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Introduction:

In a world increasingly driven by consumer culture and financialisation, debt has become a ubiquitous aspect of life for many individuals and nations. Islam offers profound insights into the handling of debt, encouraging timely repayment and promoting a life free of debt. Debt is a serious matter in Islam. It is a responsibility that should not be taken lightly or neglected. The Prophet (peace and blessings of Allah be upon him) used to seek refuge with Allah from being overburdened by debt and he warned against lying and breaking promises when dealing with debt. In this article, we will explore some of the Islamic teachings and principles regarding debt and how to repay it in a timely and ethical manner.

The Islamic View On Debt

Islam does not prohibit debt; it recognises the fact that people may face circumstances that necessitate borrowing. However, it emphasises caution, responsibility, and most importantly, the intention and effort to repay the debt promptly. One of the foundational elements in Islamic financial ethics is the prohibition of 'Riba' (usury or interest). This reflects, among many other things, the Islamic principle of social justice, ensuring that the burden of risk is not disproportionately placed on the borrower and preventing exploitative lending practices. Here, the Shariah protects the borrowers and debtors. The Shariah encourages lenders to go easy with debtors, and in fact, Shariah promotes helping those struggling with interest-free loans as well as grants.

The Virtue Of Prompt Repayment

Shariah is a perfect balance. Whilst it has guidance addressed to the creditor to guide their conduct, Shariah also protects creditors and lenders, and has guidance addressed to borrowers and debtors. The following guidance shows how Shariah balances the rights and ensures everyone’s rights are upheld.

The virtues of repaying debts promptly are emphasised throughout the teachings of the Prophet (peace and blessings of Allah be upon him). Paying off debt is a virtue and a means of attaining Allah's reward and forgiveness. It is a way of fulfilling one's duty and honouring one's trust. It is also a way of expressing gratitude and kindness to the creditor who helped the debtor in his time of need.

The Prophet (peace and blessings of Allah be upon him) said, "Whoever takes a loan intending to repay it, Allah will help him, and whoever takes a loan intending to waste it, Allah will destroy him." [Sunan Ibn Majah]

He also said, "If anyone remits anything from a debt owed to him, he will have that amount recorded for him as a charity." [Sunan Abu Dawud]

In another Hadith it was reported: "The soul of the believer is suspended because of the debt until it is settled." [Tirmidhi] This Hadith indicates the serious implications of dying in a state of debt and underscores the urgency of repayment.

The Prophet (peace and blessings of Allah be upon him) would supplicate to Allah to save him from debt. He would say, “O Allah, I seek refuge in You from a soul that does not satisfy and from a heart that does not humble itself and from a supplication not heard and from knowledge that does not benefit and from a deed not raised up and from a debt that never ends.” (Musnad Ahmad)

In another narration, the Prophet (peace and blessings of Allah be upon him) sought Allah’s refuge from debt. Abdullah ibn Umar narrates, "When the Prophet contracted a debt transaction, he would say: O Allah, I seek refuge in Thee from care and sorrow, from incapacity and laziness, from stinginess and cowardice, and I seek refuge in Thee from the burden of debt and from being humbled by people." [Abu Dawud]

Whilst prompt payment has been encouraged, unjustified delay has severe warnings. Abu Hurairah reported that the Messenger of Allah said: "Procrastination (delay) in repaying debts by a wealthy person is injustice." [Bukhari]

Hence, the AAOIFI Standards unequivocally state: “Default in payment by a debtor who is capable of paying the debt is Haram (prohibited).”

In one narration, he said: “Delay in payment by a solvent debtor would be a legal ground for his being publicly dishonoured and punished.” [Musnad Ahmad]

Advice To The Creditors

Islam is beautiful in that it addresses all parties with that which concerns them. Each party is given guidance to ensure that they are doing their best that they can do, that they are being the best version of themselves. Just as debtors are warned on delaying payment unnecessarily, creditors are encouraged to go easy. Giving loans to the needy is a noble act of charity and kindness in Islam. It is a way of helping others and relieving their distress.

The Prophet (peace and blessings of Allah be upon him) said, "A man would give loans to the people and he would say to his servant: If the debtor is in hardship you should forgive the debt that perhaps Allah will relieve us. So when he met Allah, then Allah relieved him." [Sahih Bukhari]

It is also encouraged to give respite or deferment to the debtor if he is unable to pay on time. The Prophet (peace and blessings of Allah be upon him) said: “Whoever gives respite to one in difficulty, he will have (the reward of) an act of charity for each day. Whoever gives him respite after payment becomes due, will have (the reward of) an act of charity equal to (the amount of the loan) for each day.” [Sunan Ibn Majah]

Moreover, it is permissible to reduce the amount of the debt or waive it altogether as a gesture of generosity and goodwill. The Prophet (peace and blessings of Allah be upon him) said, "If anyone remits anything from a debt owed to him he will have that amount recorded for him as a charity." [Sunan Abu Dawud]

Debt And Society: A Broader Perspective

Islam does not just focus on individual actions but also considers social responsibilities and collective well-being. Helping those in debt is seen as a meritorious act, leading to divine reward.

In one narration, it is stated, "Whoever relieves a believer's distress of the distressful aspects of this world, Allah will rescue him from a difficulty of the difficulties of the Hereafter… and whoever alleviates [the situation of] one in dire straits who cannot repay his debt, Allah will alleviate his lot in both this world and in the Hereafter." [Sahih Muslim]

The Practical Aspect: Managing Debt

Given the emphasis on prompt debt repayment and avoiding debt where possible, Islam encourages pragmatic approaches to financial management. This includes effective budgeting, prudent spending, and exploration of viable income sources before resorting to borrowing. Furthermore, when borrowing is deemed necessary, it encourages a clear understanding and documentation of the debt terms to prevent future disputes or misunderstandings.

Conclusion

In the Islamic worldview, debt is not merely a financial issue but a matter involving ethics, morality, and social responsibility. While borrowing is not prohibited, there is a clear emphasis on the virtues of prompt repayment and the spiritual and ethical implications of living a debt-free life. Furthermore, the alleviation of others' debt is seen as a meritorious act, showcasing the communal and compassionate dimensions of Islamic financial ethics.This holistic approach can offer valuable insights for contemporary societies grappling with the ethical and societal implications of widespread indebtedness. Ultimately, the Islamic teachings on debt prompt individuals to practice responsible borrowing, timely repayment, and to strive for a life free from the burdens of debt.

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

The article is only available to the subscribers of Islamic Finance News here: https://www.islamicfinancenews.com/company-focus-qardus.html

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.