Islamic Finance Guide to Investing Your Money Ethically

In this week’s Company Focus segment,JEVITHA MUTHUSAMY shines the spotlight on Qardus, a new Islamic fintech start-up aspiring to close the SME financing gap in the UK.

The beginning
It took the Qardus team 10 months to conceptualize, build, test and launch its Shariah compliant peer-to-peer financing platform on the 3rd July 2020. “I wanted a platform that offers fast and affordable Shariah compliant business financing to SMEs,” Hassan Daher, the founder and CEO, tells IFN. Qardus offers SMEs a chance at alternative financing as they believe many SMEs are not eligible for bank financing.

Market Insiders reported that the funding gap in the UK has grown to US$77 billion as of 2019. The largest hurdle the start-up faced was securing the right approvals. The firm is an appointed representative of Share In which is regulated by the UK’s Financial Conduct Authority while Qardus’s Shariah compliance is monitored and approved by Amanah Advisors.

“It is important for us to be Shariah compliant as there are over 950,000 SMEs in the UK that are financially excluded due to the lack of financial products that conform to their ethics and beliefs,” notes Hassan.
The presentQardus currently offers Shariah compliant working capital financing up to a maximum of GBP100,000 (US$125,640) and is targeting small businesses with GBP100,000 in revenues or assets.
“Due to the pandemic we are focusing on recession-proof industries. If you look at the small business on our site, it is essentially pharmacy and pharmaciesare doing really well right now, food manufacturing companies are also one of the sectors that are doing well,” explains Hassan.
While market opportunities are immense, Hassan acknowledges that it is a competitive segment especially with the emergence of new government initiatives in response to COVID-19 such as the Bounce Back Loan Scheme and the coronavirus business support loans.

The futureNevertheless, Qardus is working on distinguishing itself by being able to predict credit risk better than its competitors by using machine learning algorithms.
Over the next year, Qardus is looking to onboard around 150 SMEs with financing totaling an estimated GBP15 million (US$18.85 million) and within the nextfive years Qardus is looking to reach GBP500 million (US$630.19 million) in financing.

The platform is also looking to tap asset financing and possibly property financing. Aiming higher, Qardus is looking to provide its own technology solutions to existing lenders in the market and in turn, Qardus will do the sourcing, risk profiling and pricing of SMEs on their behalf.

Currently, Qardus is focused on making a mark in the UK and European markets but is also looking to expand to Southeast Asia and the Middle East in the future. As part of its expansion plan, the platform is also planning to become an Islamic challenger bank in the near future.

Capital at Risk. Returns are not guaranteed

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As the global pandemic fades away and the UK’s economy begins to open up and bounce back, there has never been a better time to take a few minutes and look over your own personal finances.

Money doesn’t grow on trees, but with a solid financial plan you can make your money work for you in 2022 and achieve your financial goals.

The 3 Keys To A Successful Financial Plan

The 3 keys to a successful financial plan

1) Saving vs Investing

The two main ways to grow your financial wealth are through savings and investing; however the returns on these two options are very different.

There are many forms of savings products, ranging from low yield instant access savings accounts (traditionally attached to a current account) to various forms of tax-free incentivized long-term savings products, known as ISAs. While the returns on these savings accounts range from 0.25% to 1.45% the underlying concept is the same. Savings accounts pay out interest on your money because they are using the money to make loans to individuals, businesses and other specialist products like mortgages. Crucially, your money is also protected by the FSCS deposit guarantee scheme, meaning that if the bank goes out of business your money is still safe.

In contrast, investments allow you to earn significantly higher returns because your money is not going via an intermediary - your bank - and you are able to make decisions about how your money is used yourself. For example, the average net returns for investments on Qardus is almost 11% per year. This would mean that you earn £11 for every £100 you invest, compared to £1 with a normal savings account.

2) Risk vs Returns

To best reach your financial goals, it is important to maximize the return on your money while also minimizing risk. Generally speaking, the higher the returns are on any form of savings or investment, the higher the risk. This is the reason the returns on a basic ‘instant access’ savings account are so low - typically between 0.25 and 0.5% - as there are almost no risks due to the FCSC deposit guarantee scheme.

In contrast, investments do not offer these same protections, whether investing on a platform like Qardus, in crypto assets or on the stock market. In each cash the average returns you can earn are significantly higher than with savings, because there is also a risk that the price of Bitcoin can crash overnight, that a company’s stock value may crash or that a business you have invested in via Qardus may be unable to repay it’s facility and you as an investor.

However, these risks are entirely manageable, simply by making sure you diversify your investments across a number of different businesses, so that the losses on any one investment are covered by the returns on your other successful investments. Thinking about these things is the basis of a solid financial plan and why it is so important if you want to increase your wealth during 2022.

3) Realistic and Regular
The final component of a successful financial plan is to have realistic expectations about your goals and the returns you want to achieve over several years. Unlike gambling, a financial plan is about building your wealth over a longer period of time, rather than hoping for an instant windfall. Generally speaking, if something sounds too good to be true it probably is!

Once you have set your financial goals you can build your financial plan to achieve the returns you want. Unlike ‘day trading’ on the stock market, investing on Qardus does not require constant monitoring and tracking of stock prices and the market in order to make solid financial decisions. We do most of the hard work for you by pre-screening businesses to make sure they are real, genuine investment opportunities with minimal levels of risk and great returns available. This means once you decide to invest in a business you can just sit back and let your money (as well as us!) do the work for you while you get on with your life.

However, in order to maximize your wealth and achieve your financial goals it is important that you continue to invest regularly in your portfolio on a monthly basis. Normally the best way to do this is to figure out how much you can afford to invest each month, after you’ve set aside money for your rent, bills and other expenses. This is very similar to what you may already do with your savings account, except the main difference is that when you invest regularly on Qardus, you are able to earn significantly more each month and achieve your financial goals much faster!

Halal mortgage products and services started appearing on the market to help devout Muslims borrow money. By their very nature, mortgages have historically always been interest bearing.

Islamically, interest (riba) is strictly prohibited. This means that many Muslims were unable to access funding that would enable them to step onto the property ladder.

For many people, purchasing a family home (or refinancing) is an important lifetime investment. However, Muslims in the past have struggled to find halal mortgages that would be in compliance with Sharia principles and rules relating to financial transactions.

Previously, many Muslims not wanting to pay interest on conventional mortgage products would opt to remain in rental properties.

WHAT IS A HALAL MORTGAGE?

A halal mortgage is essentially a home purchase plan. It is not really a mortgage loan in the traditional sense of what we know a mortgage to be.

Halal mortgages are considered to be compliant with Sharia principles because they do not have a loan that is based on interest payments or accrual.

By comparison, traditional mortgages have always included interest payments.

Halal mortgages are more of a long term plan that is offered by the bank to the borrower. This purchase plan contains repayment terms and conditions. However, the purchase plan does not contain any element of interest.

What the purchase plan effectively becomes is more of a sale and lease agreement.The aim of a halal mortgage is to ensure that any prospective homebuyer who wants to purchase a home and wants the terms of the agreement to comply with Sharia law is able to access funding.

Any lender or bank that offers halal mortgages will have taken guidance and advice from experts in Islamic finance and Sharia law. This ensures that the halal mortgage products they offer are fully halal and Sharia compliant.

Comparison Between A Halal Mortgage And A Conventional Mortgage

The main difference between a halal mortgage and a conventional mortgage product is the element of interest.

In Islam, banks are not permitted to make profits from loans. Conventional mortgage loans are designed to profit the banks and the terms are often weighed heavily in favour of the banks. Customers are often required to pay back interest which can fluctuate depending on the market conditions.

The ethical Islamic finance principles that underpin halal mortgages mean that the power dynamic and relationship between banks and borrowers is more even.

HOW DO HALAL MORTGAGES WORK?

Halal mortgages do not involve the borrower borrowing a sum of money from the bank in the traditional sense.

Instead, what will usually happen is that the bank will purchase the property on behalf of the borrower. The property will then be leased back to the borrower. The repayments will cover the initial purchase price and costs, and also an uplift to enable the bank to make a profit.

The monthly repayments made by the borrower to the bank will be partly put towards buying the property back from the bank and partly towards paying rent for residing in the property.

Once the term of the halal mortgage ends, the borrower will have paid back the bank and will fully own the property.

If you are looking for a halal mortgage, then you need to ensure that the lender complies with Islamic finance / Sharia principles.

Types Of Islamic Mortgages

There are three main types of halal mortgage products that are available in the United Kingdom:

• MURABAHA

A Murabaha mortgage is one where the bank purchases the property and sells it straight back to the borrower. The bank makes a profit by selling the property to the borrower for more than it originally paid for it.

This is less of a home purchase plan, and more like a traditional mortgage process. As the home is being solD for money it is considered to be within the Sharia rules that regulate the financial transaction.

• IJARA

A home purchase plan that is an ijara one involves the bank (a Sharia compliant bank) becoming the legal owner of the property you want to buy. The bank will purchase the property and then lease it back to the borrower for a fee.

The borrower is then required to make monthly repayments on agreed terms for the fixed term of the 'mortgage'. The repayments will cover an element of rental payment, and also repayment of the capital that was used to make the initial purchase of the property.

Once the term of the mortgage ends, the borrower should have repaid the bank and be the full legal owner of the property.

Once the borrower takes full ownership of the property they can then remain in the property or sell it on.

• DIMINISHING MUSHARAKAH

Diminishing musharaka works differently to an ijara product. In this type of arrangement, the borrower and the bank jointly own the property as co-owners (similar to a business partnership arrangement). As the borrower makes the repayments, so their share of ownership increases and the banks share of the property decreases.The amount of deposit you put down will help determine your respective share of the property.

The good thing about diminishing musharaka products is that as the borrower makes the repayments, the rental repayment element decreases and the bank's ownership share will keep reducing as the borrowers increases.

DO I NEED A DEPOSIT FOR A HALAL MORTGAGE?

The answer to this question is yes. It is more likely than not that your lender will require you to put down a deposit.

Of course, the size of the deposit will vary depending on the type of product you opt for and the lender you choose.

Normally, lenders will expect to see something in the region of a 20% deposit if you want to access a halal mortgage. However, it is important for you to look around at all the halal mortgages on the market and decide which one meets your needs.

There are some products and services that require much less than a 20% deposit.

You should also be aware that there are some additional costs you need to prepare for including:

• legal costs
• survey costs
• building insurance
• stamp duty
• broker fees

Any borrower looking for a halal mortgage should know that having a good deposit puts you in a strong position.

Advantages Of Halal Mortgages

There are many advantages of having a halal mortgage, and halal mortgages are not only available for Muslims. Many non-Muslims are now accessing halal mortgage products and services as they understand the concept and underlying ethical basis they have.

Some of the main advantages of halal mortgages are as follows:

• According to experts, halal mortgages facilitate financial inclusion and access to property/ house ownership for previously marginalised groups
• Those who want to live by Islamic finance principles can access funding in order to get on the property ladder
• Islamic mortgages and services are an ethical way to fund property purchases
• Halal mortgages are regulated by the Financial Conduct Authority ( FCA ) so borrowers have protection
• Islamic mortgages are less susceptible to market crashes and changes in economics
• Halal mortgages can offer borrowers the chance to own real property with stable property value
• Halal mortgages are not normally subject to fluctuating interest rates
• Halal mortgages have been approved by scholars
• Halal mortgages do not incur or charge interest (interest is strictly prohibited in Islam)

WHAT ARE THE RISKS INVOLVED WITH HALAL MORTGAGES?

It is important to start by saying that halal mortgages are no riskier than conventional mortgages.

One of the main problems with halal mortgages is knowing where to find them and doing your due diligence. This can be a complex and time-consuming exercise.

Sometimes, the rental repayments can be higher than if you opt for a conventional mortgage repayment plan. However, this is the price that is payable for having a home purchase plan that does not charge interest.

There has some been criticism of halal mortgages in recent years for being expensive. However, most banks and lenders who offer halal mortgages will be happy to go through the terms with you and offer favourable rates and services.

If you miss your repayments under a halal mortgage, you will face the same consequences you would as if you had a conventional mortgages. If you do not make the necessary payments then you could face repossession and court proceedings.

Your initial outlay and costs may be higher with a halal mortgage. Many banks have higher administration and processing costs so always check the terms and conditions of any agreement.

However, remember that halal mortgages are fully regulated by the Financial Conduct Authority and this means borrowers have legal protection. You can visit their website to find details of the protections available to borrowers.

In addition, the Financial Services Compensation Scheme does apply to lenders offering halal mortgages.