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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In recent decades the landscape and number of small and medium-sized (SMEs) businesses has seen a huge transformation. Many of these businesses are formed and led by Muslim entrepreneurs such as Shahzad Younas (Muzmatch), and Ufuk Secgin (Halalbooking.com). With the growth of Muslim entrepreneurs comes an increase in demand for Islamic finance based lending solutions and strategies.
SMEs dominate the world business landscape. They account for approximately 60% of private sector employment. It therefore makes sense that SMEs will require funding options in order to sustain and succeed as a business. With close to 60% of SMEs failing in the first few years, ensuring they have access to adequate funding is critical.
SME lending has historically been centred on the traditional models of funding that are interest based. However, there has recently been a move towards SME lending based on Islamic finance principles.
In the UK, SMEs are considered to be firms that employ less than 250 employees. UK SMEs play a significant role in the UK economy, and the government is keen to ensure that they are sustainable and successful.
SURGE OF SMEs
SMEs account for a significant portion of the world economy. They not only contribute to employment and job creation, they also play a leading role in sustainability and community impact. In the UK a staggering 99.2% of the business population comprises of SMEs.
SMEs are considered to be major employers and they drive local economy growth.
Recent statistics found that the total value of loans to SMEs in the UK reached a whopping £65.1 billion in 2022. This was an increase of over 10% on the previous year and was the official highest on record.
New business lending in the UK totals in the region of £259 million. Demand from SMEs for inclusive and diverse lending options continues to grow.
SMEs AND SOCIAL IMPACT
SMEs play a critical role in society and our economy. Not only do they facilitate and generate employment, they also increase the flow of money from individuals to industries and through society.
At the beginning of 2023 there were estimated to be 5.5 million SMEs in the UK, an increase of 0.8% over the previous year. The professional, scientific, and technical industries accounted for 14% of all SMEs while another 10% are in the retail, trade, and wholesale industry.
Beyond contributing to the economy, SMEs can impact different areas of society. They encompass social development, community wellbeing, alleviating local poverty, job creation, innovation, and reducing income inequality.
SMEs also tend to be more forthcoming in embracing sustainable and ethical practices. They foster financial inclusion by providing local opportunities for local people.
WHY SMEs ARE THRIVING
There are 1 million SMEs in London and over 852,000 in the South East. These SMEs account for 34% of the UK business population. SMEs account for 60% of the employment in the private sector within the UK. They also account for over 50% of the employment in the UK.
As SMEs have grown, so has the need to provide lending that meets their particular demands. Many SMEs do not have the stellar trading history and records of large business.
SMEs therefore need an innovative approach when it comes to lending and funding.
SMEs can come with limited credit history and collateral but bags of entrepreneurial dynamism and innovation.
Distinct from larger businesses, SMEs have unique considerations relating to scale, financials, structure and characteristics. They may have limited access to capital markets, and therefore need tailored and bespoke financial solutions. A one size approach to lending does not meet the needs of SMEs that provide a range of services in the economy.
This is where Islamic finance really comes forth as a viable option for SMEs.
Sme Lending
SME's often demonstrate adaptability and resilience when faced with economic fluctuations, challenges and issues. SMEs are well placed to weather economic downturns and maintaining local communities through change. Lending to SMEs in the UK amounted to £4.8 billion in the second quarter of 2023.
In 2022 36% of SMEs used external funding and finance options. Over 69% of SMEs have stated that they turned to lending options due to cash flow related issued.
For SMEs, obtaining favourable funding options is not as easy as it is for big companies. Perhaps this is the reason more and more SMEs are turning to Islamic finance services.
Islamic finance is a great option of raising funds for SMEs for many different reasons.
For Muslim SMEs that want to avoid interest and want to be Sharia compliant, Islamic finance provides funding options not available in the wider banking sector. Islamic finance is able to adapt to the requirements of Muslim SMEs ensuring compliance and inclusion.
It is also worth mentioning that Islamic finance is based on a risk and profit sharing arrangement. This means that the funder and the SME share the profits AND the risks.
For SMEs, this is a huge benefit as it creates a sense of partnership with support for the new SMEs on the market. SME borrowing has a huge impact on their operations and customer base growth, so it is essential that the SME lending market continues to diversify and educate itself on the needs of SMEs.
Islamic finance is asset backed finance. What this means for the SME is that the financing is linked to tangible assets. In the long term, this is a more sustainable and stable form of financing for them.
Diversity In Business
The great thing about SMEs that often goes unnoticed is how impactful they are when it comes to inclusion and diversity.
In 2020, 16% of SMEs were led by women. Almost 24% of SMEs were equally led by men and women.
Workplace diversity is essential for SMEs as they often operate within diverse local environments. With Millennials currently making up 50% of the UK's workforce (and Gen Z accounting for 27% by 2025), businesses lacking diversity are missing out.
When it comes to investment for the future and the business operations of the SME, they need to ensure they recruit and retrain properly.
Empowerment Through Enterprise
SMEs are known to encourage empowerment through enterprise. This should be done at every stage of the SME process from project initiations, implementations, cost analysis, research, and education.
The result is that SMEs can ensure that they can recognise and eliminate barriers to growth. Enterprise enables SMEs to plan and prepare, ensuring they have the right insight into how to fund their operations and continue to succeed.
For Muslim entrepreneurs there are additional considerations relating to compliance with Islamic finance rules when partaking in financial services and considering lending options.
Why should Muslim SMEs focus on Islamic finance lending:
- Adherence to Islamic rules relating to financial transactions
- Interest free finance options
- Asset backed financing
- Profit and risk sharing
- Flexible finance structures and services
- Financial inclusion without compromising ethics and religious principles
- Community impact
- Flexible payment options
- Lending is not connected to an industry, product or service deemed impermissible by Islam (ie alcohol, gambling, porn)
Faith In Business
Those SMEs that are looking for ethical and sustainable models of finance and lending can find answers in Islamic finance.
Risk sharing, loss sharing, ethical considerations and non-exploitative practices all underpin Islamic finance and support SMEs in a way that traditional financial service cannot.
WHAT IS GHARAR?
Islamic finance defines gharar as something that is uncertain, risky, or hazardous. If there is a financial transaction where any of the basic elements of the agreement are unclear, uncertain, or ambiguous then the transaction or activity could be deemed to have an element of gharar.
Using the principles of Sharia law, the reason gharar is prohibited in Islam is that it removes transparency, openness, and certainty in financial transactions and contracts.
Gharar And Islamic Finance
According to Islamic finance principles, which themselves are based on Sharia law, gharar is a fundamental prohibition in Islam as it results in a lack of certainty.
This lack of certainty then increases the level of risk and liability to one or both parties.
Islamic Finance And Ethics
Islamic finance is based on ethical finance. What this means is that whilst Islamic finance and Sharia rules recognise the importance of finance in society, there is a need to ensure that there is intrinsic value and ethical boundaries when parties transact.
The underlying ethical principles in Islamic finance aim to ensure that there is transparency and certainty for the parties involved.
When you understand the ethical nature of Islamic finance you appreciate how it works to protect the parties and ensure there is fairness.
Examples Of Gharar
Some examples of gharar in modern contracts and financial transactions include the following:
- options contracts
- future sales
- selling the unknown
- short selling
- sales of debt
- day trading
Essentially, the sale of anything which is not present or tangible is gharar, and therefore not permissible in Islam.
Similarly, if ownership of an asset or product is uncertain this could also be considered to be gharar.
This is why it is important that you understand the concept of gharar and how it is applied, whether you are dealing with a bank, business, financial institution, web page or individual.
Elements Of Gharar
In order to decide if any financial tranaction or business dealing has an element of gharar you need to assess the level of certainty within the terms of the deal.
Some of the main terms you need to understand include the nature of the transaction, the parties, the language of the contract, the product, or service involved.
Gharar has certain characteristics that you need to be aware of.
- the parties: gharar does not always relate to uncertain or risky terms in the contract. Gharar could also occur in the nature of the parties involved, their relative bargaining power, their openness and the level of risk they take on
- contract terms: language used in the contract must be clear and concise.
- two or more sales in one: this refers to deals that are uncertain with timings. For example, if a seller states they will 'sell this asset for £100 in cash today and £150 next week'. The timings here are uncertain.
- conditional contracts: this refers to conditions in a contract that are unknown and uncertain. For example, if a seller states they will sell the buyer an item if the market improves.
- price : if the price in a contract is not known then this could be deemed to be gharar. You should always be careful where the payment terms are not clear.
- Speculation: if you have agreed terms that are speculative then this is not permitted.
- Subject matter: ie, if there is uncertainty in the subject of the contract.
- Delivery: again, be careful if there are no specified delivery terms or final contract date.
Impact Of Gharar
In Islamic finance, certain types of contract are void. These include contracts that are deemed to be invalid, and contracts that are defective.
Invalid contracts are those where key details are missing, such as the price, the payment terms, and the duration.
Defective contracts are contracts which do not contractually bind the parties correctly.Based on these principles, any contract that includes elements of gharar can be deemed to be both invalid and defective in Islam.
How To Avoid Gharar
Whether you are looking to avoid gharar in your financial dealings or daily life, there are some things you can do to ensure that you are compliant with Sharia rules.
You can ensure that there is certainty in your dealings, fairness and openness, and that you are not misleading anyone else. Any transaction should involve the consent and knowledge of the parties involved.
Gharar And Trade
When it comes to trading or business, one of the main ways to ensure you do not fall into the gharar trap is to ensure that any trading has the consent of both parties.
Any form of trading in risk is not permissible. If it is likely that one party in the transaction is likely to make a significant gain at the cost of the other, then the result is that this is generally forbidden under Sharia law.
Any exchange that could lead to exploitation and injustice should be avoided. Instead, you should aim to ensure that all your dealings are transparent, consensual, and satisfactory to both parties.
In the fast-paced and dynamic world of cryptocurrency and blockchain, staking is emerging as a popular way to earn passive income. This has led to discussions and debate about whether staking crypto is halal.
This article will examine the concept of staking and the considerations relating to whether it can be deemed to be halal.
WHAT IS STAKING IN CRYPTOCURRENCY?
In cryptocurrency staking occurs when investors lock cryptocurrency for a specific period of time. This is done to support the blockchain operation. The investor will lock in their digital tokens to a specific blockchain network and in return, they will earn rewards.
For the blockchain network, it means that transactions can be validated and for investors and individuals it means they can earn rewards without having to sell their crypto.
In comparison, bitcoin and staking are not linked. Bitcoin tends not to use the staking mechanism. Instead, it uses the proof of work mechanism where miners compete with each other to problem solve maths puzzles to validate transactions.
Any locked up cryptocurrency acts as collateral to support the blockchain network. This means that it is no longer available for use and therefore staking reduces the liquidity of the asset that has been staked for any given project.
HOW DOES STAKING WORK?
Crypto staking is a consensus-based mechanism. It enables token owners to validate a crypto chain by adding blocks. Using existing crypto to validate holdings as proof of stake on a blockchain.
Any newer blocks are also validated using the proof of stake mechanism. As the crypto funds are effectively locked in for a period of time this supports the activity of the blockchain. For the investor or asset owner who are using the blockchain platform, they earn staking rewards which are similar to earning dividends on their assets.
There are two main forms of staking:
- Independent staking : this method is used when an individual deposits their crypto token as a single and sole validator on a blockchain. There is usually a minimum token threshold. For investors using this form of staking they aim to benefit from being the sole beneficiary of rewards earned.
- Staking pools: staking pools are when there are a group of people who effectively pool their crypto tokens. This is the preferred method for newcomers to staking who want to share the risk with others.
Staking involves contractual terms that identify the obligations and the rights of the parties in the staking process. These terms can vary depending on the nature of the staking.
Sharia Compliance And Staking Crypto
Islamic finance provides the conceptual and foundational basis for operating financial transactions in line with Islamic rules. Operating in an Islamic finance framework means you use your finances to ensure you manage funds in an ethical and socially responsible way.
When considering crypto staking, it is important that you do all your due diligence. Investors or those staking their crypto need to understand the mechanism of staking and screen it for Sharia compliance. You need to fully understand what happens once you deposit your crypto onto a blockchain network.
In a proof-of-stake system, any crypto being staked is used to strengthen the consensus based network and improve the integrity of it. The profit is made from the rewards you receive for investing in the blockchain's sustainability.
Always make sure you understand the level of risk involved, the projects involved and the legitimacy of the network before staking your assets. A problem could arise if the blockchain itself is deemed halal but further down the line it starts to become involved in haram industries. Management of your crypto wallet should follow the same Islamic principles as your physical wallet. This requires ongoing due diligence.
Considerations
As a starting point, you need to ensure that the blockchain is not associated with any haram industries such as gambling, alcohol and pork. Look for morally sound initiatives and well-researched projects that have already been screened.
Another important point to consider is riba / interest. Whilst earning rewards via staking is not considered to be riba, examine the structure and payment of the rewards you will be generating. For many, staking a deposit is not seen as a loan so interest cannot therefore be generated. The reward is seen as the benefit of a joint endeavour, as more people join the blockchain, more rewards are achieved. The purpose of the stake is to improve the legitimacy of the network and to maintain it.
Another consideration is the governance and the values of the blockchain platform. Make sure that the governing values are ethically sound.
IS STAKING HALAL?
Consider all the advice in this article, but in particular, if you want to determine if any staking activity is halal you need to evaluate the halal status by ensuring:
- there is no interest / riba involved in the staking or the investment of any capital
- There is no excessive uncertainty or ambiguity - the terms required must be clear
- look for ethical compliance
- focus on asset backed transactions and stay away from gambling
- seek an expert opinion
- review the market the blockchain might be linked to and evaluate it for Sharia compliance
- review the other users of the blockchain
- make sure any incentive being offered is halal
- check the governance, infrastructure, platform and protocols being used
- learn all you can about your stake and the price
Staking in its traditional form does not currently involve any kind of loan or interest. There is no borrowing of money or any interest payment. Essentially, the software involved generates tokens as rewards. These rewards do not impact or come from any other users currency so there is no exploitation of others via investment or trading.
Practical Steps For Muslims Considering Staking
For anyone looking to stake crypto, it is essential that you seek guidance from scholars who are fully aware of Islamic finance concepts and principles when it comes to money matters. Look for blockchain platforms that are already established within Islamic networks.
Some of the benefits of crypto staking include having the opportunity to earn additional tokens (passive income). Also, as you are contributing to the security and efficiency of the blockchain network this could be seen as strengthening the decentralized platform for others.
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