Qard Al-Hassan - Benevolent Lending

The growth of Sharia-compliant finance services has led to a similar growth in technology that is advancing and supporting sharia compliancy for businesses. Sharia-compliant fintech has emerged as driver of innovation and ensuring businesses can operate efficiently and within the rules of Islamic finance.

By leveraging technology, Sharia-compliant businesses are able to operate in a compliant way whilst also ensuring they are not left behind in the fintech revolution.

In addition, businesses can use technology to offer their clients and customers opportunities to become more engaged in socially responsible and ethical financial activities.

Technology that supports Sharia-compliant businesses to operate also supports Islamic finance principles relating to money, financial transactions, and any form of investment.

WHAT IS SHARIA-COMPLIANT TECHNOLOGY?

When we talk about Sharia-compliant financial technology (fintech), we refer to technological solutions that adhere to Islamic finance rules relating to Sharia-compliant transactions and services.

The fintech can take the form of online tools or cutting edge technology that includes artificial intelligence, blockchain, online banking, Sharia compliant banking, and apps that support Muslim businesses.

Sharia-compliant technology needs to ensure it is:

• Compliant
• Transparent
• In accordance with Islamic finance rules
• Accessible

Technology that is Sharia-compliant plays a critical role in ensuring that Muslim businesses can expand their reach and continue to grow. For many years, Muslim entrepreneurs and SMEs in the West had no alternative to the conventional form of finance structures offered by Western banking services.

These services and products were mainly not compliant with Sharia rules as they relied heavily on interest based lending (riba) which is strictly prohibited in Islam.

With the advent and growth of Islamic finance, the fintech industry has developed many different types of technology to support businesses and customers who want to carry out business transactions whilst remaining true to their Islamic principles.

The Intersection Of Ethics And Fintech

The combination of technology and ethics is a key component of Sharia compliant finance. Islamic finance rules are underpinned by concepts of social justice and ethics, and it therefore follows that technology must also play its role in implementing and amplifying ethics.

Leveraging technology within Islamic finance via fintech platforms and services means that businesses are increasing their ethical standing and social responsibility.

Sharia compliant fintech platforms and products needs to ensure that interest is prohibited, excessive uncertainty or ambiguity is avoided, and there is complete transparency. What technology facilitates within the Islamic finance sector, is efficiency, broader accessibility, and transparency. These are all key ethical concepts within the Islamic finance framework.

Smart contracts and decentralised platforms lead to greater accessibility and efficiency. They take the control away from large organisations and ensure that previously excluded financial groups can partake in business, whether as owners or customers.

Fintech Solutions

Technological solutions enable automated compliance, increased monitoring, reporting, real time tracking, and enhanced risk assessment and mitigation. These all align with the ethical values of Islamic finance and Sharia rules.

As technology and fintech solutions continue to evolve and come to the market, they are playing a crucial role in the accessibility of Sharia-compliant business finance. This is done through technology that enhances transparency, accessibility and offers innovation.

Let's have a look at some of the solutions that enable businesses to operate in a Sharia-compliant way:

• Smart contracts: smart contracts facilitate automation and transparency for all parties and therefore reducing any risk of exploitation and future disputes.
• Blockchain: blockchain technology is centralised this means control moves away from the conventional bank model and market. Blockchain also reduces the risk of fraud.
• Digital banking: online banking platforms have not only introduced global audiences to more finance options, but these platforms are often user friendly and Sharia compliant. Customers and businesses are able to access current accounts, business accounts and financial solutions at the press of a few buttons.
• Crowdfunding: these platforms are fast emerging as a Sharia compliant form of raising capital and investment. Many Muslim businesses and ventures across the world have created crowdfunding campaigns when they have not been able to find Sharia-compliant funding options for their project.
• AI: the future is definitely becoming more automated and managed. When it comes to the financial services economy, it is fair to say AI has the potential to revolutionise the products and services that already exist.
• Regulation tech (Regtech): for many Muslim businesses including those in the healthtech sector (dentists, pharmaceutical companies, health centres) regtech is critical. Not only does it ensure regulatory compliance, but is also essential for monitoring and maintaining Sharia compliancy.

Islamic Fintech And Social Innovation

The basic principles that underpin Islamic finance are rooted in financial stability and security. For businesses, this includes an element of corporate social responsibility. The advances in technology mean that fintech has provided businesses with the ability to compete on equal or better ground than those operating in the conventional banking system.

Technological innovations including online banking platforms have enhanced compliance with Sharia law. For example, online platforms have led to increased:

• Transparency
• Accessibility of Sharia compliant products
• Automation of compliance monitoring and reporting
• Secure transactions
• Educational information
• Customised Sharia-compliant solutions

Technology For Businesses And Individuals

It's not only businesses that are benefiting from compliant fintech solutions.

Consumers and customers are also becoming deeply ingrained in new and innovative digital ecosystems. Just consider how many people use online banking apps to monitor their spending, make obligatory payments such as zakat and sadaqa online, or donate their accrued interest payments in halal ways.

For businesses within the health sector such as dentists and pharmaceutical organisations, technology has enabled them to operate in a Sharia compliant way.

Technology aids businesses to plan their strategy whilst also ensuring they continue to adhere to Islamic finance principles.Technology is used to improve accuracy and efficiency by providing real time data. Sharia compliance can often be automated within the technological systems those in the health sector use.

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

Forex trading refers to foreign exchange trading where one currency is traded into another. Forex trading is important in the global markets and economy because it not only facilitates international trade, but is also the biggest financial market globally.

A common question is why does forex matter to the global markets? Not only does forex enable international investment and trade it also leads to financial stability. In order to conduct cross-border and cross-country financial transactions, governments and businesses rely on forex. One example of this is where a European company that is importing goods from the USA is able to exchange euros into dollars.

Central banks use forex to stabilise economies when currencies weaken or inflation increases. Forex ensures that money is able to flow across borders.

To decide whether forex trading is haram or halal depends on the the circumstances of the forex trade. We know that any forex trade that includes interest (riba), gambling (maisir) or uncertainty (gharar) could be deemed to be haram. However, when using interest-free accounts, Islamic forex accounts, and Sharia compliant strategies, forex trading can be done in a halal way.

Key Principles of Islamic Finance

What are some of the key Islamic finance principles to be mindful of when examining forex trading?

The main principles you should know about are:

• Prohibition of riba (interest): any kind of interest element attached to a trade is not permissible under Islamic finance rules. Riba is seen as unjustified financial gain and is haram. In forex trading watch out for overnight interest (swap fees) or interest earnt on sums held overnight.
• Avoidance of gharar (uncertainty): any significant uncertainty could render the forex trade haram. Avoid high-risk and speculative trades especially where traders gamble on price movements that have no real economic value. Similarly, avoid traders who trade without any underlying asset (see below). Uncertainty also applies to contract terms. If a trader has hidden fees or complex conditions then this needs to be challenged.
• Avoidance of maisir (speculation/gambling): Islam prohibits gambling and this also applies to trades where financial gains are linked to luck and unearned income. High-frequency and high-risk trades are best avoided.
• Ethical trading: trades and transactions that happen instantly such as spot forex trades (T+ 0 rule) are better than derivatives and futures that relate to settlements in the future.

The Halal Perspective

Forex trading is considered halal when conducted through Islamic accounts with zero interest. There are Islamic forex traders who adopt ethical practices in line with Islamic finance rules, ensuring adherence to Sharia law. The benefit for Muslims is that they can participate in investing and trading without breaching Islamic rules.

As a simple exchange of currencies, the following conditions can render a forex trade halal:

• Islamic swap-free accounts: these accounts are not interest-based and adhere to Islamic finance principles.
• Clear contracts: ensure you have transparent contract terms and pricing with real market involvement.
• Avoid gambling on price movements and work with experienced knowledgeable traders who understand Islamic finance and who are not single-mindedly focused on the margin or return for the parties.
• spot-trading: focus on actual asset ownership and immediate settlement rather than delayed settlements.
• Make sure your dealings are not gambling, but based on legitimate business trades.
• Day trading vs swing trading: day trading includes buying and selling on the same day. No positions are held overnight therefore the chance of incurring interest fees or swap fees is eliminated. Swing trading involves holding positions for many days at a time and this can include interest fees which are haram.

The Haram Perspective

Conventional forex trading is considered to be haram where there is interest payable/charged, and where there are elements of gambling or uncertainty. Always find out as much information you can about the broker, account, process and industry you are engaging with before starting any trading activity.

There are many Islamic brokers and experts that can help you navigate away from haram practices when it comes to currency trading and markets.

Avoid the following practices

1. interest payments.
2. hidden fees.
3. sudden changes in price.
4. manipulations by the brokers
5. excessive uncertainty and ambiguity
6. swap fees (eg overnight payments)
7. exploitation of others in trades
8. trades on market movements without understanding the fundamentals of the market
9. borrowing large amounts of money/ loan (leverage) which is often linked to riba and increased risk

According to Islamic scholars and the Fiqh Council, conventional forex trading is haram when rooted in traditional trading practices. Conventional trading practices go against Islamic beliefs and values relating to financial activities.

However, forex can be halal if:

• you use transparent traders and brokers with Islamic finance knowledge
• you use Islamic accounts with no interest (swap-free accounts)
• you conduct trades on real economic analysis and foundations
• pick Islamic-compliant brokers and organisations
• you avoid speculation, gambling and deception,
• you focus on immediate settlement and future payments
• your trades are based on real asset ownership
• trade using your own capital and not borrowed sums

Frequently Asked Questions

● Is forex trading a form of gambling?

Unless forex trading takes place within an Islamic finance framework (using Islamic accounts and knowledgeable brokers who understand the religious principles of Islam) then it could be deemed to be gambling. When conducted within Sharia rules, forex can be halal.

● How do Islamic accounts work?

Simple speaking, Islamic forex accounts avoid interest payments and interest rate calculations, and are created specifically to comply with Sharia rules about financial transactions.

● Is leverage allowed in Islam?

Leverage refers to traders borrowing money from other brokers to increase their potential profits. In traditional forex trading accounts leverage often includes interest payments on borrowing. Is Islam, leverage is allowed as long as there is no interest payable on leveraged funds.

● Can I trade forex without interest?

Yes, of course. Islamic forex accounts enable Muslims and ethical investors to trade without receiving or paying any interest. Islamic swap-free accounts were created as a solution for Muslim customers and are available on the market that are tailored to ensure they comply with Islamic finance principles.

Conclusion

Ultimately, whether or not forex trading is halal or haram depends on whether the trade itself complies with Islamic finance principles. Islamic scholars and experts can provide guidance and specify trading practices that are haram to help clarify if trading is halal or haram. However, by choosing Sharia-compliant brokers and accounts and focusing on ethical trading there are many ways of engaging in forex trading in a halal way.

There are obvious red flags to avoid for any Muslim (riba being one of them), but there are ways of ensuring that trades are halal. One of the best things you can do before any kind of financial investment or trade is to seek the advice of Islamic scholars and then speak to Muslim forex traders. These people are best placed to ensure that any trade you undertake is halal and remains compliant.

Remember, even Islamic accounts change over time so you need to ensure that there are proper risk management and risk mitigation strategies in place. Exercise caution, if something looks like it is too good to be true then the onus is on you to dig deeper.