UK gets its first Islamic crowdfunder for business financing

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...

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

Your own money

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

Friends and family

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

Grants

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

Secured loan

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

Unsecured loans

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

Venture capital and angel investors

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

Crowdfunding and peer-to-peer finance

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

Finding the right way to fund your business

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

Small business funding with Qardus

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

WHAT IS A HALAL MORTGAGE?
A halal mortgage is a mortgage that complies with the Islamic Sharia rules relating to mortgages, money, and borrowing. The financing terms of halal mortgages must comply with the principles of Sharia law, and many Muslims in the United Kingdom are on the lookout for support for halal mortgage and home finance products and services when they are considering moving home.

The main difference when comparing the financing of halal mortgages and traditional mortgages is that halal mortgages do not involve the payment of any interest. The process of obtaining a halal mortgage has some slight differences when compared to obtaining a traditional mortgage but it is very similar.

Halal mortgages are alternatives to standard mortgages on the market and were created to enable Muslim customers to buy real estate using Sharia compliant finance products.

Islamic Finance Principles Relating To Halal Mortgages

Moving houses can be a stressful time. The stress can be compounded for Muslims who are looking for banks and building societies that offer halal mortgages.The four main Islamic finance principles that apply to Islamic mortgages are:

RIBA
Riba refers to usury or interest and is strictly prohibited for Muslims as dictated by Sharia law. Islamic mortgages do not have any interest payment elements. This means that Muslims can get on the housing market and purchase property without being in breach of Sharia law.

IJARA
Ijara is an Islamic financing structure whereby the bank or building society that are financing the property purchase will buy the property and lease it back to you for a fixed monthly cost that has been agreed between the parties.

MUSHARAKAH
Musharaka refers to joint partnerships where you can make a decision with the bank to own separate shares in the property. As more and more monthly payments are made, thus the share owned by the bank is reduced until the homeowner owns the property outright. Co-ownership agreements like these are not common in the UK and are more common in commercial transactions.

MURABAHA
Murabaha is when the bank buys the whole of the property and sells it back to you for a higher price. The higher price is repaid in instalments and means that the bank can recover its costs, and the homeowner does not have to pay interest on the mortgage loan.

The structures within ijara, musharak and murahaba arrangements mean that Muslims can structure their finance terms in Sharia compliant ways.

HOW DO HALAL MORTGAGES WORK?
When looking for a halal mortgage, the general rule is that you should approach those banks or institutions that can prove that they work in a Sharia compliant way, and that they have been advised by an Islamic sharia law authority. Islamic mortgages are regulated by the Financial Conduct Authority. This means there are protections for Muslims looking for support when searching for halal mortgages.

When looking for lenders in the United Kingdom that offer halal mortgages, it is always advisable for Muslims to undertake additional due diligence on the terms and payments being offered by the bank.

Buyers should then compare the terms and process offered with other Islamic finance lenders on the market.

ARE HALAL MORTGAGES EXPENSIVE?
For Muslims looking for halal mortgages to purchase property, they normally need to ensure that they have a large deposit ready. Lenders offering halal mortgages will usually have higher administration costs.

Additionally, in exchange for not having an interest payment element anyone who takes on a halal mortgage may need a deposit of up to 20%. You should also factor in the costs of a survey, insurance, fees, stamp duty, and legal fees.

Before deciding on a lender, it is good practice to check the Financial Conduct Authority website to check that the lender is registered with them and therefore regulated.

Risks Associated With Halal Mortgages

Ethically, halal mortgages are far superior to traditional mortgages. Both parties in a halal mortgage transaction are beneficiaries. The risks may not be the traditional risks associated with non-halal mortgages (for example, increases in interest rates every few years), but you are still likely to face penalty payments if you have a co-ownership agreement with the bank for the property. This means that if you fail to make payments on time then you could be fined or face repossession.

One thing to watch out for when you are looking for Islamic mortgages is the stamp duty costs. Normally, a buyer pays stamp duty when the purchase of a property (if the property is over the UK stamp duty thresholds). With halal mortgages, as the bank is buying the property and then you are buying from them, this equates to a double payment of stamp duty.

Of course, the stamp duty costs also depend on whether you are buying your property back from the bank, or whether you have a co-ownership agreement with them.You should discuss the stamp duty costs with the bank before taking on the mortgage.

You should also note that although the bank legally owns the property, you may need to insure the property and deal with the general maintenance and upkeep of the property. Always make sure to add any additional costs to your overall purchase plan.

The Process

The process relating to taking out a halal mortgage is actually very similar to that of a traditional mortgage.This is what normally happens:

• The buyer will choose a property
• The buyer will negotiate and agree on the price with the seller
• The Islamic mortgage provider/bank will buy the property
• The bank will sell the property back to you at a higher price
• As a buyer, you will repay the bank in a series of installments

With a traditional mortgage, you would then take a loan from a bank and begin paying the repayments. With an Islamic mortgage there is no interest payable. Instead, the bank will buy the property and sell it back to you for a higher price. This is a form of halal refinancing arrangement.

For example, if the property is valued at £100,000, the bank may sell it to you for £140,000. As a buyer, you can repay this sum over a period of time.You should note that there are usually administration fees associated with halal mortgages, as there are with traditional mortgages. However, the fees for Islamic mortgages are usually lower.

Benefits Of Halal Mortgages

The most obvious benefit is that halal mortgages are not susceptible to fluctuating interest rates. As there is no interest payment element, as a buyer you will not have a changing rate of repayment.

However, if you have a lease agreement with the bank you may find the repayment rate is subject to change. This is why is it is important for Muslims to assess the terms of the halal mortgage.

Ultimately, the risks associated with halal mortgages are minimised on account of the bank sharing the risk with the buyer. Once the bank has agreed to sell the property at a fixed price, this price cannot change irrespective of market conditions.

Mainstream

As the Islamic finance world continues to grow to meet the demand from Muslims across the globe, so too are the options for halal mortgages. Islamic finance has firmly entered the mainstream finance world.

In addition, as halal mortgages are seen as ethically sound many non-Muslim customers are also keen to take advantage of the terms offered by Sharia compliant banks.

Many UK banks and building societies are now offering halal mortgages including Al Rayan Bank and United Bank Limited.