Rise of the Muslim Entrepreneurs
In recent decades the landscape and number of small and medium-sized (SMEs) businesses has seen a huge transformation. Many of these businesses are formed and led by Muslim entrepreneurs such as Shahzad Younas (Muzmatch), and Ufuk Secgin (Halalbooking.com). With the growth of Muslim entrepreneurs comes an increase in demand for Islamic finance based lending solutions and strategies.
SMEs dominate the world business landscape. They account for approximately 60% of private sector employment. It therefore makes sense that SMEs will require funding options in order to sustain and succeed as a business. With close to 60% of SMEs failing in the first few years, ensuring they have access to adequate funding is critical.
SME lending has historically been centred on the traditional models of funding that are interest based. However, there has recently been a move towards SME lending based on Islamic finance principles.
In the UK, SMEs are considered to be firms that employ less than 250 employees. UK SMEs play a significant role in the UK economy, and the government is keen to ensure that they are sustainable and successful.
SURGE OF SMEs
SMEs account for a significant portion of the world economy. They not only contribute to employment and job creation, they also play a leading role in sustainability and community impact. In the UK a staggering 99.2% of the business population comprises of SMEs.
SMEs are considered to be major employers and they drive local economy growth.
Recent statistics found that the total value of loans to SMEs in the UK reached a whopping £65.1 billion in 2022. This was an increase of over 10% on the previous year and was the official highest on record.
New business lending in the UK totals in the region of £259 million. Demand from SMEs for inclusive and diverse lending options continues to grow.
SMEs AND SOCIAL IMPACT
SMEs play a critical role in society and our economy. Not only do they facilitate and generate employment, they also increase the flow of money from individuals to industries and through society.
At the beginning of 2023 there were estimated to be 5.5 million SMEs in the UK, an increase of 0.8% over the previous year. The professional, scientific, and technical industries accounted for 14% of all SMEs while another 10% are in the retail, trade, and wholesale industry.
Beyond contributing to the economy, SMEs can impact different areas of society. They encompass social development, community wellbeing, alleviating local poverty, job creation, innovation, and reducing income inequality.
SMEs also tend to be more forthcoming in embracing sustainable and ethical practices. They foster financial inclusion by providing local opportunities for local people.
WHY SMEs ARE THRIVING
There are 1 million SMEs in London and over 852,000 in the South East. These SMEs account for 34% of the UK business population. SMEs account for 60% of the employment in the private sector within the UK. They also account for over 50% of the employment in the UK.
As SMEs have grown, so has the need to provide lending that meets their particular demands. Many SMEs do not have the stellar trading history and records of large business.
SMEs therefore need an innovative approach when it comes to lending and funding.
SMEs can come with limited credit history and collateral but bags of entrepreneurial dynamism and innovation.
Distinct from larger businesses, SMEs have unique considerations relating to scale, financials, structure and characteristics. They may have limited access to capital markets, and therefore need tailored and bespoke financial solutions. A one size approach to lending does not meet the needs of SMEs that provide a range of services in the economy.
This is where Islamic finance really comes forth as a viable option for SMEs.
Sme Lending
SME's often demonstrate adaptability and resilience when faced with economic fluctuations, challenges and issues. SMEs are well placed to weather economic downturns and maintaining local communities through change. Lending to SMEs in the UK amounted to £4.8 billion in the second quarter of 2023.
In 2022 36% of SMEs used external funding and finance options. Over 69% of SMEs have stated that they turned to lending options due to cash flow related issued.
For SMEs, obtaining favourable funding options is not as easy as it is for big companies. Perhaps this is the reason more and more SMEs are turning to Islamic finance services.
Islamic finance is a great option of raising funds for SMEs for many different reasons.
For Muslim SMEs that want to avoid interest and want to be Sharia compliant, Islamic finance provides funding options not available in the wider banking sector. Islamic finance is able to adapt to the requirements of Muslim SMEs ensuring compliance and inclusion.
It is also worth mentioning that Islamic finance is based on a risk and profit sharing arrangement. This means that the funder and the SME share the profits AND the risks.
For SMEs, this is a huge benefit as it creates a sense of partnership with support for the new SMEs on the market. SME borrowing has a huge impact on their operations and customer base growth, so it is essential that the SME lending market continues to diversify and educate itself on the needs of SMEs.
Islamic finance is asset backed finance. What this means for the SME is that the financing is linked to tangible assets. In the long term, this is a more sustainable and stable form of financing for them.
Diversity In Business
The great thing about SMEs that often goes unnoticed is how impactful they are when it comes to inclusion and diversity.
In 2020, 16% of SMEs were led by women. Almost 24% of SMEs were equally led by men and women.
Workplace diversity is essential for SMEs as they often operate within diverse local environments. With Millennials currently making up 50% of the UK's workforce (and Gen Z accounting for 27% by 2025), businesses lacking diversity are missing out.
When it comes to investment for the future and the business operations of the SME, they need to ensure they recruit and retrain properly.
Empowerment Through Enterprise
SMEs are known to encourage empowerment through enterprise. This should be done at every stage of the SME process from project initiations, implementations, cost analysis, research, and education.
The result is that SMEs can ensure that they can recognise and eliminate barriers to growth. Enterprise enables SMEs to plan and prepare, ensuring they have the right insight into how to fund their operations and continue to succeed.
For Muslim entrepreneurs there are additional considerations relating to compliance with Islamic finance rules when partaking in financial services and considering lending options.
Why should Muslim SMEs focus on Islamic finance lending:
- Adherence to Islamic rules relating to financial transactions
- Interest free finance options
- Asset backed financing
- Profit and risk sharing
- Flexible finance structures and services
- Financial inclusion without compromising ethics and religious principles
- Community impact
- Flexible payment options
- Lending is not connected to an industry, product or service deemed impermissible by Islam (ie alcohol, gambling, porn)
Faith In Business
Those SMEs that are looking for ethical and sustainable models of finance and lending can find answers in Islamic finance.
Risk sharing, loss sharing, ethical considerations and non-exploitative practices all underpin Islamic finance and support SMEs in a way that traditional financial service cannot.
Explore more news
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
What Is The Recovery Loan Scheme
The Recovery Loan scheme was launched on the 6th April 2021 by the UK government as a successor to the government’s Interruptions Loan Scheme and bounce back grants from 2020. As with any loan scheme, this scheme requires the payment of interest. This, of course, is contrary to Islamic Sharia law principles that forbid the collection or payment of interest.
For many Muslim-owned and backed businesses, the question has arisen as to whether the Recovery Loan Scheme is Sharia-compliant. Before we address that, we need to look at the Recovery Loan Scheme and its key features.
The Recovery Loan Scheme provisions were put in place by the government to ensure that they were able to provide financial support to UK businesses. The government wanted to offer additional funding to businesses in the UK that needed the funding to survive the economic turmoil brought on by the pandemic.
The Recovery Loan Scheme’s main purpose is to facilitate recovery and growth post-pandemic. The payments from the Recovery Loan Scheme also aim to ensure that businesses survive during the transitional period back to regular business activities.
The scheme is open to any business that is:
- Trading in the UK
- Able to show it has been adversely affected by the pandemic
- Not involved in any insolvency proceedings
- A viable business if not for the pandemic
How The Recovery Loan Scheme Works
The Recovery Loan Scheme wants to facilitate a full return to business activities for those businesses that have been impacted by the pandemic. The successive lockdowns have affected many small and medium businesses that have been unable to earn an income from their trade.
The Scheme is targeted at businesses that are viable enough to afford debt finance. The British Business Bank administers the Scheme. The actual funding is made available via a range of accredited lenders.
As with any process that involves applying for a loan, businesses need to make a formal application via the lender of their choice.
The loan consists of standard commercial lending terms and this includes the payment of interest on the loan amount. The interest rate varies depending on the lender who provides the loan.
Features Of The Recovery Loan Scheme
An approved lender of the Scheme can provide various loan products including:
- Overdraft facilities
- Asset finance monies
- Term loans
- Interest and fees payments
Any business applying for a loan through the Scheme can borrow up to £10 million. There are also minimum facilities that start in the sum of £1,000.
Some other key features are:
- Guarantee: the government itself guarantees up to 80% of the loan to the lender, irrespective of the size of the loan. This guarantee is not provided to the business, but direct to the lender.
- Interest: any business that takes out a Recovery Scheme Loan will have to make interest and fees payments from the date the loan is drawn. Although interest rates are capped at 14.99%, lenders are encouraged to keep the rates low.
- Term: terms vary from 3 months to 6 years.
What Are The Sharia Rules Relating To Loans And Interest
Sharia law prohibits businesses from paying or receiving interest. Interest, known as riba in Sharia law, is forbidden as it is seen as a mechanism that promotes social injustice. One of the central concepts of Islamic Finance is that Muslims cannot benefit from lending money and paying interest on loans.Sharia law deems riba as an exchange with no equity. That means that it encourages an exchange that is considered to be unequal and unjust. Riba is considered to be an exploitative transaction.
Bottom Line
If we have a look at the Recovery Loan Scheme, it relies on interest payments as a key feature of the Scheme’s repayment terms. The interest element of the Scheme deems it to be non-compliant with Sharia law. In this case, the business will be repaying the full loan amount plus interest at a rate decided on by the lender.
The Scheme goes against the Sharia principle of ensuring investments and payments are socially responsible.
Sharia law clearly states that lending with the payment of interest favours lenders who make money at the expense of the borrower. Islam forbids the receipt of income from money alone, and this is precisely what interest payments are.
Islamic Finance is based on ethical economic principles. The Recovery Loan Scheme is therefore not Sharia-compliant as the interest payment element of the Scheme is contrary to Sharia principles.However, businesses that operate within Islamic Finance principles can still recover from the pandemic. Islamic Finance is focused on sustainable economics and there are products available within the Islamic Finance market that can assist businesses with economic recovery.
The Qardus Option For Business Funding
We provide finance to small and medium-sized enterprises with growth potential that the business owners want to unlock. The funding available is from £50k to £200k with terms of between 6 and 36 months.
Our funding process is rooted in Islamic community principles and is certified as Sharia-compliant. As a result, we don't charge interest and we don't work in business sectors considered damaging to society, such as alcohol, tobacco or gambling.
Because of our principles, our funding solution is an attractive option for Muslim business owners, but we also provide funding to business owners outside the Muslim community.
We offer fast, flexible and affordable business growth funding that's firmly grounded in ethical principles.
Crowdfunding
Crowdfunding is a process of raising money for a business or idea. Unlike traditional methods of raising finance, crowdfunding is innovative and based on the concept of raising funding via crowds of people.
Some crowdfunding contributors will donate funds entirely altruistically, simply to support the business. Other crowdfunders will see their funding contribution as an investment into the business venture. In return, these investors will be rewarded with a return on their investment. The reason crowdfunding is so popular is that is has become a great way of raising money quickly. This means that no matter how ambitious or how small your project, there is a way to raise finance without resorting to asking financial institutions.
How Crowdfunding Works
Crowdfunding enables businesses and individuals to attract investors in the business through the practice of funding a project by raising sums of money from a crowd of people who are willing to invest in the business. Some of those offering funds will do so altruistically, expecting nothing in return, but for many of the donors they will expect a return on their investment. In order to start a crowdfunding campaign there needs to be a specific cause or project, and a specific goal amount in place. Businesses and entrepreneurs can then ask or invite a number of people to donate various sums of money (small and large) until the crowdfunding goal is achieved.
The unique part of crowdfunding is that it mainly takes place online. The digital revolution over the last decade, coupled with the increase in social media exposure and marketing means that crowdfunding campaigns can be widely shared and marketed. As crowdfunding tends to take place online, the use of social networks is key and makes it inherently easy for supporters of a crowdfunding campaign to share it widely, ensuring the project gains widespread exposure and funding.
Crowdfunding is used for all manner of projects, including charity projects, creative projects, start up businesses, entrepreneur ideas and small businesses. Crowdfunding is a great way for non-traditional businesses such as those businesses following Islamic finance principles, to raise funding in a Sharia compliant way.
Types Of Crowdfunding
The main types of crowdfunding models are as follows:
Investment Based Crowdfunding
This type of crowdfunding is often used by businesses looking to raise capital. Businesses will offer to sell ownership shares and stakes in return for a crowdfunding investment. Businesses will promise to use the funding to develop their business idea or product and in return the investor will receive a share of the business in return for the finance they provided. In this way, donors ultimately become shareholders of the company, with the possibility of owning some of the business equity. Often, these shareholders may also be provided with rights to be involved in the business process and project.
Donation Based Crowdfunding
Donation based crowdfunding is essentially a model where donors are asked to contribute to the project by way of a donation. Individuals will essentially donate funds with the aim of meeting the project finance goal, and in return the donors do not expect anything in terms of shares or financial returns. People who donate rather than invest are not backers of the business, they just offer finance on a not-for-profit basis.
Advantages Of Crowdfunding
For anyone looking to raise finance for their business or idea via crowdfunding, there are some important advantages you should be mindful of.Advantages:
- There are often minimal upfront fees or costs and this means there is some protection from risk when starting out
- There is little financial risk with almost no start up debt
- It's a great form of market testing and marketing research, seeking the opinion of your target audience
- Money can be raised quickly and campaigns can go viral
- Social networks, websites, and online platforms can result in speedy and widespread exposure
- You can use the crowdfunding campaign to gauge public perception, generate interest, and obtain feedback
- Investors and donors can become personally invested in campaigns and this will help you build loyalty programs and interest in your idea
- Crowdfunding enables start-ups, small businesses and innovative ideas to get financial backing
- It is a great way of raising finance and covering costs for those businesses without access to traditional forms of bank lending or in a difficult economy
- You can create community support for your project and build on these important relationships and customer loyalty
- Crowdfunding enables more effective risk management as there is often less risk for smaller businesses
Crowdfunding Tips
For a successful approach to crowdfunding you need to make sure you have a clear and strategic approach to the campaigns. The advice and tips will help you create a successful crowdfunding campaign:
- Pre launch: make sure you do your research, collate all the information you need, build email marketing lists and think of ideas for your campaign content
- Create compelling content: this could include a campaign video, written information relating to your goals and graphics/videos
- Tailor your PR: before your campaign goes live research your audience, find out where they hang out virtually (Twitter, Instagram, Facebook) and target them
- Strategic social media and influencer use: the greater your reach and the reach of the platforms you use the greater your chances of exposure and success. You don't have to limit your audience to the United Kingdom.
- Engagement: encouraging others to comment, share and post about your campaign will deliver your message to a wider audience
- Donations: don't ask for money immediately but do make sure you ask family, friends, colleagues to donate. Share your passion for your project and draw the reader in. Remember to also ask the right people for donations.
Crowdfunding Platforms
Some of the most popular crowdfunding platforms include the following:
- Kiva
- Kickstarter
- Patreon
- GofundMe
- Indiegogo
- Seedrs
All these platforms enable users to share the campaign and spread the word about your project on various social media platforms and via email.
Stay informed on finance
