Some solutions for reducing inequality
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/
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Introduction
As the global financial landscape continues to tackle the recession, inflation, and a cost of living crisis, Islamic finance is emerging as a resilient and stable financial system. Grounded in ethics and transparency, Islamic finance aims to ground financial dealings in ethics and risk sharing. This in itself is one of the main reasons that Islamic finance is helping people and organisations to override the impact of inflation.
Islamic finance has the ability to navigate the challenges posed by inflation through its distinct features and principles which are rooted in Islamic Sharia law.
WHAT IS INFLATION?
Inflation is the measure of how expensive goods, services, and products become over a period of time. Inflation can lead economies and entire countries into instability and financial turmoil. The rate at which the cost of goods and services increases over a period of time is the rate of inflation.
Inflation is usually a broad measure, but it can also be narrowly calculated. For example, currently in the UK by examining the cost of milk and eggs now and comparing it to this time last year, we can assess the inflation rate very closely.
Measuring Inflation
We usually measure inflation by looking at different economic indicators and indices. These indicators reflect the differences in prices over a specific period.
Some of the methods and tools we use to measure inflation include the following:
- GDP Deflator: the gross domestic product deflator compares the GDP over a period of time. It reviews the overall price level of services and goods an economy produces. Changes to the GDP deflator are indicative of whether the increase in nominal GDP is due to actual output or changes in prices.
- Consumer Price Index (CPI): the consumer price index is the most widely used indicator when examining inflation rates and measuring them. the CPI tracks the average cost of a basket of goods and services over a period of time.
- Producer Price Index (PPI): the producer price index examines the average change that takes place over time in selling prices domestic goods producers receive.
- Cost of living index: this index reviews the changes in price to the cost of living essentials including food, goods, and services. This index looks at factors such as consumer preferences and shopping habits and the changes in prices they pay.
WHAT CAUSES INFLATION?
There are many different factors that can lead to inflation. We cannot look at what causes inflation without referring to the root cause of inflation. At its very core, inflation is driven by there being too much demand in relation to the supply available.
So, what causes demand to outpace the supply? There are a few different reasons this can happen, but they include major disruptions to economic input such as energy (see the Ukraine war for example). If there is uncertainty around the supply of anything then this can lead to higher costs.
The government's monetary policy can also cause inflation. For example, if the UK government keeps the interest rate as low as possible for too long this can lead to inflation.
The bottleneck of global supply chains is another reason that drives inflation.
Islamic Finance Principles
Islamic finance operates on principles that are compliant with Sharia law. There are some commonalities between Sharia rules and conventional finance rules, however, there are also some stark differences.
Sharia rules relating to financial transactions deem interest (riba) to be completely impermissible. Similarly, dealings that involve uncertainty or speculation (gharar), or involve haram industries (such as gambling and alcohol) are also not permitted. Another area where Islamic finance differs from traditional finance is that Islamic finance is based on the distribution of wealth. It encourages people to participate in economic, business and personal investments using an ethical framework.
Islamic finance has an underlying principle that everything, including money, belongs to Allah. It therefore follows that interest and excessive risk and speculation are forbidden. For someone looking for an investment compliant with Islamic finance, they must ensure that any financial arrangement they enter into does not include any impermissible transactions or sectors.
Let's have a look at some of the ways Islamic finance principles are tackling inflation head-on.
HOW DOES ISLAMIC FINANCE MITIGATE INFLATION?
Islamic finance is not based on fractional reserve banking. This is the system most commonly used by conventional banks and involves banks holding what is known as a fraction of their customers money. The rest is loaned out to borrowers of the bank.
Add to this the prohibition of interest which itself can lead to instability in the market and is susceptible to market changes, Islamic finance is a more stable way of managing finances. Interest can also distort the supply and demand within a market. Under Islamic finance rules, all products and services should face natural market conditions, and not conditions that have been distorted by interest-based credit and debit.
Another important Islamic rule to mention here is the principle of zakat - one of the five pillars of Islam. Zakat (obligatory charity) aims to support the less fortunate in society and to distribute wealth throughout society. The whole concept of zakat goes against artificial supply and demand, price gouging, price fixing, and amassing large sums of money.
Asset Backed Financing
Many Islamic finance transactions include asset backed financing. Asset backed financing is one of the key concepts of Islamic finance. Essentially, it focuses on linking transactions to tangible assets. This is a departure from conventional finance instruments which are based on borrowing and lending money with interest. They generate income via interest payments and not by linking them with real assets.
Linking finance with tangible assets is one way that Islamic finance ensures there is transparency and an ethical framework underpinning savings, transactions, products, businesses and relationships.
Relying on tangible assets (such as real estate) enables Islamic finance to move away from interest based systems that fluctuate based on the value of currencies. Tying itself to real assets means that Islamic finance can reduce the overall impact of inflation by tying itself to stable assets that are not as impacted by volatile markets.
Risk Sharing
Another key hallmark of Islamic finance that is used to combat inflation is the promotion of risk sharing contracts. Essentially, these types of arrangements distribute the risks each party takes on, as well as the potential rewards.
This means that in a volatile economy both parties share the fallout and one party is not unduly burdened.
Mudarabah And Musharakah
Musharaka and Mudaraba contracts are risk sharing contracts. They encourage both parties to share in the risk. For example, one party can invest capital and the other party invests experience. Any profits or revenue generated are shared by the parties as per a pre-agreed ratio.
This structure is dynamic and transparent and is more resilient than conventional contract arrangements. The burden of economic shocks, fluctuations, and inflation is shared between the parties to the contract.
Inflation can cause huge problems for contractual arrangements, especially is one party is taking on all the risk. Sharing the risk mitigates the impact of inflation and spreads them out creating a more resistant and adaptive financial system.
Avoiding Interest
If you are dealing with a bank in the West, you will find that their products, services, and dealings are interest based. One of the main principles of Islam and Islamic finance in particular is that we must avoid interest. It is deemed to be completely haram.
In conventional finance systems. interest rates are impacted during inflation and they are adjusted to combat inflation. This is the case in the UK where the Bank of England has been steadily increasing interest rates.
By avoiding interest completely, Islamic finance is able to use alternative mechanisms to ensure transactions are safe and secure. This means the Islamic finance system is less susceptible to increasing inflation rates.
Stable Finance Amid Fluctuations
Interest rates play a key role in conventional financial systems. They do not play any part in the Islamic finance system. They are deemed to be exploitative and unstable by Islam.
Interest rates are vulnerable to the structures and systems within society and they are especially vulnerable when it comes to inflation. By avoiding interest completely, Islamic finance is able to withstand currency and economic fluctuations. This leads to a more robust and resilient financial environment.
Productive Economic Activity
Islamic finance places emphasis on real economic activity. It encourages investment in real assets and ventures that are productive. The aim is to lead to economic growth, help vulnerable communities to grow and stabilise, and to create jobs. All these endeavours should be able to withstand the terrible effects of inflation.
By focusing on productive activities that lead to improvements in the wellbeing of society, Islamic finance positively impacts the economy and society.
The goal is not selling or purchasing simply for the sake of it, but to engage in meaningful transactions that lead to a social return and benefit. There is a focus on sustainability whether you are an individual, corporate entity, or government.
Ethis And Islamic Finance
The concept of wealth in Islamic finance is very different from the concept of money in the conventional finance system the West has. According to Islam, wealth is a blessing from Allah.
Viewing finance through a socially responsible and ethical lens means there is less scope for transactions that are unfair, speculative and exploitative.
The ethical principles embedded in Islamic finance encourage fair business practices, wealth distribution, economic justice, and ethical screening. Being socially responsible with finances result in investments that lead to social stability and benefits. This stability helps to prevent the distortions in the economy that can result from inflation.
Avoiding Harmful Monopolies
As a finance system, Islamic finance encourages staying away from harmful monopolies. The result of this is that, whilst this does not directly combat inflation, it does seek to prevent market distortions, keep competition fair and ensure no party is exploited or taken advantage of.
Harmful monopolies often operate by excluding independent and small and medium businesses. The outcome is harmful for society and means there can be inefficiencies and the misallocation of resources. This in turn leads to instability in the stock market when a stock shortage becomes apparent.
Avoiding harmful monopolies also ensures that price manipulation and inflation can be monitored and avoided. Large monopolies can often dictate the market price of a service or product. In order to keep pricing fair and transparent, Islamic finance encourages avoiding harmful monopolies.
Harmful monopolies aim to concentrate wealth in the hands of those at the top of the monopoly structure. This goes against the principle of wealth distribution which Islamic finance promotes. Wealth retention leads to social disparities and exacerbates the effects of inflation for the poor.
Having a diverse and competitive market and economy ensures that there is sustainable and ethical growth and long term stability.
Ways To Manage The Current Inflation Crisis
According to the Quran, this world is a test, and Muslims see each part of their life as a challenge that is sometimes in their favour and sometimes not in their favour. The most important thing for those wanting to remain true to Islam and Sharia law is to ensure they live within Sharia rules and make sure their finances are within the parameters of Islamic finance.
Muslims also believe that their provisions are preordained and predetermined. With this in mind, if Muslims operate within Islamic rules and principles with regard to their personal and business dealings then they can save themselves from hoarding wealth and gluttony.
Ensuring financial transactions are not interest based, not exploitative and not risky means that Muslims can mitigate against the harmful affects of inflation.
In the last few decades, the halal travel industry has seen a huge increase in demand. The intersection of halal travel and the Islamic finance industry has led to a huge market catering to the needs of Muslim travellers looking for travel options that are halal. This synergy between the two industries reflects the growing need for Islamically compliant travel options. Islamic finance is offering the halal travel industry with Sharia compliant finance options in order to widen the scope of halal travel products and services.
Whether you are travelling solo, as a family with children, for a meeting or conference, the demand for halal accommodation and halal travel is growing. As the demand grows so too does the availability of halal products and services on the market.
Halal Travel
It may seem like a growing trend, but the halal travel industry is here to stay. With millions of Muslims spread across the globe, and with higher levels of disposable income earmarked for travel, the halal travel industry is booming.
The halal travel industry includes a huge range of offerings and services. These services are designed to cater to the needs of discernible Muslims who want to ensure they are compliant with the requirements of their faith, but still able to travel and see the world.
It may seem to be a niche market, but the fact that the demand currently outstrips the supply in many countries shows that this trend is likely to grow. The demand is driven by a Muslim population that places value on authentic experiences and Sharia compliancy.
WHY DO WE NEED HALAL TRAVEL OPTIONS?
Halal travel is important for many different reasons. For Muslims who want to travel without breaching Islamic rules, halal travel offers the option of travel that aligns with personal beliefs.
However, the importance of halal travel goes beyond religious and personal preferences. It encompasses cultural, economic and social dimensions.
Halal travel helps to diversify the travel industry and create respectful and inclusive tourism experiences for Muslims. Not only that, but halal travel goes a long way in contributing to the cultural understanding, economic development, and ethical sustainability of areas in the world that are under-exposed and underprivileged.
The more we invest in areas that are suitable for halal travel the more inclusive we make the world. There are many issues facing different countries in the world, so opening them up to travel and Muslims travellers can boost the economy in a way that makes them a stakeholder in the economy and travel market.
Many Muslims want their money to be spent in countries that align with their personal values and goals. For example, Muslims would probably not seek to travel to countries with precarious political positions such as Israel.
There is a lot of information online that you can use to research travel options. More Halal Travel and Trade Fair conferences are popping up to help you make more ethical Sharia compliant decisions.
Family Friendly Holidays
The main aspect of halal holidays is that they should be Sharia compliant. However, halal holidays are also all about having a family friendly holiday. Most halal resorts cater to families and promote family activities.
This creates a welcoming environment for Muslim families looking to enjoy their break. Halal travel encourages diversity when it comes to travel and tourism. Exploring Islamic history and culture is a key part of halal travel and is increasing in popularity as the Muslim population continues to grow globally.
The increased demand for halal travel also contributes to global connectivity. It encourages and fosters relationships between regions, leaders and countries all actively catering to Muslims.
This interconnectedness is important in bringing unity to Muslims and ensuring that their needs are catered to. It is important to mention that halal travel also facilitates sustainable and ethical tourism. For example, Muslims are increasingly conscious of their environmental impact and they are encouraged to prioritise sustainability and ethical living in all aspects of their lives, including travel.
Principles Of Halal Travel
The key components of halal travel include the following:
- Halal package deals: travel agencies who offer halal travel must ensure that the package itself is halal. This starts at examining the way the company operates, so it must avoid any form of interest and ensure that the package is linked to travel that does not contravene any Sharia rules and adhere to the Islamic lifestyle.
- Accommodation: halal hotels are top priority when it comes to halal travel. Hotels and resorts should be able to provide facilities that permit and promote prayer and ablution. In addition, halal hotels offer segregated swimming pools and saunas and fully halal dining options. We would not expect to see any alcohol or pork in halal hotels.
- Itineraries: some halal travel operators go further and offer trips that offer Islamic and spiritual enlightenment.
- Muslim-friendly destination: of course, when looking for a halal holiday you would want to visit somewhere that is either in a Muslim country or is Muslim friendly.
- Islamic travel insurance: takaful, also known as Islamic insurance, is becoming more popular in the halal travel industry sector. It offers customers the option of obtaining insurance coverage that is Sharia compliant.
- Look for destinations that are not based on exploitation or unfair wage labour practices.
- When approaching halal travel companies, look at their leadership, their governance, the service they offer, the kinds of project they are involved in, and their Sharia compliancy.
- Don't be scared to ask questions of any halal travel company such as who do you bank with? What are your principles and morals and how do they align with Islam? Do they trips offer private spaces for women? What is their governance and decision making process and where do they feel success lies? Remember, our due diligence should include information on how the company runs and if it is ethical so feel free to have those conversations with any company marketing halal travel options.
There are already so many halal travel options and available in many a diverse region including Turkey, Indonesia, The Middle East, Malaysia, Egypt, Pakistan, and Bosnia. You will also find many a dedicated internet forum and platform relating to halal travel if you need more knowledge from a like minded community. Countries like Spain and India that have great Islamic history and heritage are also good areas to explore.
As the halal travel market continues to expand, so too does the list of options.
Islamic Finance And Halal Travel
Islamic finance is playing a large role in the growth of the halal travel industry. If the Islamic finance market had not seen such growth in recent years, then the halal travel industry would not have been boosted. Islamic finance provides the halal travel industry with access to Sharia compliant business and finance options.
The components of Islamic finance play a key role in shaping and supporting the halal travel industry through funding. This is done not only by influencing the way financial transactions are dealt with, but also by how to manage the economic landscape to remain Sharia compliant.Providing access to Sharia compliant finance means the Islamic finance industry can support halal travel companies.
Providing critical cash and capital ensures the halal travel industry can continue to grow. Not only is this good for international trade and partnerships, but it means Muslims can travel knowing they are not breaching the terms of their faith. Knowledge is important.
The growth in the market also means that there are opportunities for investors to indulge in socially responsible and ethical investments in the tourism and hospitality sectors. The halal travel industry has encouraged those with entrepreneurship to expand their horizons and widen the offerings currently on the market.
Halal travel continues to go through an evolution where the interplay of human beings wanting Sharia compliant travel converges with the travel industry to create the perfect package for Muslims. The halal travel sector relies on building relationships across the globe, and ensuring each product on the halal travel market is compliant and enjoyable. After all, many of us travel to a different area in order to explore and relax.
Halal travel isn't only about travel. It's about ensuring that there is attention to the holistic needs of travellers. This includes spiritual fulfilment, access to prayer, compliance with rules about segregation, assurance of halal certified products, and having some cultural resonance with the area visited.
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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