The Islamic Perspective on Debt
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.
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The success of your business depends on you maintaining a healthy cashflow. You want to have money available in order to pay your bills and your staff on a weekly or monthly basis, along with having capacity for growth.
It doesn't matter how great your product or your marketing might be. The foundation of success for businesses, and the reason why some don't make it, is cashflow. The moment you don't have the money in the bank to pay your staff, suppliers or tax bills, you could be in big trouble. Cashflow planning helps you to see this coming, giving you time to take action.
Cashflow planning is essential
It's much more comfortable when you have consistent, positive cashflow. There are no moments of panic when you fret over how you'll pay a particular commitment. You have more time to plan ahead, to have an eye on the future rather than worrying about today.
Consistent, positive cashflow doesn't just happen. Being profitable doesn't guarantee that your business will always have the cash to meet your commitments. Income from sales doesn't always flow in fast enough to cover payments you need to make. Achieving a steady cashflow requires planning. It starts by making a cashflow forecast.
Prepare a cashflow forecast
A cashflow forecast is a plan of the money your business expects to receive and to pay out in the near future. It helps you to predict how much money will be in your bank account at any point in time. A cashflow forecast is usually broken down into months or weeks to make it easier to plan.
To construct your cashflow forecast you'll want to use a spreadsheet or a cashflow planning tool. Your accounting system can provide useful information about your past cashflow but it's not so helpful for predicting the future, because it's based on transactions that have already occurred.The benefits of preparing and maintaining a cashflow forecast include:
- You have better control over your business finances.
- It helps you to make realistic decisions about spending.
- You can plan for the future more easily.
Your cashflow forecast is just that - a forecast. The reality will turn out differently, although a well-prepared forecast won't be that far off what actually happens.
Use a forecast to make better business growth decisions
Growing a successful business requires you to make choices. If your business model is sound it's likely your business will expand naturally, at least in its early days. However, it won't be too long before the rate of growth levels off, as you've satisfied the initial levels of demand. Maintaining growth, or restarting it, requires decisions and actions that will bring in more customers and extend your opportunities to earn more revenue.
Your cashflow forecast will help you to assess the impact of these decisions. It allows you to model what's likely to happen in the future, as you incur more costs with the objective of growing sales.The forecast will help you determine the costs and benefits of actions such as:
- Launching a new marketing campaign.
- Taking on a new member of staff.
- Selling a new product.
- Purchasing new equipment.
- Expanding into a new geographical area.
- Raising additional working capital.
Forecasting requires making some estimates about likely future income based on your choices.
How to build a cashflow forecast
Whatever tool you use to build your forecast, it will have three basic sections. These are:
- Incoming cash
- Outgoing cash
- The net balance
Step 1 - Incoming cash
This section is a list of your different sources of income. Depending on how you sell, you may want to break this down into different categories based on the type of income, such as cash sales, credit sales, credit card settlement and the like.
Not all incoming cash is from sales. You may also receive cash from loans, equity investments, tax refunds and other sources.
Once you've completed this section, you should have a clear idea of how much money you expect to receive on a weekly or monthly basis, over the period of the forecast. Typically, a cashflow forecast will look six months to a year ahead, and longer for bigger projects.
Step 2- Outgoing cash
In the same way, list all the payments made from your business. Be sure to include every form of payment, and take care to include irregular or annual payments. To help you check that you've not missed something, take a look at your accounts for the previous year to see what payments were made.
Payments you're likely to have in this section include:
- Stock purchases
- Payroll
- Tax payments
- Loan repayments
- Asset purchases
- Expense reimbursements
Once you've completed this section you should have a total for the cash outgoings on a weekly or monthly basis.
Step 3 - Net balance
The net balance is the difference between the total incoming cash and the total outgoing cash. If you add your opening bank balance, the cashflow forecast will now give you an estimate of how much money you will have in your bank account on any particular day.
In a strong, healthy business the net balance should be positive. If it's not, the forecast will help you to identify the reason. It may be that you're investing in business growth, which will bring in more future sales income but involves advance costs. The forecast will help you identify whether you need to source short or medium-term funding from elsewhere, and the scale of that funding.
Common problems with cashflow forecasts
Errors occur in cashflow forecasts because the process involves making estimates and it often relies on data that's input into a spreadsheet manually, rather than taken directly from your accounting system.
Problems to look out for in your cashflow forecast include:
- Overlooking VAT on sales, purchases and tax payments.
- Inaccurate information about future receipts and payments.
- Big differences between actual and estimated sales.
It takes time to build and refine an accurate cashflow forecast. Don't be surprised that you need to alter yours often, adding in unexpected receipts and payments.
Keep your forecast up to date
Because your cashflow forecast is based on estimates and assumptions, it will very quickly differ from what actually happens. This means you should update it regularly and often. A well-run business will maintain their cashflow forecast several times a week, perhaps even daily, to keep it as accurate as possible.
Cashflow planning is a vital business activity that you can't afford to overlook or put off. If you're planning to grow your business successfully, the time you put into cashflow forecasting is a wise investment.
Ethical business funding from Qardus
We support growing businesses by providing growth finance of between £50k to £200k on terms of between 6 and 36 months. This finance is helping UK-based small and medium-sized companies to expand their operations and their market share.
We fund businesses that have demonstrated their capability with a proven product and management team. Our clients are drawn from many different industries, but our ethical position means we cannot work with companies involved with products considered detrimental to the welfare of society, such as gambling, alcohol and tobacco. This is because we operate based on Islamic community principles. Our funding process is certified as Sharia-compliant.
We work with businesses and their owners both inside and outside the Muslim community. Any business that operates in line with our ethical values is welcome to apply for funding.
If your business is looking for growth funding that's fast, affordable and ethical, get in touch with us today.
WHAT IS A VENTURE CAPITAL TRUST?
A venture capital trust (VCT) is essentially an investment company. In the UK the government introduced VCTs in 1995 as a way of ensuring that investors could invest in start-up companies. The government was keen to encourage investment in entrepreneurial businesses by offering tax relief to investors. Recently there has been discussion and debate about whether VCTs are halal or haram.
For new businesses, VCTs are a great way of raising investment, and for investors they are an opportunity to invest in upcoming businesses.
For anyone looking for Sharia compliant investing, VCTs can be a good opportunity to invest in a halal way. Investing in VCTs can be halal, but you have to ensure that the VCT you invest in complies with Sharia rules about investment and financial transactions.
In recent years, as the Islamic finance market has expanded so too has the desire for Sharia compliant VCTs. The Islamic VCT market is innovative and presents a viable alternative to conventional investment models which are not always acceptable to Muslims who want to invest in line with Sharia rules.
Whilst it is always a personal choice as to where investors want to invest, for Muslims there are additional considerations that require them to be mindful of Islamic laws.
Let's have a look at how VCTs work and how they can operate in a halal way.
HOW DO VENTURE CAPITAL TRUSTS WORK?
VCTs work by raising money and then using the funds to invest in new and innovative companies. Usually these companies are innovative and privately owned. The idea is that the investment raised is then used to generate a profit and solid return for the investment.
The company can be dealing in products and services, offering employment opportunities, and/or meeting a need in the economy. The number of companies seeking investment is never-ending.
As an investor in a VCT, the investor becomes a shareholder of the trust. It is important to note that the investor does not become a shareholder of each individual company, rather the investor becomes a shareholder of the trust in its entirety.
Most VCTs will invest in different companies. This enables the VCT to keep its investment portfolio options diverse and spreads the risk. It is always important to ensure you have all the information you need about the VCT before investing.
When the companies within the trust return a profit, this is paid over to the shareholders.
WHAT DO VENTURE CAPITAL TRUSTS INVEST IN?
Most VCTs will invest in new, small, and entrepreneurial companies across a wide variety of sectors. These can include tech companies, retail, clothing brands, food outlets and many more.
Many of these companies will be privately owned, and some of them are quoted on the Alternative Investment Market or the London Stock Exchange.
Different Types Of Venture Capital Trusts
There are some different types of VCTs. What differentiates them from each other is the investment focus and area:
- specialist VCTs : these are VCTs that remain focused on a specific interest and sector. For example, there are VCTs that only invest in healthcare, or retail. Due to the lack of choice and sector diversification, this often means that they can carry more risk.
- Generalist VCTs : these types of VCT are wide-ranging when it comes to investment. They invest in companies across different sectors. The value to the investor is that there is diversification and less risk.
- AIM VCTs : the Alternative Index Market (AIM) VCTs invest in shares issued by AIM quoted companies. The AIM was set up by the London Stock Exchange in 1995 to ensure that there was a market for companies who can't (or won't) meet the demanding requirements for listing on the London Stock Exchange.
Venture Capital Trusts And Tax Advantages
One of the main reasons VCTs are popular is that they offer tax incentives. Investors can take advantage of:
- tax free dividends
- up to 30% income tax relief
- tax free growth
- capital gains tax exemptions and deferrals
WHAT IS VENTURE CAPITAL TRUST TAX RELIEF?
VCT tax relief can be claimed when an income tax return is filed with HMRC.
What this means for investors is that they can end up with a lower income tax bill, or even a refund if they have already paid their tax.
Islamic Finance And Venture Capital Trusts
Remember, one of the most critical elements of ensuring compliance with Sharia law when investing in venture capital trusts is that you need to work with a Sharia aware, and Sharia compliant, financial advisor.
This will ensure that the investment contract AND investment models are both compliant with Islamic finance rules.
Islamic Venture Capital Trusts Vs Conventional Capital Trusts
The main difference between conventional VCTs and Islamic VCTs is that Islamic VCTs must comply with Islamic finance rules relating to finance and financial transactions.
Islamic VCTs need to stay away from any form of investment in non-permissible, or haram, industries.
A very simple example of this would be as follows: a conventional VCT could invest in brewery shares. However, an Islamic VCT should stay away from any alcohol related industry.
Going further, anyone looking to invest in Sharia compliant VCTs should do additional due diligence and ask questions about the company they invest in. Does it operate ethically? Does it have conventional debts on its book that is interest-based? If so, then the VCT is not considered to be halal.
Advantages Of Investing In Venture Capital Trusts For Muslims
As long as the VCT is Sharia compliant, Muslim investors offer a diverse range of investment options. Muslim investors can take advantage of investing in other Muslim businesses and industries.
There are numerous ethical investment opportunities with halal VCTs that are attractive to Muslims. Socially responsible investing is a core principle of Islamic finance and there are VCTs out there that are ethical and socially responsible.
Halal VCTs also offer the potential for job creation with early stage companies. Supporting these businesses mean Muslims can indirectly be helping struggling economies and economic development. This aligns with the Islamic finance principles that relate to promoting economic wellbeing and financial inclusion.
WHAT IS WAKALA?
Wakala is a popular model Islamic VCTs when it comes to raising capital.
Wakala permits the asset manager of the trust (on behalf of the investor) to act on their behalf based on agreed conditions and terms.
Both parties then share the profits generated, and take on the risk of any losses together. This kind of profit and loss sharing arrangement aligns with Islamic finance principles.
Mudaraba And Venture Capital Trusts
When it comes to investing in start up companies, mudaraba is a common model that is used. The mudaraba contract is a contract that enables one party to the contract to bring assets in and for the other party to bring in effort and experience.
This means that investor provides the financing, and the entrepreneur takes responsibility for the day to day management of the trust. The contract outlines the respective responsibilities of each party and the profit sharing arrangement.
As already mentioned, despite the many advantages of halal VCTs, investors need to work with Sharia compliant advisors who can direct them to halal VCTs.
Consulting with knowledgeable advisors means you have specific guidance and adherence to Sharia rules.
WHAT IS QARD AL-HASSAN?
Qard al-hassan, also known as qard al-hasan, is an Islamic finance term that essentially refers to a loan that is interest free. Typically in a transaction that includes qard al-hassan, the borrower will repay the amount owing under the principal amount without any other mark up or interest payment being charged. Qard al-hassan financial products are compliant with Sharia rules that dictate that interest (riba) payments are not permissible, whether the interest is being paid or being charged.
These types of loans offer financial solutions for Muslims looking to borrow funds that do not include any interest payments.
Qard al-hassan loans are loans that are provided to help others. The word hassan itself means acceptable or good (of good faith). Islamic banking services are now offering qard al-hassan loans for both Muslims and non-Muslims.
Qard Al-Hassan Loans
In Islam and Islamic banking, Qard al-hasan loans do not have an interest rate element, and this means that businesses and consumers are able to borrow money on a goodwill basis. Generally speaking, qard al-hasan loans tend to be used for welfare purposes. The Quran stipulates that Muslims should endeavour to provide these types of benevolent loans where possible and to those who need these kinds of services.
"Establish regular prayer and give regular charity and give Allah Qard Hassan" (Quran 73:20)
The principle of qard al-hassan in Islam enables Muslims to further the social justice ethos that underpins Islamic finance. Islamic finance facilitates loans from those with the funds to those who need financial assistance without breaching Sharia rules. Qard al-hassan can be viewed as a loan agreement that is akin to giving charity. The borrower and lender sign an agreement confirming the terms of the qard.
HOW DOES QARD AL-HASSAN WORK?
In Islam, qard al-hassan works in the following way. A lender will lend a business or service an amount of money that they need (usually for social justice purposes). The principal amount borrowed will be interest-free. The borrower will then repay the amount of money borrowed without any interest or surplus payments owing. Borrowers are permitted to pay an additional amount back to the lender as a gesture of goodwill, but this cannot be done based on any promise or commitment.
Qard al-hassan loans do not increase over time or accumulate any interest charges like traditional loans do. This means they offer problem solving solutions for Muslims.
The most important element of Islamic qard al-hasan loans is that they are untouched by any form of riba. There should not be any reference or link to the economic market conditions and fluctuations, and the lender cannot ask for the return of the loan before the contractual repayment period ends.
Qard Al-Hassan - The Redistribution Of Wealth
Islamic finance systems focus on socio-economic justice and the enhanced wellbeing of society, especially the alleviation of poverty. Alongside sadaqa and zakat, qard al-hassan is an essential Islamic finance instrument of redistribution of wealth.
Qard al-hassan minimises the cost of borrowing and remains compliant with Islamic Sharia law.
Social Justice, Qard And The Islamic Finance Economic System
The Islamic finance economic system has always centred on principles of social justice (as mirrored throughout the practices and teachings of Islam). The focus of the finance system is to ensure and improve the overall wellbeing of society and using money to enhance social conditions.
Qard al-hassan is a key concept that acts as a crucial redistributive instrument. The distribution of funds from the rich to the poor aims to reinforce social unity and cooperation. As the global experience of, and appetite for, ethical finance options and factor analysis continues to grow, qard al-hassan is fast emerging as an important tool in the fight against poverty and the drive to ensure there is more financial freedom and equity for poorer communities.
As more and more Islamic finance companies and banks are offering innovative qard al-hassan products and financial services, project management for those customers and business operations working within the social justice sector will become easier and more accessible. Qard al-hassan services will start to become more readily available in banking and private sector financial industries.
The opinion of scholars is that qard al-hassan loans are problem solving as they facilitate the redistribution of funds that are compliant with ethical and Islamic finance principles. Islamic finance is facilitating financial freedom and investment options for those who have historically been excluded from traditional financial markets and industries that did not cater to their religious requirements.
According to Sharia law, qard al-hassan loans are deemed to be acts of good faith, and loans that help those in need. Advancement of news relating to qard products and websites, and information technology means that qard al-hassan financial services are more readily available and searched for online, especially in Middle Eastern territories. This has enhanced the supply and demand of qard services. Historically, qard al-hassan loans have proved to be effective for economic growth, enhancing employment, and alleviating poverty.
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