Sharia compliant retirement planning

The COVID-19 pandemic has not only resulted in a public health crisis, but has also increased poverty levels and accelerated inequalities across the world. According to a recent survey of 37 countries[1], since the start of the pandemic:

• 3 in 4 households suffered a reduction in income with 82% of poorer households affected.
• Gender inequalities are on the rise due to consumer-facing industries being hit the hardest.
• Minorities in high income countries have been hit hardest as they live in areas that have been most vulnerable to the health and economic impacts of the pandemic.
• Inequality is also rising between countries as high-income countries have been better placed to provide financial & social safety nets to counter the crisis relative to poorer countries.

On the other end, the wealth gap is also widening as billionaires saw their wealth rise 27.5% to £7.9trn between April to July this year with their total numbers increasing to a record 2,189 (2,158 in 2017)[2]. This generally reflects the strong performance in global stock markets since the start of the pandemic.

As nations across the world attempt to cope with the crisis, they might be able to draw upon mechanisms that were used historically in the Muslim world in order to reduce poverty and income inequalities. Some of these mechanisms highlighted below, when used correctly, might serve to soften the blow by allowing for the systematic redistribution of wealth in society. These include amongst others access to a unique financing type as well as well as other mechanisms for income redistribution:

• Qard Hasan (benevolent loan) is a loan that is extended from a lender to a borrower for social welfare purposes. Through this mechanism the rich are encouraged to extend loans to the needy. The lender has no right to demand any amount in excess of the original principal amount as that would violate the prohibition on Riba (interest or usury). When used on a broad scale, this type of financing serves as a tool to not only reduce income inequality and alleviate poverty but also promote financial inclusion.
• Zakat and al-Khums (compulsory charity) and Sadaqa (voluntary charity) are mechanisms for income redistribution from the rich to the poor. Zakat, for example, a mandatory almsgiving that requires Muslims who own wealth at or above a certain threshold to donate a portion of it, typically 2.5%, to those who are eligible.[3]
• Historically, Awqaf (endowments) or the waqf (singular) played a pivotal role in socio-economic development across the Muslim world. They were important Islamic financial institutions that mobilized and facilitated the flow of funds towards philanthropic causes such as in order to fund education, health & libraries amongst others.

To varying degrees, some of these mechanisms are currently being used in various parts of the world, whereas others (ex. Waqf) are no longer as prevalent as they once were. Having said that, more has to be done as nearly all economic indicators suggest we have reached a tipping point with high levels of poverty and income inequality across the world. Efforts by policy makers to address these issues by preempting them could involve integrating such mechanisms as well as others in order to allow for a more equitable distribution of wealth and income. This in turn would create the foundations for resilient systems that are better able to cope with shocks as they appear.

[1]https://www.weforum.org/agenda/2020/10/covid-19-is-increasing-multiple-kinds-of-inequality-here-s-wh...[2]https://www.bbc.co.uk/news/business-54446285[3]https://nzf.org.uk/about-zakat/purpose-of-zakat/

ISLAMIC SAVINGS ACCOUNTS - WHAT ARE THEY?

An Islamic savings account, also known as a Sharia compliant savings account, is a type of savings account that is designed to be compliant with Islamic law. Islamic finance rules prohibit the payment and collection of interest, also known as riba.

Instead of interest, Islamic savings accounts typically pay profit or loss sharing. This means that the bank and the customer or account holder share in the losses or profits of the bank's investments.

HOW DO ISLAMIC SAVINGS ACCOUNTS WORK?

Instead of offering interest on deposited funds, an Islamic savings account operates on the principle of profit and loss sharing, where the profits made by the bank are shared between the bank and the account holder.

An Islamic savings must adheres to the principles of Islamic finance. These principles, derived from the teachings of the Quran, prohibit the payment or receipt of interest on financial transactions. The bank offering Islamic savings accounts ensures that the account is not charged or paid any interest.

Islamic savings accounts are also known as interest-free savings accounts or sharia-compliant savings accounts offer a number of benefits to those who choose to use them.

Conventional Savings Accounts

To compare, conventional ISAs are a type of savings account offered by banks and financial institutions in the United Kingdom. ISAs are regulated by the Financial Conduct Authority (FCA).

Conventional ISAs are essentially offer the customer to save money and earn interest on their savings without having to pay taxes on the interest earned. The main difference between a conventional ISA and an Islamic savings account is they way in which they earn money for the account holder.

Islamic Savings Accounts And Sharia Rules

An Islamic savings account, also known as an Islamic finance account or a Shariah-compliant savings account, is a type of financial account that is designed to be compliant with the principles of Islamic law (Shariah). In contrast, a conventional ISA, or Individual Savings Account, is a type of savings account that is offered by traditional banks and financial institutions in the UK.

One of the key differences between these two types of savings accounts is the interest rate. Islamic law prohibits the charging of interest, known as riba, on loans and financial transactions. Therefore, an Islamic savings account does not offer interest on to customers on the deposited funds.

Instead, an Islamic savings account operates on the principle of profit and loss sharing, where the profits made by the bank are shared between the bank and the customer or account holder. This means that the returns on an Islamic savings account may vary depending on the performance of the bank.

Ethical And Socially Responsible Investments

Another key difference between Islamic and conventional savings accounts is the use of investments that are considered to be ethically and socially responsible.

Islamic finance is based on the principle of avoiding investments in businesses that are considered to be harmful to society, such as those involved in the production of alcohol, tobacco, gambling, and other activities that are prohibited by Islamic law. Conventional ISAs, on the other hand, do not have any restrictions on the types of investments that can be made with the deposited funds.

Taxation Of Islamic And Conventional Savings Accounts

In addition to the differences in interest rates and investments, there are also some differences in the way that Islamic and conventional savings accounts are taxed.

In the UK, ISAs are tax-free savings vehicles, meaning that the interest earned on the deposited funds is not subject to income tax. However, the profits earned on an Islamic savings account may be subject to income tax, depending on the specific details of the account and the tax laws in the country where it is based.

It is always best to find out as much information about the savings account you are opening. The bank or provider of the service should be able to help you identify the exact tax implications for you. A comparison of the accounts can also be done via the website of the bank.

Overall, the main difference between an Islamic savings account and a conventional ISA is the way they are structures and the principles each account is based upon.

Structuring Of Conventional Savings Accounts Vs Islamic Savings Accounts

Islamic savings accounts are designed to be compliant with the principles of Islamic finance, this includes the prohibition of interest and the promotion of socially responsible investments. Islamic savings accounts need to ensure they are structured in a way that does not contravene any Islamic finance principles. The structure and the way they progress are important components as the obligation to be Sharia compliant applies to the lifetime of the savings account.

What this means is that the bank offering Sharia compliant savings accounts must ensure it meets all the Islamic finance requirements of operating such an account.

Conventional ISAs tend to be more flexible and do not have the same restrictions as an Islamic savings account would have. However, for Muslims and other customers who do want an ethical form of saving, Islamic savings accounts are useful tools for saving in a Sharia compliant way.

It is therefore important to understand the differences between the two types of savings accounts.

The Benefits Of An Islamic Savings Account

There are over a billion Muslims worldwide. As a result, the principles of Islamic finance and banking have gained increasing recognition and popularity in recent years.

One of the key products offered by Islamic finance institutions is the Islamic savings account.

An Islamic savings account must operate in a way that is consistent with the values and beliefs of Islam, including the prohibition of interest (riba) on loans and financial transactions.

There are several benefits to using an Islamic savings account. Here are just a few:

1. Alignment with religious beliefs: For Muslims, the prohibition on interest is an important religious principle. By choosing an Islamic savings account, individuals can align their financial practices with their religious beliefs.
2. Higher potential returns: Because Islamic savings accounts do not pay interest, banks and other financial institutions that offer these accounts often provide higher potential returns in other ways. For example, some Islamic savings accounts offer profit-sharing arrangements, where the bank shares a portion of its profits with account holders.
3. Increased transparency: Islamic finance is based on the principles of transparency and fairness. As a result, Islamic savings accounts often provide greater transparency than traditional savings accounts, with clear and straightforward fee structures and a lack of hidden charges.
4. Support for ethical investing: Islamic finance prohibits investment in certain industries, such as gambling and alcohol, that are considered sinful in Islam. By choosing an Islamic savings account, individuals can ensure that their money is not being invested in ways that conflict with their religious beliefs.
5. Contribution to the Islamic finance industry: Islamic finance is a growing industry, with an increasing number of people around the world choosing to use sharia-compliant financial products. By choosing an Islamic savings account, individuals can support the continued growth and development of this industry.
6. Higher Returns: Because Islamic savings accounts operate on the principle of profit and loss sharing, they may offer higher returns than conventional savings accounts that offer interest. This is because the returns on an Islamic savings account are linked to the performance of the bank, and the profits made by the bank are shared with the account holder. This means that the returns on an Islamic savings account can vary depending on the bank's performance, but they may be higher than the fixed interest rates offered by conventional savings accounts.
7. Ethical and Socially Responsible Investing: Islamic finance is based on the principles of ethical and socially responsible investing. This means that Islamic finance institutions avoid investing in businesses that are considered to be harmful to society, such as those involved in the production of alcohol, tobacco, gambling, and other activities that are prohibited by Islamic law. By choosing an Islamic savings account, you can ensure that your money is invested in businesses that align with your values and beliefs.

Choosing The Right Savings Account For Your Needs And Values

An Islamic savings account offers a wide range of benefits for savers. Some of these benefits are financial and others are beneficial for those with religious beliefs who want to adhere to Sharia compliant savings.

There has been a significant growth in lenders who are now offering Islamic savings accounts, so it is always worth doing your due diligence to find the right account for you.

In this week’s Company Focus segment,JEVITHA MUTHUSAMY shines the spotlight on Qardus, a new Islamic fintech start-up aspiring to close the SME financing gap in the UK.

The beginning
It took the Qardus team 10 months to conceptualize, build, test and launch its Shariah compliant peer-to-peer financing platform on the 3rd July 2020. “I wanted a platform that offers fast and affordable Shariah compliant business financing to SMEs,” Hassan Daher, the founder and CEO, tells IFN. Qardus offers SMEs a chance at alternative financing as they believe many SMEs are not eligible for bank financing.

Market Insiders reported that the funding gap in the UK has grown to US$77 billion as of 2019. The largest hurdle the start-up faced was securing the right approvals. The firm is an appointed representative of Share In which is regulated by the UK’s Financial Conduct Authority while Qardus’s Shariah compliance is monitored and approved by Amanah Advisors.

“It is important for us to be Shariah compliant as there are over 950,000 SMEs in the UK that are financially excluded due to the lack of financial products that conform to their ethics and beliefs,” notes Hassan.
The presentQardus currently offers Shariah compliant working capital financing up to a maximum of GBP100,000 (US$125,640) and is targeting small businesses with GBP100,000 in revenues or assets.
“Due to the pandemic we are focusing on recession-proof industries. If you look at the small business on our site, it is essentially pharmacy and pharmaciesare doing really well right now, food manufacturing companies are also one of the sectors that are doing well,” explains Hassan.
While market opportunities are immense, Hassan acknowledges that it is a competitive segment especially with the emergence of new government initiatives in response to COVID-19 such as the Bounce Back Loan Scheme and the coronavirus business support loans.

The futureNevertheless, Qardus is working on distinguishing itself by being able to predict credit risk better than its competitors by using machine learning algorithms.
Over the next year, Qardus is looking to onboard around 150 SMEs with financing totaling an estimated GBP15 million (US$18.85 million) and within the nextfive years Qardus is looking to reach GBP500 million (US$630.19 million) in financing.

The platform is also looking to tap asset financing and possibly property financing. Aiming higher, Qardus is looking to provide its own technology solutions to existing lenders in the market and in turn, Qardus will do the sourcing, risk profiling and pricing of SMEs on their behalf.

Currently, Qardus is focused on making a mark in the UK and European markets but is also looking to expand to Southeast Asia and the Middle East in the future. As part of its expansion plan, the platform is also planning to become an Islamic challenger bank in the near future.

Capital at Risk. Returns are not guaranteed

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