Islamic Finance Guide to Investing Your Money Ethically

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.

For Muslims living in the UK, they are bound by the rules and laws relating to inheritance tax and wills. These rules are not based on Sharia law or Islam but are the rules of the country in which you reside. Whilst Sharia rules include provisions relating to managing the estate on the death of someone, the rules in the UK are more stringent and need to be understood.

Islamic Sharia law states that Muslims need to ensure that their assets are distributed according to Islamic rules on their death. Sharia rules outline how assets should be divided amongst surviving relatives.

For Muslims living in Muslim countries, the laws relating to inheritance and intestacy are based on Sharia rules so this makes things easier when it comes to the division of assets. However, for Muslims living in non-Muslim countries such as the UK, if they die without a will then their assets will be distributed in accordance with the domestic laws and not Sharia law.

WHAT IS INHERITANCE TAX?

Inheritance tax is essentially a tax applied on the estate of someone who dies. This tax is paid on the property and assets of the deceased above the inheritance tax threshold.

The aim of inheritance tax is to generate revenue for the government and to implement broader policies. For those wanting specific information about their tax liability they should speak to professionals who are experts in the field of tax and estate planning/ decision making.

HOW MUCH IS TAX FREE ON INHERITANCE?

Currently, in the UK inheritance tax is charged on 40% on all assets that exceed what is known as the nil rate band of £325,000.

No inheritance tax is payable on the first £325,000 of the estate. Above that, 40% inheritance tax is charged. This amount is lower if leaving your home to direct descendants.

ARE MUSLIMS EXEMPT FROM INHERITANCE TAX?

Muslims in the UK are not exempt from paying inheritance tax. However, there are some rules in the UK tax regime that can accommodate cultural or religious practices. These include:

• Charitable donations: zakat and sadqa payments and charitable bequests in wills made to qualifying charities can benefit from exemptions.
• Spouse exemptions: Normally, the transfer of assets between spousal beneficiaries is exempt from inheritance tax.
• Business relief: there are also some exemptions and reliefs that apply to businesses and agricultural assets.

DO MUSLIMS IN THE UK PAY INHERITANCE TAX?

Yes, Muslims in the UK are subject to the laws and rules relating to inheritance tax.

Inheritance tax in the UK is not based on religion but on the actual value of the estate and the rules of the country you live in.

HOW TO LEGALLY AVOID PAYING INHERITANCE TAX?

There are some strategies you can use legally to reduce your inheritance tax bill.

• Create a tax efficient Islamic will
• Effectively utilise the nil rate band
• Speak to professionals and experts for advice on managing your assets
• Use the spouse exemption
• Invest in business or agricultural property
• Set up tax efficient trusts
• Make use of charitable donations
• Gift your assets in a tax efficient way

Always speak to Sharia tax experts when planning your will and estate distribution.

WHO IS EXEMPT FROM PAYING INHERITANCE TAX IN THE UK?

There are some people and assets that are exempt from inheritance tax including spouses and direct dependents. The general rule is that if your estate exceeds the £325,000 threshold you need to start thinking about estate planning.

Exemptions under the tax rules are subject to conditions and criteria, so always speak to experts before making any decision.

WHAT ARE THE RULES ABOUT INHERITANCE IN ISLAM?

Islam sets out some clear provisions when it comes to inheritance and death. The first step is to ensure you have a legally valid will in place.Islam sets out the order or priority when it comes to the distribution of funds. The order of payments is as follows:

• funeral costs and expenses
• Outstanding debts
• Bequests to be honoured (but not where the value exceeds one third of the value of the estate/remaining assets
• distribution of remaining assets to family

Whilst Islam predetermines how our estate is divided on our death, it is still important to ensure we have a will in place.

WHAT HAPPENS IF YOU HAVE MORE THAN ONE WIFE?

In the UK as the inheritance tax rules are not based on religion, this means that if Islamically you have more than one wife the tax rules will be applied as per UK laws.

Only the legal marriage (as per UK rules) will be recognised for the purposes of determining inheritance tax responsibilities and liabilities.

CAN HALF-BROTHERS INHERIT IN ISLAM?

The rights of the half brothers inheritance depends on many factors including the presence of other heirs in the family, and the proportion of shares (see above) and order or priority.

Half brothers and sisters can inherit if there are no full brothers and sisters.

RIGHTS OF DAUGHTERS IN ISLAM?

Islam focuses on the equality of gender when it comes to inheritance rights. Daughters are entitled to inherit from parents who are deceased alongside other relatives.

Islam states that daughters are allocated a share in accordance with the principles outlined below.

As primary heirs, daughters will take priority over distant relatives.

The Division Of Jewellery In Islam

When it comes to jewellery, Islam provides guidelines for the distribution of the estate of the deceased and these guidelines include jewellery. Those distributing the estate should be mindful of the fixed shares for the different categories of heirs as stipulated by Islamic rules.

Jewellery is considered part of the estate of the deceased and is subject to Islamic rules of asset division. Of course, the deceased can leave specific bequests in their will when it comes to jewellery and it is expected that the other heirs honour the wishes of the deceased and consent to the bequests.

Islamic Rules Relating To Wills And And Payment To Heirs

Sharia law states that you can distribute up to one third of your estate however you want to on your death. This applies as long as the third share is passed on to someone that is not already entitled to a fixed share of the estate.How is the remaining inheritance divided in Islam?The remaining two thirds of the estate on death should be distributed as follows:

• the surviving wife is entitled to receive one eighth of the husband's estate. If there are no children from the marriage then the wife receives one quarter of the estate.
• the surviving husband will be entitled to a quarter of his deceased wife's estate. If there are no children of the marriage then the husband received one half.
• depending on what the entitlement of the surviving spouse is, the mother of the deceased is entitled to one sixth of the estate. This figure is one third in the event that the deceased had no children.
• If the deceased's father is alive, then the mother is entitled to one quarter of the estate (where there are no children).
• If the deceased does not have a spouse, children or father, then the mother will inherit one half of the estate.
• If the deceased leaves behind no children, the father of the deceased will receive the surplus after distribution.
• If the deceased leaves behind one (or more) son, then the father is entitled to one sixth of the estate (but no entitlement to any surplus).
• If the deceased is survived by a spouse and daughters, then the father of the deceased will receive one sixth of the estate. In addition, the father will receive one sixth of any remaining surplus once the division of the estate has completed.
• surviving children are entitled to the surplus of the estate once the remaining spouse and parents have received their share.
• male grandchildren and children are entitled to over 50% of the estate when compared to the female children and grandchildren.
• If there are two plus surviving daughters then they will share two thirds of the estate equally between themselves (as long as there are no other surviving relatives).

CAN YOU REFUSE INHERITANCE IN ISLAM?

The simple answer to this is yes, you can refuse inheritance. However, any voluntary refusal should be made after careful consideration.

WHICH COUNTRIES HAVE NO INHERITANCE TAX?

There are many countries across the globe that do not have inheritance tax regimes. These include:

• UAE
• Saudi Arabia
• Qatar
• Oman
• Bahrain
• Monaco
• Brunei
• Slovakia

WHAT IS GHARAR?

Islamic finance defines gharar as something that is uncertain, risky, or hazardous. If there is a financial transaction where any of the basic elements of the agreement are unclear, uncertain, or ambiguous then the transaction or activity could be deemed to have an element of gharar.

Using the principles of Sharia law, the reason gharar is prohibited in Islam is that it removes transparency, openness, and certainty in financial transactions and contracts.

Gharar And Islamic Finance

According to Islamic finance principles, which themselves are based on Sharia law, gharar is a fundamental prohibition in Islam as it results in a lack of certainty.

This lack of certainty then increases the level of risk and liability to one or both parties.

Islamic Finance And Ethics

Islamic finance is based on ethical finance. What this means is that whilst Islamic finance and Sharia rules recognise the importance of finance in society, there is a need to ensure that there is intrinsic value and ethical boundaries when parties transact.

The underlying ethical principles in Islamic finance aim to ensure that there is transparency and certainty for the parties involved.

When you understand the ethical nature of Islamic finance you appreciate how it works to protect the parties and ensure there is fairness.

Examples Of Gharar

Some examples of gharar in modern contracts and financial transactions include the following:

• options contracts
• future sales
• selling the unknown
• short selling
• sales of debt
• day trading

Essentially, the sale of anything which is not present or tangible is gharar, and therefore not permissible in Islam.

Similarly, if ownership of an asset or product is uncertain this could also be considered to be gharar.

This is why it is important that you understand the concept of gharar and how it is applied, whether you are dealing with a bank, business, financial institution, web page or individual.

Elements Of Gharar

In order to decide if any financial tranaction or business dealing has an element of gharar you need to assess the level of certainty within the terms of the deal.

Some of the main terms you need to understand include the nature of the transaction, the parties, the language of the contract, the product, or service involved.

Gharar has certain characteristics that you need to be aware of.

• the parties: gharar does not always relate to uncertain or risky terms in the contract. Gharar could also occur in the nature of the parties involved, their relative bargaining power, their openness and the level of risk they take on
• contract terms: language used in the contract must be clear and concise.
• two or more sales in one: this refers to deals that are uncertain with timings. For example, if a seller states they will 'sell this asset for £100 in cash today and £150 next week'. The timings here are uncertain.
• conditional contracts: this refers to conditions in a contract that are unknown and uncertain. For example, if a seller states they will sell the buyer an item if the market improves.
• price : if the price in a contract is not known then this could be deemed to be gharar. You should always be careful where the payment terms are not clear.
• Speculation: if you have agreed terms that are speculative then this is not permitted.
• Subject matter: ie, if there is uncertainty in the subject of the contract.
• Delivery: again, be careful if there are no specified delivery terms or final contract date.

Impact Of Gharar

In Islamic finance, certain types of contract are void. These include contracts that are deemed to be invalid, and contracts that are defective.

Invalid contracts are those where key details are missing, such as the price, the payment terms, and the duration.

Defective contracts are contracts which do not contractually bind the parties correctly.Based on these principles, any contract that includes elements of gharar can be deemed to be both invalid and defective in Islam.

How To Avoid Gharar

Whether you are looking to avoid gharar in your financial dealings or daily life, there are some things you can do to ensure that you are compliant with Sharia rules.

You can ensure that there is certainty in your dealings, fairness and openness, and that you are not misleading anyone else. Any transaction should involve the consent and knowledge of the parties involved.

Gharar And Trade

When it comes to trading or business, one of the main ways to ensure you do not fall into the gharar trap is to ensure that any trading has the consent of both parties.

Any form of trading in risk is not permissible. If it is likely that one party in the transaction is likely to make a significant gain at the cost of the other, then the result is that this is generally forbidden under Sharia law.

Any exchange that could lead to exploitation and injustice should be avoided. Instead, you should aim to ensure that all your dealings are transparent, consensual, and satisfactory to both parties.