Unsecured Business Loans - Your Alternative Options
If you're a business owner unsure about what's your best option for an unsecured business loan, you're not alone in being uncertain. On the face of it, there's an overwhelming choice of business loan providers, along with many different types of loan. How do you know what's right for you?The last thing you want is to sign up to a finance agreement only to discover:
- It costs you more than you expected.
- It's not as flexible as you hoped.
- You can't repay early without paying penalties.
To avoid problems like these, it pays to plan ahead and to assess your options carefully.Here are some alternative forms of business finance, not all of which are unsecured loans.
The traditional business loan from your bank
Years ago bank managers were open to taking a risk on lending money to business owners. But as layers of regulation have been added over the last few years, the historic banks have become more cautious about who they will support by providing finance. Even opening a business bank account is much more difficult than it used to be.
While regulation provides important protections to both finance providers and borrowers, the historic banks often add to this bureaucracy with their own internal processes and requirements. While these loans are usually unsecured, the bank wants some form of personal guarantee from the directors.
That said, every year businesses raise working capital by borrowing millions of pounds from the long-established banks, usually through fixed-term loans.
Borrowing from your friends and family
For many business owners, particularly those launching a new business, friends and family are the initial source of finance. This has its advantages, including:
- Often at a lower cost than a commercial rate of interest.
- Repayment options can be more flexible.
- Any interest or fees are kept inside your friends and family community.
While this approach offers a host of benefits, there are also potential risks to this informal approach to business finance. The lender could suddenly need some or all of their money back to cover an unanticipated need, or the business may not be able to meet the agreed repayments.
Personal relationships between friends and family can be put under pressure through these arrangements, if they are not managed well or if the business fails to perform as expected.
Asset finance
You could fund the purchase of a specific business asset - such as a building or a vehicle - using asset finance. This is a loan that's linked specifically to that asset and is usually secured against it. Should you fail to make the agreed repayments, the lender has legal rights to recover some of their money by taking control of the asset.
Secured loans, such as these, often take a little longer to set up because the process needs to include valuation of the asset and preparation of additional documentation. Your business can also use asset finance to release capital from an asset it already owns. Many finance providers are willing to advance cash against the value of an asset, even when it's been in use for a while.
The funding is repaid from future income that asset helps the business to generate.
Invoice finance or merchant cash advances
Both invoice finance and merchant cash advances are methods of boosting your working capital based on the value of your sales. Rather than receiving a lump sum of cash, as you do with a loan or similar form of finance, you get a rolling injection of smaller amounts of cash, in line with your sales. As turnover grows, the value of these injections can grow.
Invoice finance is suitable for businesses that sell on credit. When you raise an invoice that's due in, say, 30 days, the invoice finance provider pays you a high percentage of the value of the invoice. You benefit by effectively being paid a few weeks in advance - which improves your cashflow.
A merchant cash advance is more appropriate where you sell a considerable amount through credit and debit cards. You can get an advance based on the level of card sales you've enjoyed in the past.
Both these forms of finance help to improve your cashflow, but they're not designed to raise the large amount of capital you may need to invest in a new business growth project.
Investment finance
Whether it's through an angel investor, or venture capitalists, or some other arrangement, investment finance is where someone puts money into your business in return for a share of ownership. This means it's not a business loan, but typically a longer-term commitment with the intention of helping you to grow the business.
The finance may come with additional support, such as business advice and mentoring from someone with greater experience.
The investor typically expects to get their money back, and more, when the business has grown in value and their share is worth more. This may occur when you sell the business, which allows all the investors to capitalise on the money they put in.
The benefit of investment finance is that there are often no regular repayments to budget for, and the cash could come with additional support. The downsides include the dilution of ownership, and the possibility that the investor wants some element of control over how the business is operated.
Crowdfunding
The digital revolution has made it much easier for businesses to raise finance from the wider community, through crowdfunding hubs. These hubs allow people to invest often a relatively small amount of capital into a project. These amounts are aggregated together, giving the business a sizeable fund it can invest in growth.
Crowdfunding comes in various forms. It's popular with startups, particularly those who can establish a connection with a community of people interested in seeing particular ideas turned into viable products, such as video games or new technologies. Peer-to-peer funding networks also work on crowdfunding principles, but are generally more structured and offer more protection to those putting their money in.
Unsecured business finance from Qardus
If you're a business owner, if that business is profitable and if you're serious about growing it, we want to hear from you.
We've supported a wide range of businesses through our unsecured finance product. It's a community-based alternative to an unsecured business loan, and it's rooted in an ethical approach to commercial finance.
If you're considering taking out a business loan and you're open to exploring something that gives you all the same benefits and flexibility, and is also competitively priced, please get in touch with us today.
Explore more news
In recent years Islamic Finance has firmly established itself as one of the most vibrant and yet often overlooked sectors within FinTech, as well as within the global financial services industry more broadly.
However, Islamic Finance is in fact a very broad term that encompasses a wide range of products, services and types of firms. What is true across this diverse segment of global financial services is that there is a lot of excitement for good reason. This is not at all surprising given the wave of innovation, growth and success of both the leading firms and the sector as a whole over recent years.Whether you are new to the world of Islamic Finance or a professional, our Insider’s Guide to Islamic Finance provides expert insights and latest data analysis on the sector - highlighting just how successful Islamic finance has become at a global level.
WHAT IS ISLAMIC FINANCE?
Islamic finance refers to financial services activities, most notably banking, insurance and financing (credit), that must adhere to Sharia law (Islamic Law). The term can also be used to refer to Sharia-compliant investments as well as broader capital and equity markets.
The common practices of Islamic finance and banking arose alongside the establishment of Islam. However, institutional Islamic finance did not emerge until the twentieth century. Currently, the Islamic finance sector is growing at a rate of 15% to 25% per year, with Islamic financial institutions managing assets worth over 2.7 trillion USD globally.
SIZE AND GROWTH OF ISLAMIC FINANCE
The global market for Islamic Finance continued positive momentum in 2020, recording a growth rate of 10.7% year-on-year, driven primarily by strong performance within Islamic Banking as well as the Equity and Capital markets:
- Islamic Banking: 4.3% year on year growth with a growth in total assets of 248 billion USD, particularly in the largest Islamic markets such as Saudi Arabia and Iran.
- Capital Markets: 26.9% year on year growth
- Islamic Insurance (Takaful): 10% annual growth rate and over 51 billion USD in total assets in 2019 prior to the global financial slowdown caused by COVID-19.
While the size and growth of the Islamic finance sector is heavily concentrated in those countries and regions where Islam is predominant, this is rapidly changing in recent years, due to an increase in global migration patterns as well as broader trends in society around ethical investments and sustainable development.
Currently the top 3 countries where Islamic Finance is most well established account for 66% of the global market size across a wide range of metrics:
- Saudi Arabia
- Iran
- Malaysia
However, the Islamic Finance sector is growing rapidly in terms of overall scale, diversity and reach around the globe and into new periphery markets. In 2020 there were over 1,526 islamic finance institutions in operation around the world, with over 46 countries now supporting the growth and development of Islamic Finance within their legal and regulatory frameworks.
This is particularly true within FinTech, where firms and growth has gravitated towards London, the global hub of innovation in financial services, despite the relatively small Islamic community in the United Kingdom.
THE FOUR MAIN AREAS OF ISLAMIC FINANCE
Our guide breaks the data and the sector down into four key areas that are currently driving innovation and global success:
- Islamic Banking
- Islamic Capital Markets (ICM)
- Islamic Insurance (Takaful)
- Islamic Fintech
This page provides an overview of each, including the latest data trends and key highlights, which are expanded on further in each of the individual sections to provide detailed analysis and insight on each area of Islamic Financial Services.
Section 1- Islamic Banking
In 2020 the total size of the Islamic Banking sector had a growth rate of 4.3% year on year and reached over 2.7 trillion USD in total assets. While Islamic banking is still largely regional in terms of market share and overall size, it now accounts for over 6% of the global banking market. Islamic Banking is also both the oldest and most important sub-sector within the global Islamic Financial Services industry, comprising 68.2% of the total market.
SIZE AND GROWTH
In the worldwide IFSI, the Islamic banking category maintained its dominance. Among the 36 jurisdictions included by the IFSI Stability Report 2021, the domestic market share of Islamic banking in relation to the total banking market segment has increased in at least 23 nations.
The performance of the Islamic banking category increased by 4.3 percent in 2020, compared to 12.4 percent in 2019. The Islamic banking segment now accounts for 68.2 percent of the global Islamic Financial Services Industry, down from 72.4 percent in 2019. This decrease is primarily due to the rising significance and strong performance within the Islamic Capital Markets during recent years, rather than indicating a drop in the performance within Islamic Banking.
Islamic Banking is still largely concentrated within geographic regions and markets, where it is the market leader within financial services. Taken together the 15 systemically important Islamic banking jurisdictions accounted for 92.4 percent of global Islamic banking assets, representing only a small increase from 91.4 percent in the previous year. These combined markets also now account for 82.7 percent of the total global assets linked to Sukūk that are currently outstanding, which indicates the availability of high-quality liquid assets (see SECTION 2 for more on Islamic Capital Markets).
DIVERSITY WITHIN ISLAMIC BANKING
As of 2020 there are now 526 Islamic Banking Institutions operating across 72 countries, with a systemically important market share in 15 of these jurisdictions. Within the Islamic Banking sector there is both innovation and diversity in terms of their operations and structures.Breakdown of Islamic banking institutions:
- 428 commercial
- 57 investment
- 22 wholesale
- 19 specialized
Regionally, GCC (the Gulf Cooperation Council countries) retained its position as the largest domicile for Islamic finance assets in 2020. The region accounted for 48.9% of global Islamic finance market share, increasing from 45.9% in 2019. The Middle East and South Asia (MESA) region constituted the second-largest share, accounting for 24.9% of global IFSI assets, remaining consistent with the previous year.
The South-East Asia (SEA) region's share shrank slightly to 20.3% in 2020 from 23.8% in 2019, while that of the Africa region remained small, with a share of 1.7%. The “Others” region, comprising Turkey, the UK and countries from the Commonwealth of Independent States (CIS) region, accounted for 4.3% of total global IFSI assets.
Section 2 - Islamic Capital Markets (Icm)
SUKUK
Growth Rate: 26.9%
Share of IFSI: 30.9%
3,420 - Number of Sukuk issuances Outstanding (2019)
538 Billion USD - Total Value of Sukuk Outstanding (2019)
The sukuk market grew 30% in issuance value in 2019, increasing from 124.8 billion USD in 2018 to 162.1 billion USD. This is the 5th straight year where the sukuk sector has achieved double-digit growth in the sukuk industry, a leader within the overall strong performance in recent years across the Islamic Financial Services Industry.
Notably, although the volume of ṣukūk issuances dropped in 2020, ṣukūk issuances denominated in foreign currencies increased by 7% due to favourable liquidity and global market conditions created by a range of policy actions taken by central banks in Islamic majority markets in response to the COVID-19 pandemic and resulting economic slowdown.
The yield buckets for outstanding ṣukūk have shifted higher, with almost 80% yielding 3–10%
As with other sectors of Islamic Finance, Sukuk market share is both concentrated and significant within several key countries, where it is the debt instrument of choice for governments and has been relied upon to finance budget deficits during the COVID-19 pandemic.
Key Sukuk Markets:
- Malaysia
- Indonesia
- Saudi Arabia
- Iran is the Fastest Growing Market for Sukuk within Islamic Finance
ISLAMIC FUNDS
Number of Funds: 140
Share of ISFI: 30.9% of total assets
Annual Growth Rate: 30% (2019)
In 2020 the ICM sector made up 30.9% of the total assets within the global Islamic Finance Industry, with growth and positive performance in key markets driven by sovereign and multilateral Sukuk issuances.
Islamic funds also recorded a noteworthy growth of 31.9% in terms of the total value of assets under management, while the Islamic equity markets also rebounded in the later part of 2020 after the initial shock and volatility in 1Q20 due to the outbreak of COVID-19 pandemic.
The total assets under management (AuM) of Islamic funds grew by 31.9% in 2020 despite the pandemic . While total AuM grew significantly, the total number of funds increased at a slower rate, which is a positive indication of growth in the average size of funds. The increase in scale of funds may be an indication of the flow of funds into emerging markets' fixed-income funds as a result of the search for yield and increased global liquidity.
Contrasting with the previous year, about 47% of funds now hold AuM of 1 billion USD or more each, while only 1% of funds hold AuM of less than 10 million USD (2019: only 2% held AuM of more than 1 billion USD each).
Section 3 - Islamic Insurance (Takaful)
Growth Rate: -14.8 %
Share of ISFI: 0.9% (2019)
The share of global takaful industry in the global IFSI declined marginally to 0.9% with a -14.8% growth y-to the exchange rate used for some member jurisdictions.
Section 4 - Islamic Fintech
Islamic FinTechs: 241 active in 2020
Transaction Volumes: 49 billion USD
Market share: 0.7% of total FinTech Transaction Volumes
SIZE AND GROWTH
Islamic Fintech is relatively small and recent but has shown strong initial signs of high growth and levels of innovation on a par, or superior to the wider FinTech sector even in the most competitive markets, such as London.
In 2020 the total transaction volume for Islamic Fintechs reached 49 billion USD, which is around 0.7% of the total global FinTech transaction volume.
While this represents an initial period of rapid growth, overall Islamic FinTech remains a relatively small part of the global Islamic Financial Services Industry. However, it is misleading to quantify the results as ‘poor performance’ in comparison to the strong growth within the mature sectors of Islamic Banking and Islamic Capital Markets. Instead, the demonstrated levels of innovation and competitiveness of Islamic FinTech also represents a huge opportunity for future growth.
At present the sector has yet to be fully developed across many regions and also many areas within the diverse FinTech landscape of innovation. Collectively, firms in the top 5 markets for Islamic FinTech account for 75% of the total market size, indicating a high concentration of market activity and room for future growth.
Top 5 Markets for Islamic FinTech:
- Saudi Arabia
- UAE
- Malaysia
- Turkey
- Kuwait
PERFORMANCE AND INVESTMENTS
The performance of Islamic Fintechs is particularly impressive, with projected transaction volumes set to reach over 128 billion USD in total by 2025. This represents a 21% CAGR, compared to the projected CAGR of 15% for the non-Islamic FinTech sector over the same period.
Investors have recognized this strong performance during recent years, with 56% of Islamic Fintechs expecting to complete an equity funding round in 2021. The expected average deal size for these investments was 5 million USD, providing a further indication that investors have high expectations for the performance of Islamic FinTech in the coming years.
Sources Used In This Report
- IFSB - the Islamic Financial Services Industry (IFSI) Stability Report 2021 [https://www.ifsb.org/download.php?id=6106&lang=English&pg=/index.php]
- DinarStandard & Ellipses - The Global Islamic Fintech Report 2021 [https://www.salaamgateway.com/specialcoverage/islamic-fintech-2021]
- ICD-REFINITIV - Islamic Finance Development Report 2020 [https://icd-ps.org/uploads/files/ICD-Refinitiv%20IFDI%20Report%2020201607502893_2100.pdf]
The purpose of Debt Consolidation is to reduce your debt and reshuffle it to make it more affordable to pay off.
Debt Consolidation works by combining multiple debts into one manageable pot. For example, if you have numerous debts that have a combined total of £10,000, you can get a single £10,000 loan to pay off those debts. You then would repay the £10,000 loan in one single monthly repayment.
Debt Consolidation can also reduce the interest you need to pay by having all your debt in one pot, at a lower interest rate.
Overdraft loans can take different forms, such as cash advances, business debt, and credit card debt. Keeping track of various debts and the interest required to be paid on them can be exhausting and time-consuming.
You may have various debts from different providers, but these debts are first paid in full before monthly repayments are made to a single provider. This way you are only accountable to one provider, keeping things simpler and straightforward.
For example, Sarah has a credit card with Santander, an overdraft with Barclays, and an asset finance loan she’s taken against a product. Consolidating these debts into a single loan allows Sarah to gradually chip away at her debts to one single provider.
Another example would be Ahmed, who takes out two business loans with the same provider. He now wants a third to invest further into his business. Just like Sarah, Ahmed can consolidate the loans he has already taken into one, straightforward loan from a single provider.
WHAT ELSE CAN DEBT CONSOLIDATION BE USED FOR?
Examples of different types of debt a consolidated loan can be used to combine:
- Credit card debt (consolidated loans help reduce the impact of the high APR - annual percentage rate - charges most credit cards have).
- Personal loan debt (these are often used to fund a car purchase, a holiday, or home improvements).
- Overdraft (most banks charge high-interest rates on overdrafts which can lead to substantial debts that can be financially crippling).
- A Store Card (like credit cards, store cards often have high APRs and fees, despite initially offering front-end discounts).
- Payday Loans (loans which can be paid directly into your bank account but have high-interest rates attached that can make repayment difficult).
- Bailiff debt (such as unpaid Council Tax bills, parking fines, court fines and county court, high court or family court judgments).
How Debt Consolidation Works
First, you’ll need to establish the total sum of your existing debts.
You can then take out a loan which will cover the total cost of the outstanding debt. When you’re looking for a new provider for a debt-consolidating loan, you will want to find a loan that works with your budget.
The idea is to create straightforwardness, simplicity, and manageability by consolidating your debts. So when choosing a new loan provider you’ll want to pick a loan repayment plan which is manageable within a reasonable time frame you know you can pay the loan back in.
Like any other loan, a debt consolidation loan is available in two forms:
AN UNSECURED LOAN
This is a personal loan that does not require an asset, such as your home, to act as security for the loan.
A SECURED LOAN
This is a loan in which you attach an asset, like your home or a car, as security. In the instance where you are unable to repay the agreed-upon loan, the loan provider can repossess the asset put forward by you as a security, where they can then sell it and recoup the loan by another means.
The Pros And Cons Of Debt Consolidation
BOOSTING YOUR CREDIT SCORE
Keeping to a single monthly repayment consistently will improve your credit score, giving you greater financial flexibility into the future. Alternatively, your credit score may be at risk if you cannot meet the monthly repayments.
LOWER OVERALL INTEREST RATES
Debt consolidation loans often have lower APRs than alternatives like payday loans, or credit cards.
EASIER DEBT TRACKING
Managing one repayment a month is much easier than several at a time.
YOUR ASSETS MAY BE AT RISK
If you choose a secured loan any asset you use as security for that loan will be at risk. This could be your home, car, or any asset the loan provider can reasonably be expected to sell should you be unable to meet the monthly loan repayments.
Ways To Consolidate Debt
O% INTEREST, BALANCE-TRANSFER CREDIT CARD
Balance-transfer credit cards are designed to let you move existing debt from one credit card - or several - to another card from a different provider. The purpose of this is to pay less interest on the transferred money. By doing this you will be able to clear your debt faster, because all of your repayments will be going towards paying off your debt, instead of being used to cover the interest.
When you receive a balance-transfer credit card you pay off the balance on your existing credit card using the new credit card. You then make repayments on your new balance transfer card to pay off the debt.
By using a 0% balance transfer card, you won’t be charged interest on the transferred balance for the duration of the interest-free period.
A DEBT CONSOLIDATION LOAN
A debt consolidation loan can help you gain greater control over your finances. Debt consolidation loans often offer terms between one and five years. In general, longer loan terms require you to borrow a more significant amount of money, so they may not be available if your consolidation loan is less than £10,000.
FEES AND CHARGES FOR DEBT CONSOLIDATION LOANS
It’s important to be aware of some of the high fees some companies charge for arranging a loan. You should read the small print carefully for any extra fees or charges before you sign anything. Check to see if there are any costs associated with paying off the existing loans early. This could cancel out any savings you make. Avoid paying a fee for a company to arrange the loan on your behalf, that is, unless you’re receiving advice and you’re sure it's worth the cost.
IF YOU CHOOSE A DEBT CONSOLIDATION LOAN
Get advice before you make a final decision. If you choose to go ahead with a consolidation loan, it may be worth talking with an independent financial adviser who might be able to find the most suitable product for your needs. Avoid just looking at the annual percentage rate (APR), or the annual percentage rate of charge (APRC) for secured loans. The APR is the interest you’ll be charged, and the APRC will include the extra costs such as an arrangement fee.
Qardus does not provide financial advice.
What is Riba in Islam? Riba refers to exploitative gains and unequal exchanges, this includes interest payments (made or received) that are strictly prohibited under Islamic finance rules. The concept of riba is seen a wholly unjust in Islam as it places a financial burden on the recipient of funds.
Riba is prohibited on the grounds that it goes against the Islamic principles of fairness, societal wellbeing, and justice.
WHY IS INTEREST (RIBA) FORBIDDEN IN ISLAM?
In any transaction involving riba, an imbalance is created between the borrower and the lender.
The lender receives a guaranteed profit which is the interest payment paid over and above the actual loan amount.The lender does not assume any of the risks in this transaction, and Islamic finance places emphasis on risk and profit sharing.
Interest is considered one of the major sins in Islam. That alone means that many Muslims will shun interest-based products and services.
WHAT DOES THE QURAN SAY ABOUT INTEREST?
The Quran has multiple verses that explicitly prohibit riba. These include the following:
- Quran 3:130 - this verse states 'O, you who believe, do not consume riba, doubled and multiplied, but fear Allah'.
- Quran 2:275: this verse states 'Allah has permitted trade and forbidden riba'.
WHY IS RIBA CONSIDERED SO HARMFUL?
The absolute prohibition on riba goes beyond the concept of exploitation and usury. It encompasses the concept of ensuring that social, economic, and ethical considerations are part of financial transactions.
Islam emphasises the greater societal good and social wellbeing. Management of funds and income should not be used in practices that cause harm to others. When a borrower is obliged to repay a loan with interest, this is seen as an unfair in Islam. Not only does the borrower have to pay back more than they borrowed, but they face the burden of an increased repayment and potentially a debt trap. Riba is also seen as enabling the concentration of wealth amongst the rich, whilst the poor get poorer.
Another important element of riba that is deemed to be harmful to society is that interest itself generates an income but that income is not linked to productivity of economic activity. Riba is a risk-free gain that does not benefit society.
In terms of moral and societal degradation, riba is fundamentally exploitative and undermines Islamic principles of fairness and compassion. Interest-based systems are dependent on the markets remaining stable, so having a riba free option leads to greater financial stability.
Whether you work in industry, or are planning a large project, there are Islamic finance services that are Sharia compliant that can meet your needs.
At the core of the ban on interest lies the Islamic teaching that wealth should be earned honestly and not through exploitation. If someone comes to you in need and asking for a loan, and you are able to lend them the money but charge interest, you are exploiting their need and benefiting financially.
In very simple terms, the ban on interest relates to promoting fairness and encouraging productive investments and activity. This will ultimately lead to a more compassionate and equal society.
WILL ALLAH FORGIVE RIBA?
For those who partake in riba, whether that is charging or paying interest, the question of whether Allah will forgive them is connected to the wider Islamic concept of tawbah (repentance).
Muslims view Allah as the most forgiving and the most merciful and repentance is encouraged.
However, any repentance must be sincere and when it comes to riba it means that the person must have sincere regret partaking in riba and must immediately stop. There is also an obligation not to return to riba at any stage of life and to try and rectify any harm caused.
HOW TO AVOID RIBA IN MODERN BANKING SYSTEMS AND ECONOMIES?
Whilst it can be challenging to completely avoid riba in the modern and Western banking system, there are interest-free alternatives available in the modern financial markets. The growth of Islamic finance means that more and more services and products are available for those wanting to comply with Sharia rules relating to financial transactions.
The Islamic finance infrastructure and architecture are continually in development and construction.
Products including halal mortgages, halal funding options, halal student loans, and halal index funds mean Muslims can partake in the banking systems without breaching Islamic rules. There are many alternatives to interest-based financial instruments.
WHAT ABOUT STUDENT LOANS, CREDIT CARDS, AND MORTGAGES?
All types of financial products are available on the financial markets these days. You should always undertake due diligence to assess the Sharia compliancy of financial products.
Halal and interest-free loans have revolutionised professional industries that focus on societal wellbeing and social responsibility.
There are even interest-free cryptocurrency and bitcoin options available within the United Kingdom and beyond.
ARE THERE ANY PERMISSIBLE FORMS OF INTEREST?
The short answer to this question is no. Riba is strictly prohibited in Islam. However, this does not mean that you cannot find alternative financial products that can provide you with the funding or returns you need.
Whilst there is no form of interest that is allowed, there are Sharia-compliant financial contracts that are sustainable alternatives. These include murabaha and musharaka contracts that enable risk and profit sharing.
HOW CAN I HANDLE UNAVOIDABLE INTEREST FROM SAVINGS ACCOUNTS?
For Muslims, it can be challenging to deal with unavoidable interest from savings accounts, particularly if you live in the West. However, if you have an account that, by design or structure, is based on interest then there are some actions you can take to make sure you adhere to Islamic rules about finance.
- Monitor your account
- Switch to an Islamic bank as soon as possible
- Check with your bank to make sure you are not receiving interest on savings and if you are then ask to waive the interest
- Search for interest-free accounts
- If you do accumulate interest then donate that interest to charity. Muslim scholars and experts have confirmed that you can donate the money received.
- When donating interest do not expect to receive any reward.
- Remember, whilst you can personally benefit from riba, it can be donated to those in need via a registered charity.
HOW CAN I NAVIGATE MODERN BANKING AS A MUSLIM?
Whether you are a student looking to finance your education, or a business hoping to fund new processes and equipment, it can be difficult to operate within interest based banking systems. Here are some key things you can be doing:
- Educate yourself on Islamic finance rules
- Seek out Islamic finance loans, experiences, and markets.
- Support Islamic finance initiatives
- Choose Islamic banks and companies who facilitate riba-free products
- Look for and ask for halal alternatives
- Consult with experts and scholars
- Make ethical investments and avoid any industry, job, product or sector that is rooted in haram activities.
- Encourage financial innovation, policy, and ideas
- Build networks with other Muslims
WHAT ARE THE SPIRITUAL CONSEQUENCES OF ENGAGING IN INTEREST-BASED TRANSACTIONS?
Every Muslim should understand that involving themselves in interest can have spiritual consequences. This can include a spiritual disconnection from the teachings of Islam and Allah's commands. It can also mean there is greater accountability and punishment on the day of judgement.
Not only is interest seen as a bad practice, spiritually it can lead to a loss of blessings and barakah in earnings and family life. There is a whole ethical decline associated with riba that can lead to a mindset that prioritises money and wealth over wellbeing. For Muslims, this is frowned upon.
For those engaging in riba, the spiritual consequences go beyond financial implications. They include a deep sense of moral and ethical responsibility, understanding and complying with Allah's commands, and the pursuit of divine approval.
HOW DO ISLAMIC BANKS OPERATE WITHOUT INTEREST?
Islamic banks operate without interest by adhering to Islamic finance rules relating to operation. Islamic finance products focus on profit and loss sharing and alternative contractual arrangements.
They are able to offer alternative halal products by offering joint venture arrangements, partnerships and Islamically compliant services. Islamic banks also partake in ijarah which is effectively a form of leasing.
Many people wonder how Islamic banks make money and the answer lies in understanding the different forms of products and services they offer.
For example, in a murabaha contract the bank could purchase a house and instead of charging interest on the sale, they sell it to the purchaser for the purchase price plus a mark up. The bank earns a profit via the mark up and not by charging interest.
WHAT ARE HALAL ALTERNATIVES TO COMMON FINANCIAL PRODUCTS?
There are many products and services on the market that offer great alternatives to conventional interest-based services. Here are some listed below:
- Cost-plus financing loans (murahaba)
- Partnerships or joint ventures (musharaka)
- Leasing (ijarah)
- Benevolent loans (qard hasanat)
- Safe custody accounts (wadiah)
- Islamic bonds (sukuk)
Stay informed on finance
