Is Forex Trading Haram?

Crowdfunding

Crowdfunding is a process of raising money for a business or idea. Unlike traditional methods of raising finance, crowdfunding is innovative and based on the concept of raising funding via crowds of people.

Some crowdfunding contributors will donate funds entirely altruistically, simply to support the business. Other crowdfunders will see their funding contribution as an investment into the business venture. In return, these investors will be rewarded with a return on their investment. The reason crowdfunding is so popular is that is has become a great way of raising money quickly. This means that no matter how ambitious or how small your project, there is a way to raise finance without resorting to asking financial institutions.

How Crowdfunding Works

Crowdfunding enables businesses and individuals to attract investors in the business through the practice of funding a project by raising sums of money from a crowd of people who are willing to invest in the business. Some of those offering funds will do so altruistically, expecting nothing in return, but for many of the donors they will expect a return on their investment. In order to start a crowdfunding campaign there needs to be a specific cause or project, and a specific goal amount in place. Businesses and entrepreneurs can then ask or invite a number of people to donate various sums of money (small and large) until the crowdfunding goal is achieved.

The unique part of crowdfunding is that it mainly takes place online. The digital revolution over the last decade, coupled with the increase in social media exposure and marketing means that crowdfunding campaigns can be widely shared and marketed. As crowdfunding tends to take place online, the use of social networks is key and makes it inherently easy for supporters of a crowdfunding campaign to share it widely, ensuring the project gains widespread exposure and funding.

Crowdfunding is used for all manner of projects, including charity projects, creative projects, start up businesses, entrepreneur ideas and small businesses. Crowdfunding is a great way for non-traditional businesses such as those businesses following Islamic finance principles, to raise funding in a Sharia compliant way.

Types Of Crowdfunding

The main types of crowdfunding models are as follows:

Investment Based Crowdfunding

This type of crowdfunding is often used by businesses looking to raise capital. Businesses will offer to sell ownership shares and stakes in return for a crowdfunding investment. Businesses will promise to use the funding to develop their business idea or product and in return the investor will receive a share of the business in return for the finance they provided. In this way, donors ultimately become shareholders of the company, with the possibility of owning some of the business equity. Often, these shareholders may also be provided with rights to be involved in the business process and project.

Donation Based Crowdfunding

Donation based crowdfunding is essentially a model where donors are asked to contribute to the project by way of a donation. Individuals will essentially donate funds with the aim of meeting the project finance goal, and in return the donors do not expect anything in terms of shares or financial returns. People who donate rather than invest are not backers of the business, they just offer finance on a not-for-profit basis.

Advantages Of Crowdfunding

For anyone looking to raise finance for their business or idea via crowdfunding, there are some important advantages you should be mindful of.Advantages:

• There are often minimal upfront fees or costs and this means there is some protection from risk when starting out
• There is little financial risk with almost no start up debt
• It's a great form of market testing and marketing research, seeking the opinion of your target audience
• Money can be raised quickly and campaigns can go viral
• Social networks, websites, and online platforms can result in speedy and widespread exposure
  
• You can use the crowdfunding campaign to gauge public perception, generate interest, and obtain feedback
• Investors and donors can become personally invested in campaigns and this will help you build loyalty programs and interest in your idea
• Crowdfunding enables start-ups, small businesses and innovative ideas to get financial backing
• It is a great way of raising finance and covering costs for those businesses without access to traditional forms of bank lending or in a difficult economy
• You can create community support for your project and build on these important relationships and customer loyalty
• Crowdfunding enables more effective risk management as there is often less risk for smaller businesses

Crowdfunding Tips

For a successful approach to crowdfunding you need to make sure you have a clear and strategic approach to the campaigns. The advice and tips will help you create a successful crowdfunding campaign:

• Pre launch: make sure you do your research, collate all the information you need, build email marketing lists and think of ideas for your campaign content
• Create compelling content: this could include a campaign video, written information relating to your goals and graphics/videos
• Tailor your PR: before your campaign goes live research your audience, find out where they hang out virtually (Twitter, Instagram, Facebook) and target them
• Strategic social media and influencer use: the greater your reach and the reach of the platforms you use the greater your chances of exposure and success. You don't have to limit your audience to the United Kingdom.
• Engagement: encouraging others to comment, share and post about your campaign will deliver your message to a wider audience
• Donations: don't ask for money immediately but do make sure you ask family, friends, colleagues to donate. Share your passion for your project and draw the reader in. Remember to also ask the right people for donations.

Crowdfunding Platforms

Some of the most popular crowdfunding platforms include the following:

• Kiva
• Kickstarter
• Patreon
• GofundMe
• Indiegogo
• Seedrs

All these platforms enable users to share the campaign and spread the word about your project on various social media platforms and via email.

WHAT IS AN ISA?

An ISA is an individual savings account. The aim of an ISA is to encourage people to save money and invest in what is considered to be a tax-efficient way.

Having first launched in the United Kingdom in 1999, ISAs have become a popular way to prepare for your future by making sure you have savings set aside.

Anyone over the age of 18 in the UK can apply to open an ISA, and for anyone under the age of 18 there are options to open a junior ISA account.

The main things to note with ISAs accounts are as follows:

1. You can only open one ISA per tax year
2. There are limits to how much money you can put into your ISA each year
3. The current ISA limit is £20,000

SHARIA-COMPLIANT ISAs

Sharia-compliant ISAs are essentially ISAs that comply with the strict Sharia rules relating to finance and savings. There can be no element of riba or interest as this is not allowed in Islam.

In addition, a halal ISA must ensure that any money generated comes from halal business and investment opportunities. So if you have a stocks and shares ISA you must ensure that the investment fund only invests in Sharia compliant companies and is not involved with industries that are deemed to be haram such as the porn, alcohol, and gambling industry.

The foundation of Islamic finance rules is that money itself has no intrinsic value. It is simply seen as a medium of exchange, therefore it cannot generate money by itself (hence the principle of interest being forbidden).

WHAT ARE THE ISLAMIC FINANCE RULES THAT APPLY TO ISAs?

As mentioned above, money held in Sharia compliant ISAs cannot attract nor pay any interest. In addition, any money held in a halal ISA must be invested ethically under Islamic finance banking rules.

A good bank that is Sharia compliant will go to great lengths to ensure it remains Sharia-compliant and in line with Islamic finance rules. For example, it will steer clear of businesses and industries that are deemed to be haram and unethical (such as gambling, weapons, and alcohol).

A Sharia-compliant will ensure no interest is paid on your ISA, and that you are not charged interest. Instead, many banks will pay what is known as an 'Expected Profit Rate' This is deemed to be profit that is earned on the savings (as opposed to interest which is accrued).

WHAT TYPES OF HALAL ISAs ARE AVAILABLE?

There are a variety of ISAs that are available on the market. These include the following:

• Stocks and Shares ISAs: also known as investment ISAs, these types of ISAs invest your savings into investments including stocks, shares and commodities.
• Cash ISAs: these work like a traditional savings account.
• Lifetime ISAs are popular with people saving for retirement or their first home. They are only available to those over 18 and under 40 years old.

INVESTMENTS AND ISAs

Sharia-compliant banks will invest your money into those ventures that are deemed to be halal and Sharia compliant. Any money that is generated from this investment is then returned to investors.

For cash ISAs, the important distinction between standard ISAs and halal ISAs is that no interest is payable on halal ISAs.

Banks offering their customers halal ISAs will ensure that they have lots of information about the businesses linked to their ISA investments, and potential opportunities are screened for compliance with Sharia rules. Any bank offering Sharia-compliant products and services will have a dedicated team who is responsible for the management and screening of the product against Sharia principles and providing advice about the products.

As ISAs are seen as tax efficient this is a big draw and incentive for people to open an ISA account.

IS MONEY IN A HALAL ISA SAFE?

There are various different banks in the United Kingdom that offer their customers and investors halal ISAs. They include Al Rayan Bank, Ahil United Bank, and Gatehouse Bank. There is further information about the ISAs on the website of these banks. ISAs in the United Kingdom are regulated by the Financial Conduct Authority.

Halal ISAs are available to Muslims and non-Muslims and offer what is considered to be a decent return on investment. Any provider offering halal ISAs and any other Islamic finance product or service in the UK will need to be registered with the regulating authorities and follow the guidance that applies to any company offering financial services. This means that customers have some peace of mind in the event of a collapse.

You should always make sure that any investment product you are interested in is offered by an institution that is regulated. Under UK law, this means that the Financial Services Compensation Scheme protects investors savings of up to £85,000 in the same way as they would be in a traditional bank.

Islamic Finance provides a financing mechanism without Riba (interest), Gharar (gross uncertainty) and Maysir (gambling). These three are the key to all economic oppressions, economic imbalances and instability. They give rise to micro and macro risks which impact the overall wellbeing of an economy. Islamic Finance offers alternative structures and products which are free from Riba, Gharar and Maysir. One of these products is Commodity Murabaha.

In minorities where it is difficult to get Shariah compliant working capital financing for SMEs, Commodity Murabaha is an alternative Shariah compliant product and financing mechanism. Commodity Murabaha is the most common Islamic money market tool that is used to provide liquidity in the short-term Islamic money markets. The AAOIFI Shariah Standards, the majority of global Shariah scholars and global Shariah boards approve of Commodity Murabaha if it is implemented correctly with the correct controls to overcome financing challenges. The classical jurists also approved of a Tawarruq or Commodity Murabaha structure. In fact, Mufti Taqi Uthmani has produced a detailed research paper on Commodity Murabaha outlining the views of classical scholars. Ibn Muflih from the Hanbali school, Imam Shafi’i, Ibn al-Humam and Ibn Abidin from the Hanafi schools have all permitted this product and narrate its permissibility from other classical jurists[1].

Working capital financing is used to cover a company's short-term operational needs and not to buy long-term assets or investments. Those needs can include costs such as payroll, rent and inventory and other costs associated with daily operations etc. Practically, business owners who are looking for shariah-compliant working capital financing to cover their short-term operational needs generally prefer entering a Commodity Murabaha Agreement where a fixed profit rate and corresponding deferred sales price instalments is specified in advance. This allows them to finance their growth at a lower cost of capital as compared to for example using profit and loss sharing (PLS) arrangements such as Mudarabah and Musharakah that result in a higher effective cost of capital. PLS arrangements are better suited for business ventures where there is a higher risk of loss. Profit and loss sharing refers to financing whereby parties enter into equity financing arrangements where the financier has a share ownership in the business.Furthermore, a stable business looking to finance their working capital might not want to dilute their ownership through equity financing. Stable businesses will not want to share their upside so would prefer debt-based financing. By doing so, they are happy to protect the financier from the downside and retain exclusivity to the upside. A PLS is favourable where there is greater risk of downside and therefore the business is happy to share the upside.

In the UK, the most direct and common way for a party to obtain working capital is to obtain an interest-bearing loan from a third-party finance provider. Since a conventional loan represents a purely monetary transaction—in essence, the use of money by a party in exchange for the payment of compensation based on the length of usage—this type of loan may not be given or received by Shariah-compliant investors. The Commodity Murabaha product allows Muslims to finance their working capital without being exposed to interest-based financing.

The Commodity Murabaha agreement has been conscripted to fill the void. A customer enters into a Commodity Murabaha transaction not to obtain a physical asset for its use, but to engage in a series of purchase and sale transactions that result in the customer obtaining working capital. In a basic Murabaha transaction, the customer receives assets in return for a deferred payment obligation, and then employs those assets in its business. In a Commodity Murabaha transaction, the customer takes the additional step of selling the assets to a third party for cash, which represents the working capital (or financing for an acquisition, as the case may be) required by the customer. Note that the customer would not necessarily be required to sell the Assets to a third party; it merely is allowed to do so, as owner of the assets. The sale of the assets to a third party is not an element required to make the Commodity Murabaha transaction a valid transaction under Shariah.

To ensure that this product is not a smokescreen for Riba (usury/interest), contemporary Shariah scholars have placed several controls. The AAOIFI Shariah Standard highlights these controls to ensure that Commodity Murabaha aligns with the principles of the classical jurists. These controls are as follows:

1. Different brokers: The trades must involve the market and involve different brokers from the buy and sell side. This ensures that the trades are genuine and that the brokers are selling/buying the asset with an interest in the asset.
2. Real asset :The trades must involve a real asset. A fictitious product cannot be sold. The asset transaction must impact the inventory of the seller and the eventual buyer.
3. Real trades: All the Shariah requirements for trading must be met in terms of valid offer, acceptance, legal capacities of the parties, agreement on the commodity, agreement on price etc.
4. True ownership: The traders should assume true ownership through true sales of the underlying commodity.
5. Possession: The traders must assume possession; either physically, constructively or digitally. This possession must allow them to dispose of the asset or redeem the asset.
6. Correct Sequence: The Commodity Murabaha must be performed in a correct sequence which further establishes and validates all of the above key elements.
7. Discretion to not sell: The traders must have the discretion to not sell and hold. This ensures that the trade is not fictitious.
8. Different agents: The financier should not be the sole agent for all the parties involved in the Commodity Murabaha.

By meeting the above principles, the Commodity Murabaha is a Shariah compliant, asset-backed financing mechanism which aligns with the principles of Islamic Finance. From a micro-economic perspective and for a Muslim minority in the UK context, this product provides a valid Shariah compliant alternative in a system where every corner and every offer are interest-based. An overview of the Commodity Murabaha facility used by Qardus for SME business financing can be found here.

You can contact Mufti Faraz Adam on sharia@qardus.com

[1] Uthmani, M.T. (1998), Buhuth Fi Qadhayah Fiqhiyyah Mu’asarah. Dar al-Qalam