Why Sharia complaint finance is the smart choice for ethical investors

What is Riba in Islam? Riba refers to exploitative gains and unequal exchanges, this includes interest payments (made or received) that are strictly prohibited under Islamic finance rules. The concept of riba is seen a wholly unjust in Islam as it places a financial burden on the recipient of funds.

Riba is prohibited on the grounds that it goes against the Islamic principles of fairness, societal wellbeing, and justice.

WHY IS INTEREST (RIBA) FORBIDDEN IN ISLAM?

In any transaction involving riba, an imbalance is created between the borrower and the lender.

The lender receives a guaranteed profit which is the interest payment paid over and above the actual loan amount.The lender does not assume any of the risks in this transaction, and Islamic finance places emphasis on risk and profit sharing.

Interest is considered one of the major sins in Islam. That alone means that many Muslims will shun interest-based products and services.

WHAT DOES THE QURAN SAY ABOUT INTEREST?

The Quran has multiple verses that explicitly prohibit riba. These include the following:

• Quran 3:130 - this verse states 'O, you who believe, do not consume riba, doubled and multiplied, but fear Allah'.
• Quran 2:275: this verse states 'Allah has permitted trade and forbidden riba'.

WHY IS RIBA CONSIDERED SO HARMFUL?

The absolute prohibition on riba goes beyond the concept of exploitation and usury. It encompasses the concept of ensuring that social, economic, and ethical considerations are part of financial transactions.

Islam emphasises the greater societal good and social wellbeing. Management of funds and income should not be used in practices that cause harm to others. When a borrower is obliged to repay a loan with interest, this is seen as an unfair in Islam. Not only does the borrower have to pay back more than they borrowed, but they face the burden of an increased repayment and potentially a debt trap. Riba is also seen as enabling the concentration of wealth amongst the rich, whilst the poor get poorer.

Another important element of riba that is deemed to be harmful to society is that interest itself generates an income but that income is not linked to productivity of economic activity. Riba is a risk-free gain that does not benefit society.
In terms of moral and societal degradation, riba is fundamentally exploitative and undermines Islamic principles of fairness and compassion. Interest-based systems are dependent on the markets remaining stable, so having a riba free option leads to greater financial stability.

Whether you work in industry, or are planning a large project, there are Islamic finance services that are Sharia compliant that can meet your needs.

At the core of the ban on interest lies the Islamic teaching that wealth should be earned honestly and not through exploitation. If someone comes to you in need and asking for a loan, and you are able to lend them the money but charge interest, you are exploiting their need and benefiting financially.

In very simple terms, the ban on interest relates to promoting fairness and encouraging productive investments and activity. This will ultimately lead to a more compassionate and equal society.

WILL ALLAH FORGIVE RIBA?

For those who partake in riba, whether that is charging or paying interest, the question of whether Allah will forgive them is connected to the wider Islamic concept of tawbah (repentance).

Muslims view Allah as the most forgiving and the most merciful and repentance is encouraged.

However, any repentance must be sincere and when it comes to riba it means that the person must have sincere regret partaking in riba and must immediately stop. There is also an obligation not to return to riba at any stage of life and to try and rectify any harm caused.

HOW TO AVOID RIBA IN MODERN BANKING SYSTEMS AND ECONOMIES?

Whilst it can be challenging to completely avoid riba in the modern and Western banking system, there are interest-free alternatives available in the modern financial markets. The growth of Islamic finance means that more and more services and products are available for those wanting to comply with Sharia rules relating to financial transactions.

The Islamic finance infrastructure and architecture are continually in development and construction.

Products including halal mortgages, halal funding options, halal student loans, and halal index funds mean Muslims can partake in the banking systems without breaching Islamic rules. There are many alternatives to interest-based financial instruments.

WHAT ABOUT STUDENT LOANS, CREDIT CARDS, AND MORTGAGES?

All types of financial products are available on the financial markets these days. You should always undertake due diligence to assess the Sharia compliancy of financial products.

Halal and interest-free loans have revolutionised professional industries that focus on societal wellbeing and social responsibility.

There are even interest-free cryptocurrency and bitcoin options available within the United Kingdom and beyond.

ARE THERE ANY PERMISSIBLE FORMS OF INTEREST?

The short answer to this question is no. Riba is strictly prohibited in Islam. However, this does not mean that you cannot find alternative financial products that can provide you with the funding or returns you need.

Whilst there is no form of interest that is allowed, there are Sharia-compliant financial contracts that are sustainable alternatives. These include murabaha and musharaka contracts that enable risk and profit sharing.

HOW CAN I HANDLE UNAVOIDABLE INTEREST FROM SAVINGS ACCOUNTS?

For Muslims, it can be challenging to deal with unavoidable interest from savings accounts, particularly if you live in the West. However, if you have an account that, by design or structure, is based on interest then there are some actions you can take to make sure you adhere to Islamic rules about finance.

• Monitor your account
• Switch to an Islamic bank as soon as possible
• Check with your bank to make sure you are not receiving interest on savings and if you are then ask to waive the interest
• Search for interest-free accounts
• If you do accumulate interest then donate that interest to charity. Muslim scholars and experts have confirmed that you can donate the money received.
• When donating interest do not expect to receive any reward.
• Remember, whilst you can personally benefit from riba, it can be donated to those in need via a registered charity.

HOW CAN I NAVIGATE MODERN BANKING AS A MUSLIM?

Whether you are a student looking to finance your education, or a business hoping to fund new processes and equipment, it can be difficult to operate within interest based banking systems. Here are some key things you can be doing:

• Educate yourself on Islamic finance rules
• Seek out Islamic finance loans, experiences, and markets.
• Support Islamic finance initiatives
• Choose Islamic banks and companies who facilitate riba-free products
• Look for and ask for halal alternatives
• Consult with experts and scholars
• Make ethical investments and avoid any industry, job, product or sector that is rooted in haram activities.
• Encourage financial innovation, policy, and ideas
• Build networks with other Muslims

WHAT ARE THE SPIRITUAL CONSEQUENCES OF ENGAGING IN INTEREST-BASED TRANSACTIONS?

Every Muslim should understand that involving themselves in interest can have spiritual consequences. This can include a spiritual disconnection from the teachings of Islam and Allah's commands. It can also mean there is greater accountability and punishment on the day of judgement.

Not only is interest seen as a bad practice, spiritually it can lead to a loss of blessings and barakah in earnings and family life. There is a whole ethical decline associated with riba that can lead to a mindset that prioritises money and wealth over wellbeing. For Muslims, this is frowned upon.

For those engaging in riba, the spiritual consequences go beyond financial implications. They include a deep sense of moral and ethical responsibility, understanding and complying with Allah's commands, and the pursuit of divine approval.

HOW DO ISLAMIC BANKS OPERATE WITHOUT INTEREST?

Islamic banks operate without interest by adhering to Islamic finance rules relating to operation. Islamic finance products focus on profit and loss sharing and alternative contractual arrangements.

They are able to offer alternative halal products by offering joint venture arrangements, partnerships and Islamically compliant services. Islamic banks also partake in ijarah which is effectively a form of leasing.

Many people wonder how Islamic banks make money and the answer lies in understanding the different forms of products and services they offer.

For example, in a murabaha contract the bank could purchase a house and instead of charging interest on the sale, they sell it to the purchaser for the purchase price plus a mark up. The bank earns a profit via the mark up and not by charging interest.

WHAT ARE HALAL ALTERNATIVES TO COMMON FINANCIAL PRODUCTS?

There are many products and services on the market that offer great alternatives to conventional interest-based services. Here are some listed below:

• Cost-plus financing loans (murahaba)
• Partnerships or joint ventures (musharaka)
• Leasing (ijarah)
• Benevolent loans (qard hasanat)
• Safe custody accounts (wadiah)
• Islamic bonds (sukuk)

As the global pandemic fades away and the UK’s economy begins to open up and bounce back, there has never been a better time to take a few minutes and look over your own personal finances.

Money doesn’t grow on trees, but with a solid financial plan you can make your money work for you in 2022 and achieve your financial goals.

The 3 Keys To A Successful Financial Plan

The 3 keys to a successful financial plan

1) Saving vs Investing

The two main ways to grow your financial wealth are through savings and investing; however the returns on these two options are very different.

There are many forms of savings products, ranging from low yield instant access savings accounts (traditionally attached to a current account) to various forms of tax-free incentivized long-term savings products, known as ISAs. While the returns on these savings accounts range from 0.25% to 1.45% the underlying concept is the same. Savings accounts pay out interest on your money because they are using the money to make loans to individuals, businesses and other specialist products like mortgages. Crucially, your money is also protected by the FSCS deposit guarantee scheme, meaning that if the bank goes out of business your money is still safe.

In contrast, investments allow you to earn significantly higher returns because your money is not going via an intermediary - your bank - and you are able to make decisions about how your money is used yourself. For example, the average net returns for investments on Qardus is almost 11% per year. This would mean that you earn £11 for every £100 you invest, compared to £1 with a normal savings account.

2) Risk vs Returns

To best reach your financial goals, it is important to maximize the return on your money while also minimizing risk. Generally speaking, the higher the returns are on any form of savings or investment, the higher the risk. This is the reason the returns on a basic ‘instant access’ savings account are so low - typically between 0.25 and 0.5% - as there are almost no risks due to the FCSC deposit guarantee scheme.

In contrast, investments do not offer these same protections, whether investing on a platform like Qardus, in crypto assets or on the stock market. In each cash the average returns you can earn are significantly higher than with savings, because there is also a risk that the price of Bitcoin can crash overnight, that a company’s stock value may crash or that a business you have invested in via Qardus may be unable to repay it’s facility and you as an investor.

However, these risks are entirely manageable, simply by making sure you diversify your investments across a number of different businesses, so that the losses on any one investment are covered by the returns on your other successful investments. Thinking about these things is the basis of a solid financial plan and why it is so important if you want to increase your wealth during 2022.

3) Realistic and Regular
The final component of a successful financial plan is to have realistic expectations about your goals and the returns you want to achieve over several years. Unlike gambling, a financial plan is about building your wealth over a longer period of time, rather than hoping for an instant windfall. Generally speaking, if something sounds too good to be true it probably is!

Once you have set your financial goals you can build your financial plan to achieve the returns you want. Unlike ‘day trading’ on the stock market, investing on Qardus does not require constant monitoring and tracking of stock prices and the market in order to make solid financial decisions. We do most of the hard work for you by pre-screening businesses to make sure they are real, genuine investment opportunities with minimal levels of risk and great returns available. This means once you decide to invest in a business you can just sit back and let your money (as well as us!) do the work for you while you get on with your life.

However, in order to maximize your wealth and achieve your financial goals it is important that you continue to invest regularly in your portfolio on a monthly basis. Normally the best way to do this is to figure out how much you can afford to invest each month, after you’ve set aside money for your rent, bills and other expenses. This is very similar to what you may already do with your savings account, except the main difference is that when you invest regularly on Qardus, you are able to earn significantly more each month and achieve your financial goals much faster!

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:

1. Zero hunger:
2. Alleviation of poverty:
3. Improving health and wellbeing
4. Education
5. Clean and affordable energy
6. Industry, innovation and infrastructure
7. Gender equality
8. Clean water and climate action
9. Reducing inequality
10. 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