Sharia-compliant venture capital supporting innovation and growth

The success of your business depends on three factors - your product, your marketing and your funding. Most businesses fail not because of their product or their marketing, but because of cash flow problems. It's poor funding that brings them down.As an entrepreneur and business owner, it's easier to get excited about your products and their potential, rather than about your finances. But without secure financial foundations, that excitement can soon turn to frustration.Cash will flow into your business as you sell. But in order to sell you first need money to invest in stock, people and premises. Whether yours is a startup company or you're looking to expand, you need funds to invest in advance of starting to see sales coming in.There are many different forms of business funding. Here are some of those most commonly used by business owners.

Your own money

Many small businesses rely on the founder or owner providing at least some of the capital. There's always an element of risk in starting or growing your business and by funding it yourself, you're not accountable to anyone else. This does mean, however, that if the business doesn't grow as you hope, you risk losing some or all of the money you've invested.Using your own money allows you to be in full control of how you run the business. However, you could be missing out on the advice and guidance that's often available when you're borrowing from someone else.If you're starting a new business, or expanding your current business into a new market, you should anticipate costs being higher than you expect and allow a generous contingency to cover the unexpected. Small businesses don't grow without some mistakes being made, and these cost money. In the longer term, you learn from these mistakes, and they help you make better decisions in the future. However, if you're working on a very tight budget, these costs could seriously hold you back.

Friends and family

You may know people who are open to investing in your business. Some may be willing to give you a loan, quite possibly on generous terms such as with low or no interest and flexible repayment terms. Others may want equity in return for their money - they effectively become co-owners of the business, although probably only owning a small slice.It's for you to determine whether friends and family money is appropriate. It can be very convenient, and flexible, but at the same time you need to be aware of how financial arrangements can affect your relationships with people close to you. If all goes well, there's unlikely to be a problem. But if the business struggles, they may become concerned or even demand some of the investment back.When borrowing from friends and family, it's a good idea to draw up a document that will help to set everyone's expectations, both for how much involvement they will have in running the business, and how and when they will be repaid. They should be made fully aware of the risks involved when putting money into a new venture.

Grants

A grant is money that does not usually need to be repaid. There are various local and national grant schemes available to businesses, usually linked to startups, growth or innovation. They can range in size from just a few hundred pounds to many thousands, even millions.While grants can be hugely beneficial to entrepreneurs, they can also be time-consuming to apply for and sometimes come with quite stringent conditions. Many grants are based on match funding, meaning they won't cover the full cost of a specific project - you are expected to raise some of the funds from elsewhere.

Secured loan

A secured loan is where you borrow from a bank or other institution and if you fail to make repayments the lender has rights over an asset that you own, such as your home or business property. Because the loan is secured on an asset the lender has confidence they will get some or all of their money back, should you run into financial problems.It can take a few weeks to set up a secured loan because legal documents must be drawn up and signed off. The advantage of such a loan is that because it's secured, you may get more favourable terms, such as lower interest charges or a longer repayment term. The downside is that if you fail to keep up with repayments, your property is at risk. Most lenders aren't in a hurry to sell your asset, as they'd rather you found ways to keep up your repayments. However, they have that option if they need it.Applying for a loan will usually require you to provide considerable information about the financial position of your business, along with projections about future income and cash flow.

Unsecured loans

An unsecured loan is where you borrow without providing an asset as security. However, most banks and other financial institutions do ask for a director's guarantee or equivalent. This is where the director agrees to take personal responsibility for repaying the loan, should the business be unable to do so.Because it's not linked to an asset, an unsecured loan can be set up more quickly. However, for the same reason the amount you can borrow is likely to be lower, and the terms less favourable.These loans can come in various forms, including business credit cards, which are effectively an indefinite loan where you choose how much you want to borrow and repay on a monthly basis, subject to certain limits.

Venture capital and angel investors

Venture capitalists and angel investors are individuals or groups seeking to put money into businesses with growth potential. Venture capitalists are investing funds on behalf of a third-party and as such, they are more risk averse. They're looking for evidence that the business has a promising future. An angel investor, or business angel, is a high-net-worth individual who is often more open to getting involved with a startup and will take a bigger risk.The money they give you is not a loan. They are effectively buying part of the business - they have a stake in the equity of your business, meaning they become co-owners. This can have some implications for the amount of control that you have over how you run the business, but can be beneficial, giving you a source of advice and support, and it can provide a strong incentive for you to be more successful.Both VCs and angel investors will make a careful assessment of your business and its potential, and they know that by investing they are taking a risk. At some point they will want to be repaid - often when the business is sold.

Crowdfunding and peer-to-peer finance

The internet has made it much easier to connect people who want to invest, often small amounts, with businesses looking to raise working capital - the cash they need to operate and grow.Crowdfunding is where a business wants to raise money to launch a specific product. The business can be either a startup or an established firm. It launches a crowdfunding appeal to people likely to be interested in the product. The funders typically don't have a right to be repaid if the business or product fails, but if it all goes well, they get access to the product on preferential terms. Two of the most well-known crowdfunding platforms are Indiegogo and Kickstarter.Peer-to-peer finance matches people and businesses with money to lend with others looking to borrow. Top peer-to-peer sites include Zopa and Funding Circle.Any business looking to raise money through crowdfunding or peer-to-peer systems is usually required to undergo credit checks and other financial assessments, to ensure the risk to investors is minimised.

Finding the right way to fund your business

Finding the right way to fund the plans for your small business depends on many different factors, including how much you need to raise, when and how you'll be able to repay it, and your attitude towards giving up some ownership or control of the business. Potential lenders or investors will be interested in your business history, your credit rating and your growth potential. Each will have different attitudes to risk.

Small business funding with Qardus

We provide funds to small businesses with a proven track record that are looking to grow. Our finance is ethical and community based, providing funding from £50k to £200k with terms of between six and thirty-six months. Our funding process follows Islamic principles, meaning we don't charge interest and we don't work with industries considered harmful to society, such as alcohol, tobacco and gambling. The funding is Sharia-compliant, making it an attractive option for Muslim business owners, but we also fund others outside the Muslim community.We offer fast, flexible and affordable unsecured finance, firmly grounded in ethical principles.

IS THERE A HALAL INDEX FUND?

Yes, there are many options these days for those looking for halal index funds.

Index funds have long been known as one of the best and easiest ways to invest your money. The increase in the availability of halal index funds, that is funds that comply with Islamic Sharia rules, means that there is an even greater opportunity to maximise your investments without breaching Islamic finance principles.

Halal index funds enable investors to invest in a wider selection of stocks all within one fund.

WHAT ARE INDEX FUNDS?

An index fund is essentially a fund that follows what is known as a benchmark index, for example, Nasdaq 100, FTSE 100, and the S&P 500. Index funds are a portfolio of stocks and bonds.

Index funds are generally regarded as a passive form of investing. What this means is that investors who invest in index funds do not have to actively manage their investments.

The index fund will aim to mirror the index they track, they do not need to be actively and constantly managed.

Exchanged traded funds (ETFs) are those funds that are traded on exchanges and usually ETFs will track a specific index. EFTs offer investors a basket or bundle of assets that can be traded. The result is that the portfolio is diversified and the risk is deemed to be low, especially in times of economic growth.

Index funds are popular with all kinds of investors from angel investors, stock investors, new investors, and those looking for responsible investment options.

Difference Between Mutual Funds And Index Funds

The main difference between mutual funds and index funds is that mutual funds need a great deal more active management by fund managers. These fund managers actively choose the investments and manage the mutual fund and this leads to increased management fees and costs.

Before making any kind of investment in index funds you should make some inquiries about the fund, read online information from the relevant website and try and look into the methodology the fund uses (this includes yield, capitalisation, and price).

HOW DO INDEX FUNDS WORK?

Index funds work by investors investing their money in to an index fund that has been created. The money is then used to invest into the companies that comprise the particular index fund chosen. This means investors are able to diversify their portfolios and invest in companies they want to.

For example, if an investor invests money in the S&P 500. This index fund essentially tracks the performance of 500 of the largest companies in the USA. The S&P 500 is one of the largest and most popular index funds on the market.

Investing in companies via index funds means that investors' money is linked to, and tied up with, the performance of the companies within the fund. Many of these index funds have a very wide range of companies within the fund.

INDEX FUNDS WHAT ARE THE RISKS?

As many of the most popular index funds are diverse, this means they are less risky for investors. The reason the risk is lowered with index funds is that there are usually many companies within the fund, so all the investment is not tied up with the performance of one company.

Index funds are known for offering what is considered to be a broad market exposure for investors, with very low operating costs and risk. Index funds are popular with people who want to use the fund as a pension and plan for retirement.

Index funds are normally managed by a fund manager whose employment is based on ensuring that the fund is managed and tracked properly.

Sharia Principles Relating To Index Funds

The Sharia rules that relate to investment funds are the same rules that apply across all financial transactions.The main principles of Islamic finance that should always be considered when looking for halal index funds to invest in include the following:

• There should be no element of interest (riba)
• The investments should be ethical and should enhance communities and society in keeping with the social justice element of Islamic finance
• There should be no element of speculation or gambling (maisir)
• Both parties in the transaction should share the risks and profits
• There should be no transactions involving uncertainty (gharar)
• There must be asset backing - this means that every financial investment and transaction must relate to a tangible asset
• The industries, business, and companies within the fund should not be deemed to be impermissible in Islam

WHAT INDEX FUND IS HALAL?

The aim of halal index funds is to create long term appreciation of the investment funds via a diversified portfolio. Revenue is generated if the portfolio increases in value.

This portfolio is securities and investments are compliant with Islamic finance investment principles as laid down by Sharia laws.

Two of the largest index funds are the HSBC Islamic Global Equity Index Fund (halal) and the Vanguard FTSE 100 Index Fund. In the United States, the Dow Jones Industrial Average is one of the most popular funds to invest in. However, there are other index funds that meet the Sharia principles of halal investment. The numbers in the name often refer to the number of companies included within the index. For example, the FTSE 100 includes the largest 250 companies that are currently listed on the London Stock Exchange.

Before investing, always make sure you have done your due diligence and that the index fund you are investing in has been certified as compliant with Sharia rules.

For Muslims, the main incentive for investing in halal index funds is that they comply with Islamic finance rules and regulations. Any stock or bond within a halal index fund needs to be compliant with Sharia rules relating to investing.

ADVANTAGES OF INVESTING IN HALAL INDEX FUNDS - IS INVESTING IN A FUND HALAL?

One of the main advantages for any individual investing in a halal index fund or product is knowing that you will be investing your money in funds that comply with Sharia principles. Halal index funds also take care to ensure that the money is not invested in industries prohibited by Islamic finance principles (such as the gambling, alcohol, and porn industries).

For investors who want to invest in an ethical way that does not adversely impact society, then halal index funds offer the opportunity to do that. The relevance of halal index funds has grown significantly in recent years with the increase in demand for Sharia compliant and ethical investment options.

There is a great deal of global movement towards more responsible investing and halal index funds meet the criteria for ethical investing.

In the United Kingdom, index funds are regulated by the Financial Conduct Authority.

Considerations For Investors Wanting To Invest In Halal Index Funds

Investment in any kind of fund comes with its own risks. You should always seek to do as much research as possible before you invest.

Some of the key risks relating to halal index funds include:

• Risk of the investment value going down
• Exchange rate risks - if the economy and the markets are volatile then the exchange rates could fluctuate and affect your investment gains
• Tracking risks - whilst index funds will track the index, you should expect to see occasional differences in the gains
• Operational risks - as with any fund, halal index funds could be subject to operational and compliance risks which could affect any profit or return generated

LOOKING FOR THE RIGHT HALAL INDEX FUND - IS THE S&P FUND HALAL?

In addition to the points raised above, if you want to invest in a halal index fund then you should look specifically for:

• Confirmation/documentation that the index fund has been certified as being compliant with Sharia rules
• The scope for diversification - the greater the diversification the lower your overall risk
• Fund fees - check what fees your investment will incur
• Foreign companies - looking at companies abroad is a great way of diversifying your portfolio and finding halal investment funds
• Minimum investment levels - check to see if there is a minimum investment level required for the fund you are interested in. Many halal index funds are accessible and have reasonable charges for every level of investor
• Information - check what information is available on the index funds you are interested in. If you have any questions find an expert who can help you with your queries

As halal index funds grow in popularity across the globe it is important to find the fund that works best for you. Currently, Apple is deemed to be one of the largest holdings in the S&P Shariah Index.

SAVING VERSUS INVESTING IN INDEX FUNDS?

Whilst is it always a good idea to have savings, if you are comfortable with taking small risks and want to diversify your investment portfolio, then halal index funds are the way forward.

If you are risk averse and do not want to deal with any market fluctuations, then it is probably best for you to maximise your savings. However, in the current economy savings are not the best way to use your money. Also, for Muslims who are not permitted to make use of high interest savings accounts, looking into index funds is a good way of earning revenue from the money they have.

Halal index funds are a great way for beginners to invest in the stock market. Index funds enable investors to own a share in a company for relatively low cost.

The company that manages the fund will do all the running around and hard work so you do not have to.

The emergence and growth of blockchain and Sharia-compliant finance has led to a debate about whether blockchain is Sharia-compliant. Both Sharia-compliant finance and blockchain are based on the same central components of fairness, transparency, accessibility and decentralisation. These similarities have led to an uptake in blockchain from Muslim markets and businesses.

What is of critical importance for those wanting Sharia-compliant finance options, is that blockchain is compliant with the rules of Islamic finance and financial transactions.

WHAT IS BLOCKCHAIN?

Blockchain is a decentralised system where records of cryptocurrency transactions are maintained and linked. This form of digital ledger technology enables transparent and secure transactions across computers.

The ledger, or digital database, acts as a growing list of records (blocks) that are all linked together. Since Bitcoin and Ethereum became known worldwide, so too has recognition of blockchain platforms and their purpose.

Blockchain - Key Features

The key features of blockchain are:

• decentralised databases: no single entity controls the data and this means it is resistant to manipulation, fraud, and censorship
• Immutability: once a transaction is logged onto the blockchain it cannot be deleted or changed.
• Transparency: all the transactions that are recorded on the blockchain are visible and transparent to all the participants in the network. This enhances transparency and authenticity.
• Secure: as each digital transaction is verified by participants being they are added to the ledger this prevents fraud and unauthorised transactions.
• Smart contracts: blockchain includes smart contracts that self-execute and automatically enforce terms. This means the room for error or fraud is massively reduced when compared to traditional contracts.

Sharia Rules And Blockchain

For Muslims looking for Sharia-compliant financial solutions, blockchain is becoming a viable option. Blockchain technology offers Sharia-compliant finance that offers transparent and secure alternatives that are compliant with Islamic rules relating to financial transactions.

According to Islamic finance rules, blockchain technology is considered to be a fairly neutral database tool that stores records in a transparent and secure way.

Sharia rules as they relate to financial transactions require adherence to Islamic finance principles that relate to ethical conduct and social responsibility. Key elements of prohibition include a ban on interest, speculation and investment in haram industries and practices.

Blockchain technology, as a secure and decentralised ledger system, certainly meets the Islamic finance standards of transparency and security. However, when assessing if any technology is truly compliant with Sharia rules several factors should be considered including the nature of the financial transaction taking place, the underlying assets, and the consensus mechanisms.

WHAT MAKES BLOCKCHAIN SHARIA-COMPLIANT?

Sharia-compliant finance revolves around fairness, equity, transparency, and risk sharing. Any blockchain technology or service needs to comply with these principles and be free from interest and speculation.

The development of currencies that are Sharia-compliant and based on blockchain technology is fast-moving. For Muslims looking for adherence to Islamic rules, blockchain is quickly able to verify transactions with a clear and traceable ledger.

It is important to note that not every blockchain transaction will be Sharia-compliant. This is in the same way that not every bank, project, return, investment, platform, and digital asset will be Sharia compliant. The compliancy will lie in the type of transaction and nature of the deal.

Islamic Finance And Blockchain

The interplay of blockchain and Islamic finance is interesting. Not only does it present opportunities to transform and innovate the industry, but it also means that blockchain-based solutions can now facilitate Sharia-compliant transactions.

Blockchain facilitates fractional ownership, asset management, and efficient cross-jurisdictional and cross-border transactions. The transparent ownership and financial records and real-time settlement blockchain offers is compliant with Sharia rules.

Put very simply, blockchain technology and platforms support Islamic finance initiatives and businesses. This means Muslims can use blockchain to invest and transact.

Zakat And Blockchain Potential

For Muslims who want to comply with one of the five pillars of Islam, zakat, blockchain technology has a great deal of potential in enhancing and facilitating compliance with this pillar. Not only can blockchain enhance the administration of zakat money, but it can also help and provide value in the administration of zakat.

Blockchain technology streamlines the distribution of payments ensuring that zakat transactions are fast and transparent. By recording zakat on immutable ledgers that are visible to all participants, blockchain is being used more and more by Muslims across the globe.

People are easily able to trace and audit their payments and zakat transactions, tracing the flow of their funds. What's more, it is easy to check if your zakat contribution is affecting those in need in the most appropriate way. This greater visibility provides clarity and precision for donors.

Blockchain has the potential to revolutionise global zakat payments by using methodology that increases efficiency, transparency, and seamlessness. Donors are able to maximise their donations automation and traceability.

Supply Chain Management

When it comes to business operations and analysis of Sharia-compliant methods, blockchain provides immutable records.

For Muslim business owners and customers, making sure of authenticity is key when it comes to analysing the halal elements of any dealing.

Blockchain technology can validate halal certifications and methodology throughout the supply chain. This provides a verifiable audit trail and ensures that Sharia-compliancy can be checked.

Blockchain And Sukuks

Blockchain technology ensures that Islamic bonds (sukuk) are transparent, secure and fully Sharia-compliant. As blockchain enables real-world assets such as property and commodities to be tokenised.

Sukuk issuers can then tokenise the assets backing each sukuk, making sure that each token issued represents a percentage share of ownership. What this means in Islamic finance terms is that the sukuk is backed by tangible assets or services, making it compliant with Sharia rules.

In addition, each sukuk issuance and transfer is recorded on the digital ledger and this helps to verify authenticity along the chain of ownership and eliminate fraudulent or speculative activity.

When used properly, blockchain can be set up to automatically screen for Sharia compliancy for users. This screening not only screens for Sharia compliance, but also verifies participants.

This level of transparency is highly encouraged in Islamic finance transactions.

Islamic Finance Asset Management

Blockchain can be used to enhance Islamic asset management portfolios. By streamlining settlement of money, blockchain enables real-time settlements of transactions. Platforms dedicated to blockchain encourage peer to peer engagement and transactions and this eliminates the need for intermediaries and third parties.

What this means is that asset management becomes more transparent and more streamlined. The level of risk is reduced, and overall efficiency is improved.

Management Of Waqf

Waqf, Islamic endowment, is the act of dedicating or endowing a property for charitable, community, or religious purposes.Using blockchain, the management of waqf can be delivered in an easier and more efficient way.

This is done via platforms that provide traceability, authenticity and audit trails.

Ethical, Safe And Decentralized

Using blockchain properly means products and services can become more transparent and screened for Islamic adherence. Investors and organisations can use blockchain technology to enhance the efficiency, integrity, and accessibility of Islamic finance solutions.

Blockchain is emerging as a safe and ethical partner for Islamic finance products and services. The hybrid of modern blockchain technology, cryptocurrency, and long established Islamic principles of exchange is a welcome one for the finance world.