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WHAT IS ISLAMIC FINANCE?

Islamic finance at its very core is a way of managing money and financial transactions in a way that is compliant with Islamic rules and guidance. There is a significant interplay of sustainability and ethics in Islamic finance.

One of the foundational principles of Islamic finance is that money itself does not have any value. Instead, money is a means through which we can exchange products and services.

Islamic finance rules state that you should not use money to make money. This is why one of the most important Islamic finance principles is the one which prohibits interest in any form.

Paying or receiving interest is not seen as a permissible or equitable way of managing finances in Islam. You cannot make money by charging interest, this is seen as unethical and exploitative but also non-sustainable in the long-term.

Another important element of Islamic finance is that our transactions should not cause any harm to other individuals or wider society.

The focus should be on economic activities that are grounded in tangible assets and services, and partnership arrangements where each party shares in the profits and losses.

Ethics And Islam

Islam provides ethical guidelines within which to operate. These guidelines are based on the teaching within the Quran and from the experiences of the Prophet Muhammad (PBUH).

Underlying Islamic finance is a foundation based on integrity and fairness. The underpinning of Islamic finance with ethical considerations can be seen as contradictory to conventional business models, but ethical finance is a fast-growing industry.

Investors, individuals, and businesses are more socially conscious and want to operate in a more sustainable way.

It seems that everyone wants a more inclusive financial system where there is a real interplay between ethics and finance. Having witnessed the financial collapse of 2008 and the current global pandemic, existing Western finance models have proved to be volatile, unstable, and temperamental.

Islamic finance offers a sustainable, unique and viable ethical alternative. Applying normative ethics to financial and economic transactions brings more equality and sustainability to the table. This is mainly because operating from an ethical perspective is about duties and responsibilities rather than consequences.

Considering the consequences and impact of financial decisions means negative impacts can be identified and eliminated early. This leads to a more robust, fair, and resilient financial system.

Islamic finance recognises that finance has a useful role to play in economics. It requires overarching ethical considerations to be in place to ensure that there is intrinsic value in financial dealings, and these are supported by ethical and moral conduct.

Islam places a great deal of emphasis on ethical conduct. This is because Sharia rules derived from Islamic teachings are based on an ethical framework.

Islam requires us to align our values with the teachings of Islam in all areas of our lives. What this means for parties involved in any kind of financial deal is that the transactions are just, fair and equitable.

Islam And Wealth Distribution

Another important thing to note is that Islamic finance places emphasis on the concept of wealth distribution and social justice.

Practices including the payment of zakat every year, and regular charitable donations in the form of sadaqa aim to distribute wealth fairly. Sharing wealth is a key component of Islam, whether this is through donations or promoting those economic activities, projects, and practices that contribute positively to society.

Justice and fairness are fundamental concepts in Islam.

What Does Islamic Finance Say About Sustainability

When it comes to Islamic finance and sustainability, there is a unique interplay. Islamic finance principles are derived from Sharia law which places great emphasis on ethics and being socially responsible.

This social responsibility covers everything from wealth generation, wealth distribution, climate change, business, capital receipts, financial services, education, personal and business objectives, and education.

Sustainability in Islam must be viewed through the lens of being Sharia compliant in all dealings throughout life.

Adopting sustainable practices means you are promoting fairness and equality in every aspect of your life.

It has long been known that Islamic finance helps to divert capital into those environmental and social projects that benefit society.

There is growing recognition and support for the moral concepts of Islam and their link to global sustainability and development goals as set out by the United Nations.

Sustainable Development Goals

In 2015, the UN established sustainable development goals with the aim of achieving them by 2030.

These goals have common ground with Islamic finance as they both aim to promote social, economic, and environmental sustainability. In fact, there are several aspects of Islam and Islamic finance that align perfectly with the objectives within the UN's sustainable development goals:

1. Zero hunger:
2. Alleviation of poverty:
3. Improving health and wellbeing
4. Education
5. Clean and affordable energy
6. Industry, innovation and infrastructure
7. Gender equality
8. Clean water and climate action
9. Reducing inequality
10. Partnership arrangements

Role Of Islamic Finance In Sustainable Development Goals

Islamic finance is already playing a large role in contributing to the achievement of the UN's sustainable development goals. The foundations of Islam already align with these goals seeking to empower vulnerable communities.

Islamic finance initiatives such as zakat and sadaqa focus on poverty alleviation and working towards zero hunger. Islam promotes good health and wellbeing which is another UN sustainable goal.

Whether it comes to climate action, peace and justice, responsible consumption and sustainable cities, Islam is already ahead of the game.

With its emphasis on sustainable and ethical principles, Islam has been focusing on these kinds of goals for over 1400 years.

WHAT ROLE DOES SUSTAINABILITY PLAY IN ISLAMIC FINANCE?

Sustainability is a key concept in Islam, it therefore follows through that Islamic finance will also include elements of sustainability.

The Islamic finance and industry is well placed to support sustainability and sustainable development goals, whether that is individually or via collaboration.

Islam promotes social inclusion and socially responsible finance decision making. In today's global market where there is a wage labour crisis and worries about economic growth, sustainable Islamic finance is becoming more and more popular.

Research indicates that Islamic finance is one of the most sustainable and leading finance and funding models. Not only does Islamic finance base itself on ethics, it works with human beings to problem solve societal issues.

In the United Kingdom, the Bank of England recognises the significance of Islamic finance and the diversity it offers. Islam encourages inclusion and places great value in equality.

What this means for those using Islamic finance is that greater opportunities are available, and many argue that finance models based on Sharia principles will create ethical and socially responsible foundations.

Sustainability And Ethical Investments

Sustainable Islamic ethical investments are those investments that align with socially responsible and sustainable goals.

This interplay of finance and sustainability leads to positive benefits on an environmental, social and governance practices. Let's have a look at some sustainable and ethical Islamic finance investments:

• Green sukuk: green sukuks are Islamic bonds that invest in environmentally friendly projects. These projects can relate to renewable energy initiatives, climate action and other green policies.
• Islamic microfinance: Islamic microfinance provides financial services to people who may find themselves excluded from mainstream funding options.

Community development initiatives: these initiatives finance projects in agriculture, address the vulnerability in communities, and alleviate poverty.

Leveraging Islamic Finance To Build Sustainability

It is clear that Islamic finance has the potential to play an even greater transformative role in sustainability.

What is needed is for all stakeholders from individuals, governments, countries, and organisations to work together to maximise the impact of Islamic finance.

Some strategies that could achieve the synergy between Islamic finance and sustainable development goals include:

• Partnering with sustainability initiatives
• green sukuks
• sustainable investment vehicles
• support for socially responsible enterprises
• Increase in Islamic microfinance services
• Innovative finance models
• Using zakat for sustainable development
• International collaboration

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.

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.