these can be reduced in any way. Ring your providers and ask them if they have any better deals on offer that could lower your costs.

Track all of your expenses and payments. This is the only way that you can successfully budget. Information and knowledge are power so use them to your advantage. Create a spreadsheet or table that lists all your incomings and outgoings, and then have a close look at where your money is going.

Muslims will already be used to the concept of planning and budgeting as they have to reconcile their finances and accounts every year in order to calculate their zakat calculations.

However, it is a good idea to keep a more regular eye on your finances, and remember that any drop in your income and savings may also affect your zakat and sadaqa payments.

Live Within Your Means

This is really important. It sounds so simple, but many people in the UK live beyond their means and this means they will struggle during the recession.

Having debt is not so much of a problem when times are going well. However, if you fail to make your repayments things could go wrong very quickly.

There is a famous Arabic proverb that states 'cut your coat according to your cloth'. Essentially, this encourages us to live within our means and not overstretch ourselves financially.

Islam does not look favorably on those who spend excessively and keep increasing their debt. We should all be looking at how we make use of our resources and expressing empathy for those less fortunate. Managing our finances well is something everyone needs to do, and needs to learn to do better.

Pay Off Debts

It might sound obvious but it is vital that you pay off any debts that you are able to. There are many online debt advice helplines that offer you recommendations and a guideline to help you reduce your debts.

You should prioritize paying off any debt, especially if it is a debt that accrues interest. Interest is not only strictly prohibited in Islam, but is also detrimental on your finances as the interest rates are likely to continue to increase.

If you can, pay off your debts.

Do Not Accrue New Debt

If you are thinking of taking on a new loan or new debt then think twice. Especially if the debt will be accrued due to a purchase that you do not necessarily need.

The same applies to buying things using your credit card. Now is not the time to be accruing more debt that incurs interest.

Start Saving Now

If you can, start saving now. It is never too late to start saving. Good financial management not only means monitoring your spending habits, it also means looking at your savings strategies.

You may need to undertake an evaluation of all your incomings and outgoings to see if there is anything you have left to save. If you do, even if it is a small amount, it is never too late to start saving.

If you do not have an ISA now is a good time to find information about what savings products are out there. For Muslims, there are some halal savings accounts that do not pay interest.

These halal savings accounts offer the same banking services as conventional savings accounts without interest.

Set Savings Goals

Set savings goals for yourself. This could be as little as saving £10 a month, to saving much more.

If you are saving to buy your first home, then you will likely be impacted by the increase in interest rates.

Look for banks and lenders that offer halal mortgages based on Islamic finance principles. Halal mortgages tend not to be as dependent on standard interest rate fluctuations and offer more stable repayment options.

Invest

Many people are scared of investing during a recession or economic crisis, but there are some good investments out there that can generate revenue and income.

Do your research and have a look at what investment opportunities are out there for you.

Investing in the right funds, stocks and bonds can be inflation busting. If you do your research you could find investments that offer a good rate of return. For Muslim investors, there is a range of halal investment options on the market which tend to be more stable than the conventional stocks and shares.

If you want to minimise the risk when it comes to investing, then try not to be too exposed to a limited number of sectors or assets. Diversifying your portfolio via investment is a good way to spread your money with less risk.

Think About Side Hustles

Side hustles have become popular in recent years when it comes to generating additional monthly income. Some low cost side hustles that have been successful in recent years include the following:

• Amazon selling
• Etsy selling
• Selling digital art and services
• Creating a website
• Freelance graphic designing
• Freelance writing
• Blogging and vlogging
• Social media influencing
• Shopify
• Dropshipping
• Creating online courses and offering advice
• Affiliate marketing and advertising services
• Starting a podcast
• Using comparison and cash back websites

These are just some side hustles that require very little financial outlay at the start.

Undertake Due Diligence Before Making Big Financial Purchases And Decisions

If you are thinking of making a big purchase such as a home or a car then make sure you do all the necessary research. Use comparison websites to find the best prices for things like electrical goods and holidays.

When it comes to home purchases, remember the housing market is likely to undergo some change in the coming months.

It might be better to sit tight to see if there is a fall in house prices. You should also look at different funding options such as halal mortgages. These types of mortgages tend not to have fluctuating rates as they are not interest based loans.

Take Your Time - Don'T Be Hasty

This is important. Now is not the time to make rash decisions or rush into big purchases or commit to long-standing and expensive monthly subscriptions.

Whether it is a smartphone or a new streaming service, take your time in deciding whether you definitely want to commit some of your monthly income to it.

WHAT IF YOU ARE SELF-EMPLOYED?

For the self-employed there are some additional concerns during a recession. For a start, whilst you may already be accustomed to fluctuating monthly income, you may see a drop in overall income as your customers feel the pinch and cut back on their spending.

Rising inflation is likely to affect all businesses, irrespective of size and industry.

Now is a good time to look at your personal finances, and check to see that you can:

• meet your mortgage repayments or rental payments
• meet all your essential direct debit payments for things like utilities
• have enough money to cover food and groceries for at least 3 months
• have some savings to fall back on in case your monthly income drops
• cut back on any non-essential items of expenditure

Some Ways You Can Protect Your Money

The Bank of England recently raised the interest rates. When this happens, it is usually an indication that the Bank of England wants people to start saving more and spending less.

Some ways to future-proof your money and savings include the following:

• Pay off as much of your existing debt as you can
• Make changes to your living standards that would bring your costs down
• Check to see if you can consolidate any of your debts
• If you have investments, check up on them and see how they are performing
• Save for a rainy day - even a few pounds a month will soon add up
• Track your spending by separating your wants from your needs
• Limit spending on gifts
• See if you can fix your mortgage if you are currently on a variable rate, there are some deals to be had out there

Introduction

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

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

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

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

Key Principles of Islamic Finance

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

The main principles you should know about are:

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

The Halal Perspective

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

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

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

The Haram Perspective

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

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

Avoid the following practices

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

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

However, forex can be halal if:

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

Frequently Asked Questions

● Is forex trading a form of gambling?

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

● How do Islamic accounts work?

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

● Is leverage allowed in Islam?

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

● Can I trade forex without interest?

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

Conclusion

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

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

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

WHAT ARE INTEREST RATES?

Interest and inflation rates are linked and affect our daily lives from the cost of our weekly shop to how much money we can borrow. Interest rates are essentially the amount borrowers are charged for borrowing money. Most banks will show the interest rate as a percentage of the total loan amount. This means that the higher the percentage, the more interest you will pay back over the term of your loan.

If you are not a borrower and you are a saver, then the interest rate will inform you how much money you will accrue in your account. the higher the interest savings rate you have the more money you will be paid into your bank account.

Interest rates vary depending on who you are borrowing from, the amount of your borrowing, the level of risk involved, and the terms of your loan.

If a lender thinks lending you money is high-risk then it is likely they will charge you a higher interest rate. In this way, the economics of a country are impacted by the interest rates.

HOW CHANGES IN THE INTEREST RATE AFFECT US?

One of the most obvious impacts of a changing interest rate is that it affects the amount of interest we are paid (as savers) or pay (as borrowers).

Any time there are changes in interest rates you should examine your savings and lending to see if you will be affected.

For those looking to borrow money, whether that is to buy a house, invest in business, or even just for the purposes of education (such as a student loan), the cost of borrowing will increase when interest rates are raised.

Current economic uncertainty means that businesses, individuals, corporations, and almost everyone in society are impacted.

For homeowners, an increase in interest rates means an increase in repayments (unless the mortgage is based on a fixed rate). Ultimately, this will result in a squeeze on household income and budgets at a time when the UK is dealing with an energy bills crisis and an increase in fuel costs.

To summarize the main effects of rising interest rates:

• increase in mortgage repayments

• increase in the cost of borrowing

• reduced consumer and business confidence

• increased incentive to save more to take advantage of the improved interest rates (but this depends on the rate being offered by banks on savings accounts)

• slower economic growth

• possible rise in unemployment

WHAT IS A BANK RATE?

A bank rate is set by the Bank of England. Arguably, it is the most crucial interest rate and is also sometimes known as the base rate.

The base rate is controlled by the Bank of England and is the rate paid by the Bank of England to businesses and banks that borrow from it.

The Bank of England is known as the central bank of the United Kingdom. They not only set the bank rate, which is currently 1.25%, but they also undertake the regulation of the banking industry, and financial business services, and they oversee the country's monetary policy. This then goes on to affect the economy including employment, wages, spending, and borrowing.

When banks set an interest rate they consider many factors in addition to the bank rate.

However, if the Bank of England changes the bank rate, then banks will also change their interest rate for both borrowers and savers in the market.

WHAT IS INFLATION?

The word inflation describes rising prices. If prices of goods and services are rising quickly then this is referred to as the rate of inflation.

Currently, in the United Kingdom the rate of inflation is 9.4%.

The rate of inflation is worked out by comparing the cost of products today and comparing the price against what the same products cost a year ago. The Office for National Statistics is the organization that is responsible for checking the price of goods and services.

If the price of production, imports, and raw materials increases then it is very likely that the rate of inflation will also increase. In addition, any increase in demand from consumers also causes the inflation rate to increase.

This is what is currently happening in the UK with the cost of living crisis.

WHAT CAUSES INFLATION?

As mentioned above, inflation is caused by various factors. The main drivers of inflation rates going up are the increased cost of production, and increases in raw materials and wages.

If inflation rates begin to increase it means that the cost of basic necessities including food and household items also rises. This can adversely affect society as many people will struggle to afford the basics and fall into debt. Inflation rates could also affect employment rates as employers also face cuts to their budgets and increased costs of operating.

Inflation does not only affect the basic necessities such as food. As we have seen recently in the UK, inflation also affects utilities, fuel costs, clothing, luxury goods, and cars.

Some of the main factors causing the rising prices in the UK, and thereby affecting the rate of inflation, include the following:

• increase in energy bills

• high fuel prices

• the war in Ukraine

• the rising cost of car prices (according to the Office for National Statistics)

• increased costs of household goods and furniture

• increased costs of food

• higher interest rates impacting homeowners

Whilst the cost of goods is rising, the wage increases are not rising in line with the cost of living.

HOW ARE INTEREST RATES AND INFLATION CONNECTED?

Theoretically, interest rates and inflation rates have what is considered to be an inverse relationship. This means that when interest rates are low, inflation is expected to rise, and when interest rates are high inflation rates should go down.

When interest rates are lower, the borrowing power of consumers is increased.

If consumers are spending but the prices of goods are going up faster than wages are increasing, then inflation rates increase. In order to encourage borrowers to borrow less and encourage them to save more the Bank of England increased the interest rate.

The aim is to slow the economy down enough to decrease inflation.

WHY HAVE INTEREST RATES GONE UP?

The Bank of England has increased interest rates so that it can reduce the rate of inflation. If the rate of inflation continues to go up in the UK then this can have many negative effects on UK residents. Currently, the inflation rate in the UK is at a 40 year high.

For example, people will have to pay more and more for goods and services. Property could lose some of its value, and fuel prices could continue to rise.

If inflation rises too high then this is called hyperinflation. This can result in a full economic collapse and devalue the currency.

WHY DID THE BANK OF ENGLAND RAISE INTEREST RATES?

The general view is that if the Bank of England raises interest rates they want people to spend less money.

When interest rates increase the Bank of England hopes that people begin to spend less and save more.

The Role Of The Bank Of England In The Economy

The Bank of England was established in 1694 as a private bank that lent the UK government money.

In 1997, the Bank of England was granted independence so that it could set the interest rates without any form of political affiliation.

The Bank of England is not connected to the Chancellor of the Exchequer as it it is important for it to base its interest rates on economic factors rather than political ones.

Not only does the Bank of England set the base rate, but they also:

• forecast the inflation rates

• issue coins and bank notes

• act as a lender of last resort for UK banks

The Current State Of The Uk Economy

According to PWC, the UK economy was recovering well from the global pandemic.

Unemployment rates were low and the labour market and service industry was recovering well.

However, the war in Ukraine was a shock to the UK economy (and economics globally), impacting it in many different ways including:

• disrupting supplies and services for all industries including retail and construction,

• leading to higher commodity prices and less revenue for businesses

• lower trade levels

• less investment flow

News agencies and websites are reporting that the UK growth outlook for the next 12 months does not look promising.

KPMG has agreed with this analysis stating that the GDP growth this year will halve and slow further in 2023 (UK Economic Outlook Report, KPMG, 2022).

According to KPMG, they predict further interest rate increases from the Bank of England. This is based on data from economic forecasts, consumer spending, interest rates, and the unemployment rates.

WHAT IS HAPPENING IN OTHER COUNTRIES?

Many other countries around the world are dealing with similar problems that the UK economy is dealing with.

According to the Office for National Statistics, the European Union is facing similar rates of inflation as the UK.

The United States is reporting inflation levels of 9.1%.

DO INTEREST RATE AND INFLATION RISES AFFECT INVESTOR BEHAVIOR?

The basic answer to this question is yes. Interest rates and inflation rates affect investor behavior. In fact, changes in inflation and interest rates affect everyone.

What it means in real terms is that any money you have saved could be worth less today than it was yesterday. High inflation rates impact the purchasing power and confidence of consumers and their spending.

Inflation rates and interest rates affect investment portfolios. If investors are finding it more expensive to borrow funds to invest then it is very likely that investments overall will reduce.

Investor Risk

Investors aim to increase their wealth and minimize their risk and tax liabilities. In an economy where interest rates and inflation are rising, there is normally an impact on portfolios and investments.

Rising inflation not only affects stocks and bonds it also affects property prices. Of course, all investment comes with a risk of losses.

Any investor with inflation-indexed assets or liabilities needs to be particularly aware of the changes in their portfolio.

Also, as interest rates rise this affects borrowing. As borrowing becomes more expensive, this leads to investors having less money available to invest.

Rises in interest rates also affect the stock market and the impact of the rise is usually felt quicker than in the general economy.

Normally, when interest rates fluctuate investors should expect the market rate of their bonds to also fluctuate. However, not all bonds are equally affected. Bonds that have short maturities may not be as impacted as bonds with longer maturities.

For investors who have a long-term outlook and planning when it comes to their portfolio, short-term changes to the interest rate should not significantly impact them.

For an investor who is looking at the long-term goal and who has a mix of assets, the long-term outlook of their portfolio should be fine.

To summarize, when interest rates increase the impact on investments includes the following:

• a rise in mortgage rates

• affect on the price of commodities

• Fall in bond prices

• Potential losses in the stock market

• fluctuations in real estate values

• increases competition between banks

Interest Rates And Islamic Finance Customers

For many borrowers, any increase in interest rates will affect how much they pay back to the bank they have borrowed from. The exception to this is those with fixed rate loans or mortgages. As the interest rate on these loans has effectively been 'fixed' for a specific period, then interest hikes or drops will not affect the repayments. Make sure to check when your fixed rate period comes to an end so you can plan accordingly.

In theory, for customers of banks who want Islamic Finance and Sharia compliant services, changes in the interest rate should not adversely affect borrowers or savers. This is because banking services based on Islamic Finance principles do not rely on interest or include any form of interest payment.

Conceptually, Islamic banking customers are not motivated by profits or gains. Therefore, changes to the interest rate should not affect them.

However, on a wider scale, any changes to the interest rates and inflation will affect all lending institutions in some way. Many Islamic Finance lenders use the base rate of the country to benchmark their repayment calculations. This means any increase to the base rate could affect the repayments for customers of Islamic finance products.

However, for economies where the interest and inflation rates and subject to fluctuation, this could lead to more people being interested in the interest-free products offered by financial institutions that offer Sharia compliant services. A research study in Malaysia found that any increase in base rates increased consumer interest in Islamic mortgages.

Ultimately, how you are affected by increased interest rates and inflation rates depends entirely on your financial circumstances and the management of your investment portfolio.