The Islamic Perspective on Debt

Islamic finance has historically played a significant role in financial inclusion in countries where Islam is a major religion, but it has not been accessible to Muslims in the West until very recently. The growth of Islamic finance has catapulted financial inclusion in previously overlooked groups and has ensured that businesses operating under Islamic principles have opportunities to access funding options and scale their growth.

The foundations of Islamic finance that rest on the principles of anti-usury and no interest have traditionally seemed to be at odds with the concept of successful business and entrepreneurship. After all, usury - leveraging interest rates – is a key component of traditional business growth. However, when it comes to Islamic finance one of the central foundations is that money should not make money, hence receiving or paying interest is not permissible.

In recent years the financial sector has realised the potential of Muslim entrepreneurship and investment, and has offered more inclusive Sharia-compliant financial services. The Islamic finance sector is growing up to 25%[1] each year, and this shows the demand is there for Sharia-compliant finance and banking.

Islamic Finance Principles

What are the main Islamic finance principles that impact on businesses? Islamic finance includes certain prohibitions, rules, and restrictions:

• Gambling (maisir): any form of gambling or speculation is prohibited.
• Contractual ambiguity (gharar): contracts with too many uncertainties or risks are considered gharar.
• Payment and receipt of interest (riba) is not permissible.
• Endowment (Waqf): this refers to a philanthropic actions where the benefit serves specific beneficiaries.
• Interest free loan (qard) where there is no interest payable by the borrower on the loan.
• Insurance (takafuI) refers to a common pool or fund where monies are redistributed to members as and when the need arises.

Combined with the principle of charity (zakah) these Islamic finance principles are centred on inclusion and social solidarity. Promoting socio-economic inclusion, benevolence, and growth via the redistribution of wealth is one of the central concepts of any Islamic finance system.

Islamic Financing Arrangements

Examining the Islamic finance principles above, it is easy to wonder how financial institutions that offer finance based on Islamic Sharia principles actually make money. The answer is that the different types of financial vehicles enable financiers to make money through various financing arrangements. These arrangements facilitate profit sharing and risk management [2].The most common Islamic Financing arrangements include:

• Murabaha: this refers to an arrangement based on profit and loss sharing where both financier and businesses share in the profits and losses. This principle is applied in mortgage transactions where the bank would typically buy the property and resell it to the customer for a price that includes a profit margin.
• Musharakah: this is a joint venture arrangement where both parties contribute capital and agree on the share of profits.
• Ijarah relates to leasehold arrangements whereby the lessor leases the property to a lessee in return for rental payments.

Financial organisations that offer risk-sharing financial solutions, and interest-free banking help to achieve financial inclusion. As you can see from the principles mentioned above, the structure of the arrangement means the bank can make their money by charging rent, sharing profits, or agreeing on a price above market value.

What is Financial Inclusion?

Financial inclusion is defined by The World Bank as a concept that ensures that people and businesses ‘have access to useful and affordable financial products and services’.

When it comes to Islamic finance, one of the key principles that facilitates financial inclusion is ensuring that there is access to savings and credit that is compliant with Sharia law. Research has found that in Muslim-majority countries up to 13% of people do not use conventional banks due to religious reasons [3]. The figures relating to financial inclusion in non-Muslim countries are likely to be much higher.

The United Nations and G-20 have both stated that financial inclusion is high on the agenda if globally we are to achieve sustainable development goals. Financial inclusion, therefore, goes beyond finances and relates to social and economic inclusion.

Why Is Financial Inclusion Important?

Financial inclusion is imperative because access to financial services is a driver of development, growth and opportunity. For Muslims, conventional financial services that are not compliant with Sharia law can result in a period of self-exclusion [4]. What Islamic finance facilitates and promotes is the inclusion of those who have been excluded on the grounds of religion. There cannot be equality of opportunity, access and sustainability without financial inclusion.

Financial services that are affected by self-exclusion:

• Lending and financing
• Insurance
• Savings
• Credit history

Evidence from countries such as Malaysia and Saudi Arabia has shown that Islamic finance not only improves outcomes for businesses but also helps the economy and presents opportunities for investors. Financial inclusion is an enabler of growth that is inclusive, compliant, and sustainable.

How does Islamic Finance Promote Financial Inclusion?

A system of well-designed financial services based on Islamic principles will not only enable Muslims to build financial resilience but ensure that they become active economic participants in the countries they live in.

Digital finance and mobile technologies mean Islamic finance is more widely accessible. The World Bank survey (2017) found that Muslims can often exclude themselves from using the formal financial institutions in place due to religious reasons [5].

Islamic finance is against the concept of asymmetric risk where one party has to lose if another gains. Instead, Islamic finance promotes risk-sharing that is not rooted in interest rates and speculative deals [6]. Certainly, in terms of micro-finance, Islamic finance is an emerging and fast-growing niche that aims to redress the current global imbalance when it comes to micro-finance and enabling marginalised groups to access financing options that work for them.

Islamic finance promotes financial inclusion, and by default creates significant financial migration. It provides an avenue for people with religious boundaries and principles to access financial services that were previously inaccessible to them. Islamic finance is not only about financial inclusion for businesses and individuals, it also attracts Islamic investors. This results in positive impacts at a local, community and global level.

Islamic finance is one of the fastest-growing industries in the finance sector. Governments and organisations including the World Bank and United Nations have all recognised that financial inclusion is imperative if global economic and sustainability goals are to be met. Also, if governments (particularly in the West) want political participation and empowerment for Muslims then financial inclusion is key to achieving that inclusion.

It is also important to remember that Shariah-compliant services are based on principles of equality and social justice. Therefore, financial inclusion and Islamic finance really do have the same end goal in mind – social equity.

References

1. https://corporatefinanceinstitute.com/resources/knowledge/finance/islamic-finance/
2. https://www.theguardian.com/money/2013/oct/29/islamic-finance-sharia-compliant-money-interest
3. https://www.brookings.edu/blog/future-development/2017/06/08/can-islamic-finance-boost-financial-inc...
4. https://www.emerald.com/insight/content/doi/10.1108/IJIF-07-2018-0074/full/html
5. https://globalfindex.worldbank.org/sites/globalfindex/files/2018-04/2017%20Findex%20full%20report_0....
6. https://developingeconomics.org/2019/04/05/islamic-finance-and-financial-inclusion-who-includes-whom...

WHAT IS ZAKAT?

Zakat is one of the five pillars of Islam. It is an obligatory act of worship and is also a mandatory form of charity for Muslims. It has always been seen as a means by which people can achieve social impact through the redistribution of their wealth. The five pillars of Islam are the absolute fundamentals of Islam and include the following:

• Faith (shahada)
• Prayer
• Zakat
• Fasting
• Hajj

Every Muslim is expected to fulfil these five pillars of Islam which serve as the very fundamental acts of worship prescribed by the Islamic faith.

Paying zakat, sometimes referred to as almsgiving, is an obligation for every Muslim who is able to and serves to bring economic equality, fairness, and to rebalance societal injustice.

The Obligations Of Zakat

Muslims who have the financial means and capability are required to pay zakat. They must donate 2.5% of their wealth (see our zakat calculator to work out how much you need to pay). The 2.5% is calculated on money and assets.

The aim of zakat funds is to ensure that they are used to provide the basic necessities for families and communities in need. These needs can include the provision of food, shelter, clothing, education and healthcare.

One of the most important elements of zakat is that payment of it is seen as a means of purifying your wealth whilst demonstrating empathy and compassion for others. In fact, the word zakat actually means 'cleansing' or 'purifying'.

The whole concept is based on the idea that once an individual donates a percentage of their wealth to charitable causes, they fulfil their moral obligation to serve others and build stronger communities and economies. Zakat is particularly important in times of crisis, as it can be used to alleviate hardship via the distribution of wealth.

Zakat is not the same as sadaqa which is encouraged but not obligatory. Zakat is an annual payment that is worked out in a specific way and spent in a specific way.

The Exemptions From Zakat

There are some important exemptions to be aware of when it comes to zakat.

Firstly, there are exemptions for those people who do not have to pay zakat and these include:

• children
• the mentally ill
• the infirm and elderly
• slaves
• Non-Muslims
• the very poor

WHO CAN RECEIVE ZAKAT?

Islamic finance principles set out clearly who can receive zakat. Those eligible to receive zakat include the following:

• Poor people
• The needy
• Debtors who cannot repay their debts
• Orphans
• Widows
• The stranded and destitute
• Travellers
• Slaves or captives
• New Muslims
• Those fighting a just cause

It is very important that when you pay zakat the recipients meet the eligibility criteria set out in Sharia law. Always make the intention of helping those who are in need and adhering to the principles of Islamic finance.

WHAT ROLE DOES SOCIAL JUSTICE PLAY IN ISLAM?

Social justice is one of the fundamental principles of Islam and Islamic finance. The Islamic framework is centred on social justice in all aspects from individual behaviour, to financial transactions, to how we behave in relationships with others.The teachings of Islam place great significance on ethical and moral behaviour. Islam promotes social justice by emphasizing the importance of the following concepts:

• Anti-discrimination: all humans are seen as equal in Islam and discrimination in any form is prohibited. In fact, the Prophet Mohammad's final sermon reiterated how important it was to treat everyone equally and fairly.
• Economic equity: Islam promotes economic justice by ensuring there are frameworks in place for wealth distribution. Zakat plays a key role in the distribution of wealth. Furthermore, the prohibition on interest further prevents exploitation and inequality.
• Charity: as already mentioned the concept of charitable giving is an essential element of Islam. Charitable giving takes place via zakat and sadaqa (amongst other forms of donation). Muslims are encouraged to consistently donate to the poor.
• Gender equality: as mentioned above, Islam believes that men and women are equal and it actively promotes gender rights (particularly those of women) and equality. The Quran consistently mentions treating people with respect and fairness.
• Legal justice: Sharia rules set out the legal framework within which Muslims operate and these rules focus on justice, fairness, and equity. The legal judicial system in Islam operates to ensure that justice and fairness are implemented.
• Ethical behaviour.

The Potential Of Zakat

The actual potential of zakat is large, and estimated to be valued in the region of $200 billion - $1 trillion (this is according to research from the Institute of Development Studies and the World Bank). It is difficult to estimate the exact amount paid each year, but it is clear that Muslims who pay zakat on an annual basis are some of the biggest and most consistent charity givers in countries across the world.

Whilst the Western world is still learning about the impact and potential of zakat, Muslim economies have harnessed the potential of zakat for many decades by establishing leadership institutions to manage and distribute zakat. In addition, Muslim countries have had discussion and debate with scholars relating to zakat and how best to use it, incorporating it into fiscal policy.

HOW DOES ZAKAT HAVE A SOCIAL IMPACT?

• Empowers individuals and communities
• Alleviates poverty
• Optimisation of social good
• Social cohesion building
• Wealth distribution
• Funding charitable projects (such as climate and environment change programmes, education, and healthcare initiatives and practices)
• Economic development
• Promote social justice

An underlying philosophy of Islamic finance and Zakat is the concept of mobilising finance for the greater good. Islamic finance embodies socially responsible actions whether from companies or individuals.

Zakat And Sustainable Development Goals

As zakat is applicable to all Muslims across the globe, it is one of the largest and most successful forms of philanthropy. It acts as one of the largest methods of wealth transfer from the rich to the poor that takes place consistently and with clear guidelines.

Inspired by the Islamic faith, zakat is taking on relevance in countries throughout the world including the UK, United States, Australia and beyond.

Alleviating poverty, inequality, and hunger are not only central tenets of Islam and Islamic finance, but they are also part of the UN's sustainable development goals. According to the Quran there are 8 categories eligible for zakat (see above) and these all align strongly with sustainable development goals.

Some countries such as Indonesia have started collaborating with zakat donors to achieve partnership working towards sustainable development goals. This is a win-win for Muslims as Islam and Sharia rules relating to financial transactions state that every person should seek to work collaboratively and fairly for the good of society.

Conclusion

The power of zakat to harness social impact through charity is undeniable. When you clearly understand what zakat is and its function in society it becomes clear that zakat has the power and potential to alter lives and bring equity.

Nothing good can be said about a global pandemic and to even look for a silver lining can at times just feel wrong. However, as humans we are programmed to look towards the future and to make the best of changing situations in our lives and in the world around us.

While the shift towards remote work is perhaps the most notable and obvious lasting social change brought on by COVID-19 the data clearly shows that there was also an equally seismic change in people’s spending habits over the past two years. For millions of people the forced reduction in travel, meals out and just about everything else we consider to be fun in life has lead to a substantial increase in their bank balance and household savings.

Research by the Institute for Fiscal studies shows that the household savings rate peaked at 23% during 2020.

Put simply, for every pound that people had leftover after bills, rent and other essentials, households have on average been saving almost a quarter of it. This has been an unexpected yet very pleasant surprise for anyone looking to buy a house, put money aside for their child’s future or even just to take a long overdue holiday in 2022.

What is perhaps even more surprising is that people haven’t been showing any signs of ‘blowing it’ now that pandemic restrictions are easing up and workplaces, entertainment venues and restaurants are opening their doors to the public.

There is a clear trend it seems to not let this once in a lifetime financial windfall go to waste, yet for many people who have for years struggled to save anything at all there is also uncertainty about what to do with their newfound ‘nest egg’ and how to best use it to help them achieve their financial goals.

3 Ways To Make The Most Of Your Pandemic Savings

1) PUT YOUR MONEY TO WORK

Having money stashed away under your mattress or in a savings account is nice and can give you peace of mind about your financial security, but it doesn’t actually help you to build a better, brighter future for you and your loved ones. The average savings account with a high street bank typically pays you an interest rate of less than 1% per year. That means for every £1 you hand over and let them use for loans to other customers, you earn 1 single penny each year. This is not great, especially when you stop and think about how much banks earn on those loans they make with your savings, as the interest rates they charge for overdrafts, credit cards and personal loans can often be as high as 10% or even 25% APR.

In the past it was simply not possible to do anything else than keep your money at the bank, but the rapid growth of new innovative FinTech platforms means that halal investing options are now more accessible than ever. Our investors have earned over £285,000 through their investments on our platform, through lending their money directly to verified, high growth UK businesses that are aligned with their ethics and values. By cutting out the middleman - your bank - and letting our smart technology do the hard work for you, it is truly possible not just to enjoy the security of the money you’ve saved up during the pandemic, but to actually make it work for you!

The compounding nature of rates mean your modest savings can turn into something that you can truly use to build a brighter future for you and your family.

2) HELP PEOPLE AND SOCIETY

Having money is good, having more money is even better, but the hardships endured by all during the recent pandemic have truly brought life to the phrase - ‘money can’t buy you happiness’.

The pandemic brought out the best in our society, as people worked together both on the frontline in hospital A&E departments, as well as on the ‘home front’, delivering food to elderly neighbours who could not leave their homes for months on end. This is another trend that looks set to continue, as people seek out different ways to make the world a better place one day at a time. Investing is no exception, as when you make values based, ethical investment choices you can not only grow your own future, but help others to build theirs at the same time.

Unlike your savings deposited in a low-yield high street bank’s vault, on platforms like Qardus you can choose where your money goes, who you invest in and for what purpose. We only allow verified, robust businesses to obtain funding on our platform, to mitigate the risk of your investments, and to increase the potential returns on your money. However, unlike other p2p lending platforms we actually allow you to choose which specific businesses you want to fund and invest in, so that you can be sure your money is being invested according to your beliefs and values.

Each investment opportunity on our platform provides you with not only the financial details about the business you are funding, but also their story so you can get to know the people behind the business and make investment choices that make the world a better place £1 at a time.

3) PROTECT YOUR FAMILY AND YOUR FUTURE

If the events of the past 24 months have taught us anything it is that we all need to do a better job of planning for the unexpected and ensure we have the financial resilience to live happily during the good times and the bad.

In fact over 8 million people have no savings at all to rely on in the event of illness, job loss or anything else life might throw at them.

While investing can seem risky and may not be something you have done before it doesn’t have to be. We have created the technology, investment screening processes and legal contractual structures to allow you to invest with confidence in a diverse portfolio of ethnical opportunities with high returns. By investing regularly and diversifying your investments you can grow your ‘rainy day savings’ into a solid financial future for you and your family.