Business Finance Planning

Introduction

As the global financial landscape continues to tackle the recession, inflation, and a cost of living crisis, Islamic finance is emerging as a resilient and stable financial system. Grounded in ethics and transparency, Islamic finance aims to ground financial dealings in ethics and risk sharing. This in itself is one of the main reasons that Islamic finance is helping people and organisations to override the impact of inflation.

Islamic finance has the ability to navigate the challenges posed by inflation through its distinct features and principles which are rooted in Islamic Sharia law.

WHAT IS INFLATION?

Inflation is the measure of how expensive goods, services, and products become over a period of time. Inflation can lead economies and entire countries into instability and financial turmoil. The rate at which the cost of goods and services increases over a period of time is the rate of inflation.

Inflation is usually a broad measure, but it can also be narrowly calculated. For example, currently in the UK by examining the cost of milk and eggs now and comparing it to this time last year, we can assess the inflation rate very closely.

Measuring Inflation

We usually measure inflation by looking at different economic indicators and indices. These indicators reflect the differences in prices over a specific period.

Some of the methods and tools we use to measure inflation include the following:

• GDP Deflator: the gross domestic product deflator compares the GDP over a period of time. It reviews the overall price level of services and goods an economy produces. Changes to the GDP deflator are indicative of whether the increase in nominal GDP is due to actual output or changes in prices.
• Consumer Price Index (CPI): the consumer price index is the most widely used indicator when examining inflation rates and measuring them. the CPI tracks the average cost of a basket of goods and services over a period of time.
• Producer Price Index (PPI): the producer price index examines the average change that takes place over time in selling prices domestic goods producers receive.
• Cost of living index: this index reviews the changes in price to the cost of living essentials including food, goods, and services. This index looks at factors such as consumer preferences and shopping habits and the changes in prices they pay.

WHAT CAUSES INFLATION?

There are many different factors that can lead to inflation. We cannot look at what causes inflation without referring to the root cause of inflation. At its very core, inflation is driven by there being too much demand in relation to the supply available.

So, what causes demand to outpace the supply? There are a few different reasons this can happen, but they include major disruptions to economic input such as energy (see the Ukraine war for example). If there is uncertainty around the supply of anything then this can lead to higher costs.

The government's monetary policy can also cause inflation. For example, if the UK government keeps the interest rate as low as possible for too long this can lead to inflation.

The bottleneck of global supply chains is another reason that drives inflation.

Islamic Finance Principles

Islamic finance operates on principles that are compliant with Sharia law. There are some commonalities between Sharia rules and conventional finance rules, however, there are also some stark differences.

Sharia rules relating to financial transactions deem interest (riba) to be completely impermissible. Similarly, dealings that involve uncertainty or speculation (gharar), or involve haram industries (such as gambling and alcohol) are also not permitted. Another area where Islamic finance differs from traditional finance is that Islamic finance is based on the distribution of wealth. It encourages people to participate in economic, business and personal investments using an ethical framework.

Islamic finance has an underlying principle that everything, including money, belongs to Allah. It therefore follows that interest and excessive risk and speculation are forbidden. For someone looking for an investment compliant with Islamic finance, they must ensure that any financial arrangement they enter into does not include any impermissible transactions or sectors.

Let's have a look at some of the ways Islamic finance principles are tackling inflation head-on.

HOW DOES ISLAMIC FINANCE MITIGATE INFLATION?

Islamic finance is not based on fractional reserve banking. This is the system most commonly used by conventional banks and involves banks holding what is known as a fraction of their customers money. The rest is loaned out to borrowers of the bank.

Add to this the prohibition of interest which itself can lead to instability in the market and is susceptible to market changes, Islamic finance is a more stable way of managing finances. Interest can also distort the supply and demand within a market. Under Islamic finance rules, all products and services should face natural market conditions, and not conditions that have been distorted by interest-based credit and debit.

Another important Islamic rule to mention here is the principle of zakat - one of the five pillars of Islam. Zakat (obligatory charity) aims to support the less fortunate in society and to distribute wealth throughout society. The whole concept of zakat goes against artificial supply and demand, price gouging, price fixing, and amassing large sums of money.

Asset Backed Financing

Many Islamic finance transactions include asset backed financing. Asset backed financing is one of the key concepts of Islamic finance. Essentially, it focuses on linking transactions to tangible assets. This is a departure from conventional finance instruments which are based on borrowing and lending money with interest. They generate income via interest payments and not by linking them with real assets.

Linking finance with tangible assets is one way that Islamic finance ensures there is transparency and an ethical framework underpinning savings, transactions, products, businesses and relationships.

Relying on tangible assets (such as real estate) enables Islamic finance to move away from interest based systems that fluctuate based on the value of currencies. Tying itself to real assets means that Islamic finance can reduce the overall impact of inflation by tying itself to stable assets that are not as impacted by volatile markets.

Risk Sharing

Another key hallmark of Islamic finance that is used to combat inflation is the promotion of risk sharing contracts. Essentially, these types of arrangements distribute the risks each party takes on, as well as the potential rewards.

This means that in a volatile economy both parties share the fallout and one party is not unduly burdened.

Mudarabah And Musharakah

Musharaka and Mudaraba contracts are risk sharing contracts. They encourage both parties to share in the risk. For example, one party can invest capital and the other party invests experience. Any profits or revenue generated are shared by the parties as per a pre-agreed ratio.

This structure is dynamic and transparent and is more resilient than conventional contract arrangements. The burden of economic shocks, fluctuations, and inflation is shared between the parties to the contract.

Inflation can cause huge problems for contractual arrangements, especially is one party is taking on all the risk. Sharing the risk mitigates the impact of inflation and spreads them out creating a more resistant and adaptive financial system.

Avoiding Interest

If you are dealing with a bank in the West, you will find that their products, services, and dealings are interest based. One of the main principles of Islam and Islamic finance in particular is that we must avoid interest. It is deemed to be completely haram.

In conventional finance systems. interest rates are impacted during inflation and they are adjusted to combat inflation. This is the case in the UK where the Bank of England has been steadily increasing interest rates.

By avoiding interest completely, Islamic finance is able to use alternative mechanisms to ensure transactions are safe and secure. This means the Islamic finance system is less susceptible to increasing inflation rates.

Stable Finance Amid Fluctuations

Interest rates play a key role in conventional financial systems. They do not play any part in the Islamic finance system. They are deemed to be exploitative and unstable by Islam.

Interest rates are vulnerable to the structures and systems within society and they are especially vulnerable when it comes to inflation. By avoiding interest completely, Islamic finance is able to withstand currency and economic fluctuations. This leads to a more robust and resilient financial environment.

Productive Economic Activity

Islamic finance places emphasis on real economic activity. It encourages investment in real assets and ventures that are productive. The aim is to lead to economic growth, help vulnerable communities to grow and stabilise, and to create jobs. All these endeavours should be able to withstand the terrible effects of inflation.

By focusing on productive activities that lead to improvements in the wellbeing of society, Islamic finance positively impacts the economy and society.

The goal is not selling or purchasing simply for the sake of it, but to engage in meaningful transactions that lead to a social return and benefit. There is a focus on sustainability whether you are an individual, corporate entity, or government.

Ethis And Islamic Finance

The concept of wealth in Islamic finance is very different from the concept of money in the conventional finance system the West has. According to Islam, wealth is a blessing from Allah.

Viewing finance through a socially responsible and ethical lens means there is less scope for transactions that are unfair, speculative and exploitative.

The ethical principles embedded in Islamic finance encourage fair business practices, wealth distribution, economic justice, and ethical screening. Being socially responsible with finances result in investments that lead to social stability and benefits. This stability helps to prevent the distortions in the economy that can result from inflation.

Avoiding Harmful Monopolies

As a finance system, Islamic finance encourages staying away from harmful monopolies. The result of this is that, whilst this does not directly combat inflation, it does seek to prevent market distortions, keep competition fair and ensure no party is exploited or taken advantage of.

Harmful monopolies often operate by excluding independent and small and medium businesses. The outcome is harmful for society and means there can be inefficiencies and the misallocation of resources. This in turn leads to instability in the stock market when a stock shortage becomes apparent.

Avoiding harmful monopolies also ensures that price manipulation and inflation can be monitored and avoided. Large monopolies can often dictate the market price of a service or product. In order to keep pricing fair and transparent, Islamic finance encourages avoiding harmful monopolies.

Harmful monopolies aim to concentrate wealth in the hands of those at the top of the monopoly structure. This goes against the principle of wealth distribution which Islamic finance promotes. Wealth retention leads to social disparities and exacerbates the effects of inflation for the poor.

Having a diverse and competitive market and economy ensures that there is sustainable and ethical growth and long term stability.

Ways To Manage The Current Inflation Crisis

According to the Quran, this world is a test, and Muslims see each part of their life as a challenge that is sometimes in their favour and sometimes not in their favour. The most important thing for those wanting to remain true to Islam and Sharia law is to ensure they live within Sharia rules and make sure their finances are within the parameters of Islamic finance.

Muslims also believe that their provisions are preordained and predetermined. With this in mind, if Muslims operate within Islamic rules and principles with regard to their personal and business dealings then they can save themselves from hoarding wealth and gluttony.

Ensuring financial transactions are not interest based, not exploitative and not risky means that Muslims can mitigate against the harmful affects of inflation.

Introduction

Islamic microfinance refers to financial transactions that are based on wider Islamic finance principles. These Islamic finance principles themselves are based on the teachings of the Prophet Muhammad (PBUH) and the Quran.

Islamic microfinance provides access to financial services for those who live in low-income households or economies.

The contractual terms of Islamic microfinance arrangements are not interest-based, but instead the terms are Sharia complaint. Islamic microfinance is viewed as a positive tool and concept for facilitating poverty alleviation and financial inclusion.

Research has shown that economies that operate or make available Islamic microfinance widen the market for any Muslim customer looking for structures that do not contravene Sharia rules and want a more ethical basis for their financial dealings.

WHAT IS ISLAMIC FINANCE?

Islam sets out principles that should govern financial transactions, especially commercial financial transactions. One of the main principles of Islamic finance is that the money itself does not earn - what this refers to is interest. Interest, or riba, is not permitted in Islam as money is not seen as an asset that earns in and of itself.Some of the main principles of Islamic finance are as follows:

• No interest (see above)
• Prohibition of involvement in haram industries and products
• Equity in profit and loss sharing
• Ethical and socially responsible investing
• Fairness and transparency
• Avoiding speculation or gambling

WHAT IS ISLAMIC MICROFINANCE?

Any Islamic microfinance product or service in any capital form cannot mirror conventional finance arrangements. Many conventional financial arrangements, although able to provide financial resource, are not Sharia compliant.

Let's examine some of the key features of Islamic microfinance:

• Any Islamic microfinance commodity or service must ensure that there is no element of riba whatsoever. No interest is attached to the debtor, the lender, or the debt.
• In addition, microfinance transactions should always be linked to tangible economic activity. This means there cannot be any financial speculation or uncertainty that is excessive.
• Any product that is bought or sold must be clear and tangible. You cannot trade in or sell something you do not own.
• If involving activities, then these should be socially responsible activities that do not exploit or morally harm others.

What this means for Muslims is that many of them stay away from the financial services on offer. Whilst the structure of conventional finance options may appeal to the masses, Islamic microfinance offers an alternative form of finance.

Key Principles Of Islamic Microfinance

One of the main objectives of Sharia law and Islamic finance is to alleviate poverty and empower people and communities.

Whilst we have looked at some of the key principles above, let's have a look at them in more detail:

• Asset backed finance: Asset backed finance encourages finance options that are backed by real and tangible assets.
• Profit and loss sharing: Islamic finance is focused on profit and loss sharing arrangements. This means that the risk is also shared between the respective parties to the contract and transaction. Common forms of profit and loss sharing arrangements in Islamic finance include mudaraba and musharaka arrangements.
• Social welfare: Promoting social welfare is a central tenet of Islamic finance. Providing and facilitating access to education, healthcare, and essential services is seen as the promotion of social welfare so any form of financial arrangement that enables this to take place is seen favourably in Islam.
• Ethical investing: as is the case with social responsibility, Islamic microfinance heavily favours ethical investments. What this means in principle is that any investments need to add value to others and society. Examples of projects and investments that are deemed to be ethical include community development projects, agricultural, and healthcare projects.
• Interest (riba) avoidance: riba is strictly prohibited in Islam so any form of arrangement where interest is paid or charged is impermissible. Islamic microfinance steers clear of interest-based products (often used by lenders in Western economies which are credit and debt based).

Social Responsibility

One of the main principles of Islamic finance is that finance should serve society. What this means is that financial transactions must be conducted in a socially responsible manner. The foundation and ongoing management of Islamic microfinance products (on paper and in practice) should be equity-based.

The idea underpinning Islamic social responsibility is that there is a balance between social objectives and financial objectives. What this ultimately leads to is more sustainable finance long-term as the scope for exploitation and inequality within transactions is minimised.

In many ways, Islamic microfinance is underpinned by principles of benevolence, morality, unity, freedom, and equilibrium. Muslims believe that they all have a responsibility to society and the environment. Therefore, they must embody this commitment to social responsibility through their words and actions.

In this way, they can contribute to social justice (as prescribed by Islam) and ensure populations across the globe are not adversely impacted.

Types Of Islamic Microfinance

Islamic microfinance is based on the foundations of Sharia law. Sharia rules place great emphasis on transparency, fairness, social responsibility, and ethical behaviour.

Let's have a look at some Islamic microfinance products:

MICROCREDIT

Islamic microcredit is a term used to describe small financial services relating to credit. Microcredit operates within Sharia rules and is designed to ensure that entrepreneurs and small businesses are able to access fair and equitable financing options.

Islamic microcredit does not include any riba and is asset-based finance. Any loan issued is backed by assets or productive ventures.

MICROLEASING

Islamic microleasing (also known as microfinance leasing), enables small businesses and entrepreneurs to lease assets for varying periods of time. The leasing arrangements are compliant with Islamic finance rules.

In Islamic microleasing arrangements, the lessor (lender) will retain ownership of the asset and grants the lessee a right to use the asset for a period of time. The lessee then pays the lessor lease payments for the use of the asset.

MICROINSURANCE

Islamic microinsurance is also known as takaful insurance. This type of insurance does not contravene Islamic finance principles. Takaful is a cooperative arrangement based on shared risk and mutual assistance between the parties.

What this means in real terms is that businesses and individuals are able to access insurance coverage whilst remaining Sharia compliant.

Islamic Microfinance - The Prospects

It is estimated that over 60% of Muslims who live in Muslim countries do not use formal financial service institutions and services. One of the main reasons for this is that many Muslims view conventional finance institutions as incompatible with aspects of Sharia law.

This has led to the emergence of microfinance services and products being developed both inside and outside of Muslim countries and economies.

Muslims are increasingly keen to engage with financial services that comply with Sharia law and the rules of Islamic finance. Since 2006, the Islamic finance market has seen a four-fold increase, and this is likely to continue growing in the future.

What Islamic microfinance represents is the merger of two quickly accelerating industries - Islamic finance and microfinance. Not only does Islamic finance meet the commercial business demands within global economies, but it also provides individuals looking with Sharia compliant funding options.

Unlocking The Potential Of Islamic Microfinance

Any financial transaction that meets Sharia rules is not only good for business, but it also means that transactions are socially and ethically considerate.

Islamic microfinance has the power and potential to operate in a fair, socially responsible and transparent way. What this means for businesses, the entrepreneur, individuals, and communities is that they too can access funding and enhance their ability to access finance and loans.

Providing financial access to poorer or marginalised communities who currently reject conventional, interest-based finance products means greater equity and economic development.

Islamic Microfinance And Poverty Reduction

Islamic microfinance is based on the foundations of equity and social and environmental responsibility.

One of the main advantages of Islamic microfinance is that it contributes to poverty reduction in various ways:

• Enterprise and entrepreneurship - Islamic microfinance supports individuals and businesses from low-income and under-developed communities. It enables these businesses and entrepreneurs to access capital for the ventures and establish sustainable and Sharia compliant livelihoods.
• Financial inclusion - as already mentioned, Islamic microfinance has become an important tool in encouraging and facilitating financial inclusion. Offering financial products that are not only accessible but also Sharia compliant means that marginalised groups can access funding for their start-ups.
• Skills growth - there are many Islamic microfinance organisations that offer training and skill enhancement programmes alongside their financial products and services.
• Community development - with a strong focus on equity and social responsibility, Islamic microfinance is committed to community development. This goes beyond offering financial assistance. Microfinance products can include access to healthcare, education, and a wide range of community benefits.

Islamic Microfinance - The Challenges

One of the main challenges for the Islamic microfinance industry is spreading awareness of the products and services on offer. Despite growing rapidly, this industry is still seen as being in its infancy.

Further advertising and outreach work is required to make sure that Muslims and socially responsible investors are aware of the microfinance options available to them.

The important thing to remember is that Islamic microfinance encourages and develops financial inclusion and freedom. Whilst the impact of Islamic microfinance funding options may vary depending on the regulatory environment, local economic conditions, and institutional capacity, Islamic microfinance is essential if we want to ensure the sustainability of Islamic finance initiatives and alleviate poverty.

Introduction

Zakat is the third pillar in Islam and plays a significant role in the way Muslims live and conduct their financial affairs. The recipients of zakat are a very specific group of people as outlined in the Quran, and there is a specific calculation involved.

Our online zakat calculator assists with calculating the amount of zakat that is owing.

Understanding Zakat And Its Obligations

WHAT IS ZAKAT?
The word zakat means growth and purification in Arabic and refers to the mandatory obligation to give a portion of wealth accrued to charity. Zakat is a fundamental obligation for all Muslims who meet the criteria, and its purpose is to purify wealth and create economic equality and enhance social welfare.

According to Islamic teachings, zakat is a fundamental act of worship. The Quran (2:110) states: 'Establish prayer and give zakat'

WHO NEEDS TO PAY ZAKAT?
Muslims who are required to pay zakat must first understand if they have accrued the minimum amount of wealth required before they become eligible to pay zakat. This is known as nisab and this is worked out based on the equivalent of 85 grams of gold or 595 grams of silver.

Those eligible to pay zakat include the following:

• Adults who have reached puberty and have wealth over the nisab threshold.
• Adults who have full mental capacity.

WHAT ASSETS COUNT TOWARDS ZAKAT?
Zakat is payable on different types of wealth:

• cash
• silver
• gold
• business assets
• investment income
• agricultural produce.

When And How Much Zakat To Pay

Zakat is due on wealth that you have been in possession of for one lunar year. It's also important to note that you can deduct immediate debts from zakatable wealth (see below).

You can pay zakat at any time of the year through instalments or in one lump sum.

Calculating Zakat Step-By-Step Using A Zakat Calculator

Muslims are expected to pay 2.5% of their zakatable wealth every year. Follow these steps to work out how much zakat you need to pay:

• Determine your zakatable wealth total by adding up your assets and deducting immediate debts.
• Ensure that you meet/exceed the nisab threshold
• Apply the 2.5% rule
• Use the online zakat calculator to work out what you need to pay

Always visit a reliable zakat calculator website.

Deductions And Liabilities

There are certain debts and liabilities that be deducted when making your zakat calculation.

The following deductions are allowed:

• short term debts such as credit card balances and small loans that become due in the zakat year.
• for long term debts such as mortgages you can only deduct the payment owing in that zakat year.
• living expenses including bills, rent, good costs, transport.
• unpaid wages to employees.
• business liabilities for the zakat year.

Please note that future debts and expenses are not deductible.

Zakat Payment And Its Impact

Zakat is more than a financial payment, it goes beyond wealth distribution into the realms of spiritual growth, economic justice and fulfilling an important religious obligation.

Paying zakat on time fulfils an essential Islamic obligation and strengthens the relationship with Allah.

Timely payment of zakat leads to increase in blessings and purification of our wealth.

How To Pay Your Zakat

Zakat can be paid in different ways. You can pay zakat direct to individuals who are eligible to receive zakat. Zakat can also be paid to charities and global zakat funds.

Many Muslims choose to pay zakat online by utilising online zakat calculators.

Receiving Zakat

There are eight groups of people to whom zakat can be given:

The needy (this includes people whose earnings fail to cover basic needs such as food, home, water, clothing)

Those in poverty (who have little to no personal belongings and no means of earning a living)

Those employed to administer zakat monies

The wayfarer

People whose hearts have been reconciled to the faith In the cause of Allah (SWT)

People in debt

People in bondage

Recipients of zakat should not be members of your immediate family such as your spouse, parents or children. Other non-immediate relatives can be recipients of your zakat payments.

Many people give to charity throughout the year, for any donation to qualify as fulfilment of the zakat obligation, then there must be an intention to give the money as zakat.

Common Questions And Expert Advice

WHAT IS NISAB?
Nisab is the minimum amount of wealth you need to have before you become eligible to pay zakat. Typically nisab is the equivalent of 595 grams of solver or 85 grams of gold.

DO I PAY ZAKAT ON MY HOME?
Zakat is not payable on your primary home. If you have rental properties then zakat is payable on the income generated.

CAN I GIVE ZAKAT TO MY FAMILY?
You cannot give zakat to immediate family, ie those already dependant on you such as your partner and children. You can pay zakat to extended family members if they are eligible.

ARE ONLINE ZAKAT CALCULATORS ACCURATE?
Yes, as long as you insert the correct information based on your personal circumstances then zakat calculators are an excellent way to calculate your zakat.

IS ZAKAT PAYABLE ON MY RETIREMENT SAVINGS?
If you have full access to these savings and you meet the nisab threshold then zakat is payable.

WHAT IF I FORGET TO PAY ZAKAT?
Use an online zakat calculator to calculate what you owe and pay your zakat as soon as you can.

IS ZAKAT PAYABLE ON STOCKS AND SHARES?
Yes, if the value exceeds the nisab threshold then zakat is payable.

SHOULD NISAB BE CALCULATED ON GOLD OR SILVER VALUES?
In the United Kingdom you can use either the gold or silver value. Many scholars believe that using the value of silver is preferable as it means the amount of zakat increases. If you have assets that mainly consist of gold then it is sensible to use the gold nisab.

WHAT IS THE ZAKAT YEAR?
The zakat year begins on the date on which you first possessed the wealth that took you over the nisab threshold. This will be the start of your zakat year. The zakat payment will therefore become due when the year has elapsed.

HOW DOES ZAKAT APPLY TO YOUR INVESTMENTS ON THE WARDUS PLATFORM?
For all of you that pay zakat, it would be on the total outstanding amount payable to you from your investments via Qardus. The investment is based on a financing arrangement which involves the buying and selling of commodities, and therefore, we believe that these assets are zakatable in nature. Therefore, investors who pay zakat would use the capital plus the profit due to them to calculate the amount of Zakat payable.

Please note that Qardus does not provide tax or other financial advice and that if advice is needed, you should consult an appropriately qualified professional.

Conclusion

Calculating zakat accurately and paying it in a timely manner ensures that it reaches the most vulnerable in society. Paying zakat fulfils one of the core pillars of Islam.

Using an online zakat calculator not only ensures the payment you make is calculated accurately, it saves you time and helps you to make the sometimes complex set of calculations.

Zakat calculators also guide you to eligible recipients and make it easier for you to track your zakat payment history and accountability. The calculations eradicate errors and provide an audit trail. If you have any specific questions about your zakat payment, always remembers to consult with expert scholars.

Use the Qardus zakat calculator here.

Please note that the prices information and values mentioned above are for example purposes only. For an accurate figure of the zakat you are liable to pay then it is always best to use the zakat calculator, and also conduct your own research and obtain qualified advice where required.

Qardus do not offer financial or tax advice and if advice is needed, this should be sought from a qualified professional.