The role of technology in advancing Sharia-compliant business finance

Since student loans were first introduced in the United Kingdom in the 1990s they have proven to be problematic for Muslim students. The primary reason for this is that student loans incur interest - something that is prohibited in Islam under Sharia rules.

For many Muslim students who want to be compliant with Sharia laws relating to financial transactions, taking out a student loan is not seen as a viable option.

Riba In Islam

The literal Arabic meaning of the word riba is 'increase', 'growth', 'excess', or 'addition'.

According to Sharia laws, an increase of a debt owed or repayment of a loan is considered to be riba, or interest. This is strictly forbidden in Islam. Both the payment of interest and the receipt of interest payments are considered to be contrary to Islamic Sharia rules.

The reason Islam does not permit interest is that it is considered to be a means through which the poor remain poor, and the rich get richer. There is considered to be an inequality between the parties and within the transaction.

Riba is generally deemed to increase the gap between the poor and the rich in society and this goes against Islam and the social responsibility message that permeates Islam.

Student loans within the UK are currently repayable with interest, so this creates a dilemma for Muslim students.

Interest And Student Loans

As student loans require repayments that incur interest, many Muslims deem them to be an unacceptable way of funding their higher education goals.

There has been a great deal of debate within the Muslim community about student loans and the issue of riba.

Islamic Concept Of Finance

One important thing to note for anyone considering taking out a student loan is that traditional western banks and lending organisations treat money solely as a commodity in business.

By contrast, in Islam, money is considered to be a medium of exchange with a measure of value only.In Islam, money performs a social role.

The value of the money is stored within it, not outside it. This is one of the primary reasons riba / interest is not permitted.

Student Loans - History

Student loans have had a variable history. In the 1960s, 12% of school leavers went on to university. This represented 1 in 10 students. There was no such thing as student loans in the 1960s. University fees were actually paid fully by local education authorities. Students left university with little to no debt.

In addition to having fees paid, university students could also apply for a means tested annual grant to cover their living costs.

In the 1970s the number of school leavers attending university increased slightly to one in seven. By the end of the decade, this figure had dropped again as there was a squeeze on university funding.

The 1980s saw a huge increase in the numbers of students wanting to go on to higher education. The then education secretary, Kenneth Barker, pushed for higher numbers of young people to attend university and increase their skill sets.

By 1990, one in five school leavers was attending university. However, the maintenance grants had not increased by much, so in 1989 the Tory government introduced student loans akin to mortgages. These loans were to account for having no increase in the annual student grants and were intended to bridge the gap between the funds available and the increased cost of living. Grants of up to £2265 were available on a means tested basis.

Higher education and university entry really saw a boom period in the 1990s onwards. More and more young people were going to university and the number of courses available increased.

The Labour government got rid of the grant in 1997 and replaced it with a new policy and system whereby a £1,000 means tested tuition fees was available, alongside low cost loans.

By the early 2000s, many more young people were attending university. The Labour government pledged to raise the percentage of young people going to university to 50% and they wanted to make sure students had an incentive to study further. Tuition fees amounted to £1,100 per year, and this was offset by loans of up to £3,950.

In 2006, tuition fees were raised to £3,000 per year which become payable once students graduated and were earning above £15,000 per annum. Students were informed that the repayments were to be made on the 9% of income over the relevant threshold, with inflation-only interest rates.

Coming to modern day student loans, tuition fees are currently £9,000 per year and additional loans are available that could amount to over £12,000. This means that an average university student who undertakes a 3 year degree will come out of it owing a considerable debt. This debt accrues interest.

In the United Kingdom, it is the Student Loans Company that administers and monitors student loans. The Student Loans Company is the organisation that calculates the amount payable to individuals and ensures the payment reaches the right bank account.

INTEREST ON STUDENT LOANS - IS THIS RIBA?

Opinion is divided about whether student loans are considered to be halal or haram.

There are some Islamic scholars who believe that student loans are inherently haram and non Sharia compliant as they incur interest. However, there are also scholars who have the opinion that student loans are halal.

Let's have a look at the arguments for and against student loans.

Fatwas That Deem Student Loans To Be Haram

The Al Qalam Institute did its own research and issued a fatwa relating to student loans and their permissibility for Muslim students. The issue they looked at in detail was whether the repayment of the student loans was commensurate with inflation rates, or whether the repayments incurred 'bolt on' interest payments.

The research the Al Qalam institute undertook concluded that the student loans at the time of the fatwa (2013) were deemed to incur riba. This meant that student loans were contrary to Islamic laws relating to finance and loans.

The reasoning behind the judgement was that student loans DID attract riba and were not simply attracting inflation based increases in repayments.

According to the Institute, irrespective of the need for the loan (ie to further a person's education, knowledge, and prospects), if a loan incurs interest then it is prohibited.

There is still a great deal of ongoing debate amongst scholars about whether the loans are strictly linked to index price/inflation raises or whether they do actually incur interest outright.

It is likely the debates will continue for some time until any consensus is reached.

Arguments And Fatwa In Favor Of Permitting Student Loans

There are, however, other schools of thought that have the opinion that by their very nature, student loans do not fit the traditional definition of a loan.

Some Islamic scholars have raised the question of whether student loans do in fact incur riba and whether they should fall under the definition of what a de-facto loan is.

The reasoning behind this argument is that any student who obtains a student loan will never fully take ownership of the loan amount.

The student loan itself is seen as an investment towards a future of learning.

As the bulk of the student loan is given straight to the university or institute of higher education, the student never actually receives full ownership of the money. Without ownership it is questionable as to whether student loans are actual loans under Islamic finance principles.

In addition to the above, it can be argued that as the loan only becomes repayable once a student earns over a certain threshold, there is no automatic interest based repayment.

Shaykh Dr. Haitham al-Haddad has issued his own fatwa relating to student loans. It is his opinion that taking out a student loan is permissible. He maintains that no riba is involved in the student loan transaction.

Shaykh Dr Haitham al-Haddad has researched this issue at length and concluded that student loans within the UK are permissible under the rules of Islam.

The Shaykh raises the following points to note when arguing that student loans are halal:

• the student never receives the full loan amount
• the student does not have full control of where the money is spent nor is there any element of profit
• the loan is eventually written off (cancelled if you die)
• the minimum earning threshold applies before any repayment is due

According to the Shaykh, the points mentioned above render the student loan as an entity that is different from the traditional loan, or qard.

The element of human ownership is not fulfilled as the monies are paid (mostly) directly to the university in lieu of tuition costs.

Of course, opinions on this issue continue to remain divided.

Students are encouraged to undertake their own research and due diligence.

Want Versus Need

Some scholars are of the opinion that there will never be a clear cut answer on whether student loans are considered to be halal or haram.

However, students should always consider whether their desire to pursue further education is a want or a need. If university is seen as a want - that is, it is not essential - then taking out extensive student loans might not be a good idea.

However, for those people who have no choice but to go to university such as doctors, lawyers, and dentists, perhaps there is an argument to say that there is a real need.

Not everyone who attends university is entitled to a bursary or scholarship and it would be a shame for these students to miss out on learning or advancement.

What is clear is that many Muslim students (and parents of students) have felt unable to access Sharia compliant and appropriate student finance. This has affected their employment prospects and their career progression.

Whatever your view of student loans, the UK does need to identify and create solutions that are accessible for Muslim students.

Conclusion

Ultimately, when deciding if student loans are halal or haram. students should be doing their own research on whether they feel comfortable taking out student loans.

Always seek out the knowledge of experienced and knowledgeable scholars. Use a website that you trust to find out more information, and read the opinions and advice of scholars who have researched the topic extensively.

Whilst not all Islamic scholars agree on whether student loans are halal or haram, what is clear is that the subject is still open to debate. Perhaps this is the reason that more and more universities are directing their Muslim students towards Sharia compliant loans and finance options.

In addition, the Federation of Student Islamic Societies, and the National Union of Students have been working collaboratively with the government to find alternative finance solutions for Muslim students who do not want to go down the traditional student loans route.

In the meantime, it is worth having a look at the various scholarships and bursaries available. These could be an alternative form if financing but it is rare to find one that will cover a full university course plus living costs.

In addition to this, many UK banks offer interest free current accounts up to a certain limit so it is also worth checking these out.

The UK government has been looking into having an alternative financing option for Muslim students to ensure that they have access to higher education.

In 2014, the government approved a non-interest based student loan model, and this is still under review.

However, in June 2022, the Federation of Student Islamic Societies reported that a date has been finalised for the non-interest based student loan and it would be available in 2025.

Until then, of course, the most beneficial course of action would be to seek out halal funding options. There are service providers available who provide Sharia compliant loans and products. In addition, there are some Muslim charities who will fund higher education.

Islamic car finance is available for Muslims wanting Sharia compliant options. What halal finance options do Muslims have and how do they work?

There is a huge array of car financing and leasing options on the market for those who do not want to buy a car outright. For Muslims, the car finance options available can be difficult to navigate, especially if they want finance and leasing options that are not in contravention of Islamic finance options.

Islamic car finance operates to enable people to use their money wisely, spread the actual cost of financing the car whilst ensuring that they do not pay interest on the finance option they have chosen. Drivers can take advantage of car finance deals whilst also adhering to Islamic Sharia rules relating to interest (the payment and receipt of which is prohibited) and speculation.

The halal car finance market is aimed at those people who want Sharia compliant finance options. Essentially, for those people who do not have the cash to buy a car outright, or those who do not want to buy a car paying cash, Islamic finance ensures that people can spread the cost of the car without breaching Sharia rules.

Islamic Finance Principles Applied To Car Finance

The main Islamic finance principles relating to car finance are:

1. Riba (Interest) - Islam prohibits the receipt or payment of interest. It is deemed to be haram. In car finance terms, this means that Muslims who want to remain Sharia compliant cannot borrow funds with an Annual Percentage Rate (APR) attached. An APR is an interest rate and is prohibited in Islam.
2. Simplicity of Contracts: Islamic Sharia principles dictate that transactions should always be honest, transparent and open. This means that if you enter into a contract for leasing a car you should make sure that there is no undue risk, speculation, or gambling involved. The contract should be fair for both parties and be simple to interpret.

Buying A Car Outright Without Car Finance

It goes without saying that buying a car outright with a cash payment is probably the best option for those wanting to remain strictly Sharia compliant. If you have savings that would cover the purchase of the car you can avoid interest payments and APR. However, not all Muslims have the option of paying cash outright for a car and this is where the market has developed to cater to the needs of those wanting Sharia compliant car finance options.

Car Finance Options - Leasing

Islam does not prohibit leasing (ijara). In fact, leasing is permissible and is compatible with Islamic finance principles. Payments for vehicles can be done via leasing contracts with car companies. Sharia does not prohibit car leasing agreements because the heart of the transaction relates to a tangible asset - the car. As long as the leasing contract sets out the terms of the lease, the details of the parties, and the payments it can be structured to be compliant with Islamic finance rules.HOW DOES HALAL CAR FINANCE WORK?

Halal car finance is actually straightforward, working on the basis of a loan being agreed between the parties. The buyer and seller in the transaction agree on the value of the car the seller is selling. The seller does not charge an interest rate for payment of the car as they would normally to make money on the finance arrangement. Instead, the seller increases the purchase price of the car to cover the interest payments they would have received. No interest is actually charged by a bank or the seller.

What this means for the buyer is that the deposit will be higher than a deposit they would pay on a non-halal car finance option, but for Muslims this is a halal way of obtaining car finance.

Halal Car Finance Options

Generally speaking, the traditional car finance options such as hire purchase agreement and personal contracts are always attached to an APR and this makes them non compliant with Sharia rules.

However, below is an example of how Islamic finance options can adapt the traditional car finance options to make them halal.

Hire Purchase Agreement (Hp)

HP financing means the buyer can spread the cost of the car over fixed monthly payments and the use of a deposit. Below is an example of an Islamic finance HP deal:

Example:

Price: £20,000

Contract Term: 12 months

APR: 6%

Total Cost to buyer: £21,200

Using an Islamic finance agreement, the seller/dealer would add the additional £1,200 to the price of the car. The buyer of the car would then pay £21,200 as fixed payments monthly for the contract term. When all the payments have been made, the buyer owns the car outright.

Personal Contract Purchase (Pcp)

PCP's are a common form of car financing option and act as a loan, with the buyer only paying off the full value of the car at the end of the contract term if they decide to keep the car. If the buyer does not pay off the full value of the car then they do not own the car at the end of the contract. PCP's usually always come with interest payments and are therefore not Sharia compliant.

However, there are sometimes some PCP finance deals available for new cars but these can be expensive and the requirements are often stringent.

Personal Contact Hire (Pch)

As PCH agreements are actually long-term hiring agreements they are normally deemed to be Sharia compliant. As you are simply renting the car from the owner or dealer you are simply paying for the use of the car for a specific duration.

Conclusion

Each contract and hire purchase agreement is different. The onus is on the customer to ensure that they have inspected the terms, and service fees of the agreement before they decide whether the option is Sharia compliant. There are various Islamic car finance options on the market these days, so it is always best to explore these options rather than using the traditional bank or dealer car finance options.

WHAT IS QARD AL-HASSAN?

Qard al-hassan, also known as qard al-hasan, is an Islamic finance term that essentially refers to a loan that is interest free. Typically in a transaction that includes qard al-hassan, the borrower will repay the amount owing under the principal amount without any other mark up or interest payment being charged. Qard al-hassan financial products are compliant with Sharia rules that dictate that interest (riba) payments are not permissible, whether the interest is being paid or being charged.

These types of loans offer financial solutions for Muslims looking to borrow funds that do not include any interest payments.

Qard al-hassan loans are loans that are provided to help others. The word hassan itself means acceptable or good (of good faith). Islamic banking services are now offering qard al-hassan loans for both Muslims and non-Muslims.

Qard Al-Hassan Loans

In Islam and Islamic banking, Qard al-hasan loans do not have an interest rate element, and this means that businesses and consumers are able to borrow money on a goodwill basis. Generally speaking, qard al-hasan loans tend to be used for welfare purposes. The Quran stipulates that Muslims should endeavour to provide these types of benevolent loans where possible and to those who need these kinds of services.

"Establish regular prayer and give regular charity and give Allah Qard Hassan" (Quran 73:20)

The principle of qard al-hassan in Islam enables Muslims to further the social justice ethos that underpins Islamic finance. Islamic finance facilitates loans from those with the funds to those who need financial assistance without breaching Sharia rules. Qard al-hassan can be viewed as a loan agreement that is akin to giving charity. The borrower and lender sign an agreement confirming the terms of the qard.

HOW DOES QARD AL-HASSAN WORK?
In Islam, qard al-hassan works in the following way. A lender will lend a business or service an amount of money that they need (usually for social justice purposes). The principal amount borrowed will be interest-free. The borrower will then repay the amount of money borrowed without any interest or surplus payments owing. Borrowers are permitted to pay an additional amount back to the lender as a gesture of goodwill, but this cannot be done based on any promise or commitment.

Qard al-hassan loans do not increase over time or accumulate any interest charges like traditional loans do. This means they offer problem solving solutions for Muslims.

The most important element of Islamic qard al-hasan loans is that they are untouched by any form of riba. There should not be any reference or link to the economic market conditions and fluctuations, and the lender cannot ask for the return of the loan before the contractual repayment period ends.

Qard Al-Hassan - The Redistribution Of Wealth

Islamic finance systems focus on socio-economic justice and the enhanced wellbeing of society, especially the alleviation of poverty. Alongside sadaqa and zakat, qard al-hassan is an essential Islamic finance instrument of redistribution of wealth.

Qard al-hassan minimises the cost of borrowing and remains compliant with Islamic Sharia law.

Social Justice, Qard And The Islamic Finance Economic System

The Islamic finance economic system has always centred on principles of social justice (as mirrored throughout the practices and teachings of Islam). The focus of the finance system is to ensure and improve the overall wellbeing of society and using money to enhance social conditions.

Qard al-hassan is a key concept that acts as a crucial redistributive instrument. The distribution of funds from the rich to the poor aims to reinforce social unity and cooperation. As the global experience of, and appetite for, ethical finance options and factor analysis continues to grow, qard al-hassan is fast emerging as an important tool in the fight against poverty and the drive to ensure there is more financial freedom and equity for poorer communities.

As more and more Islamic finance companies and banks are offering innovative qard al-hassan products and financial services, project management for those customers and business operations working within the social justice sector will become easier and more accessible. Qard al-hassan services will start to become more readily available in banking and private sector financial industries.

The opinion of scholars is that qard al-hassan loans are problem solving as they facilitate the redistribution of funds that are compliant with ethical and Islamic finance principles. Islamic finance is facilitating financial freedom and investment options for those who have historically been excluded from traditional financial markets and industries that did not cater to their religious requirements.

According to Sharia law, qard al-hassan loans are deemed to be acts of good faith, and loans that help those in need. Advancement of news relating to qard products and websites, and information technology means that qard al-hassan financial services are more readily available and searched for online, especially in Middle Eastern territories. This has enhanced the supply and demand of qard services. Historically, qard al-hassan loans have proved to be effective for economic growth, enhancing employment, and alleviating poverty.