Understand Riba in Islam - Interest Guide

If your business is to grow, you need to invest in it. Whether the business is a start up, just getting going, or an established firm looking to expand, it needs cash to pay for recruitment, infrastructure, marketing, stock or whatever it is that you need for growth.

Choosing the way to fund your business growth can make a huge difference to your firm's future. While raising finance has one objective - to give you more working capital to invest in growth - the method you choose can have significant implications.

There are different routes for raising this finance. You can put money into the business yourself, take out a bank loan, receive capital from an external investor or take one of several other options. Factors that influence your choice include why you want the finance, the amount involved, your attitude to risk and business ownership, the assets available and your plan for repaying the funds.

How much and for how long

Before entering into a funding arrangement, it's important to be very clear on how much money the business needs and the plan for repaying it. You're investing in future growth, meaning potentially more sales and more profit, but how long will it take for these to come through? Preparing a detailed budget and cashflow gives you clearer visibility of how long it will be before you can repay. While you can't predict the outcome of your business growth activities, you can, using some reasonable assumptions, form a good idea of what's likely to happen.

Armed with this information, you're now in a better position to choose the right funding option for your business.

Debt finance

Raising money for your business can involve borrowing money from your family, a bank or other financial institution. Borrowing, or debt finance, can take the form of a loan, a credit card, invoice finance or some alternative mechanism, such as peer-to-peer borrowing. You're committing to make repayments over a period of time, usually paying interest on the amount borrowed.

Debt finance is either secured or unsecured. A secured debt is where the amount borrowed is linked with an asset, such as a building, and the lender has rights over that asset should you default on making the agreed repayments. You're giving the lender some security that they'll get their money back should your business become unable to repay.
An unsecured debt is not linked to an asset, making it harder for the lender to recover their money. As a result, the interest payments on an unsecured arrangement are often higher and the amount you can borrow is lower. Many financial institutions ask that a director signs a personal guarantee, making them personally responsible for ensuring that the debt is settled.

One risk of debt finance is that the business can become trapped in a debt cycle. You're continually borrowing and paying interest, which eats away at profits. Debt finance can be hugely useful, but its use should be planned and managed.

Equity finance

Equity finance means exchanging part of your business in return for a cash investment. This can be a popular approach for a startup company, particularly where high growth is anticipated, but it needs substantial investment to get going. Venture capitalists and angel investors are always looking out for investment opportunities like this - a business they can buy into that will give them a high return, years in the future.

Because equity capital means giving up ownership of part of your business, it can also mean handing over an element of control. The extent of this should be agreed in advance, in order to set clear expectations. Some investors are comfortable with leaving the founder to manage the business while others want some input into strategic decisions. This can be useful where the investment comes from someone with solid commercial knowledge and experience that they are able to share. Some angel investors want to provide mentorship as part of their investment.

Business angels and others willing to make an investment in equity will want some assurance as to how they will get their money back, and more besides. This could be in the form of dividends or as proceeds from the sale of the business.

The benefits of equity investments include access to larger sums of capital, and potentially, access to the expertise of their investor and their network of contacts. The downside can be loss of total control.

Asset finance

Your choice of funding is broader when your business has assets, such as property, equipment or non-tangible items such as intellectual property. An asset has intrinsic value and this value can be released by taking out finance that's secured on the asset. An example of this is a sale and leaseback arrangement, where the business effectively sells the asset, say a major piece of equipment, and then leases it back from the new owner. This ensures that you can still use the asset, but you also get a lump sum payment from the sale.

A related approach to raising money is invoice finance, also known as invoice factoring. This is often used to improve cash flow in a business that raises invoices on credit terms. The company gets paid almost as soon as it's raised an invoice, even though the customer may take 30 days or even longer to settle the bill. As with most such asset finance arrangements, the interest rate on the money borrowed will affect its cost and the impact on the bottom line.

Business finance can also be raised against the value of an asset in the possession of the business owner, typically a private property.

Crowdfunding finance

The sharing of the risks and rewards of doing business has been at the heart of commercial funding for hundreds of years. That's the principle behind the stock market. Today, crowdfunding is a popular solution to the problem of finding investment for your business growth plans. It comes in various forms, allowing you to raise either debt or equity finance. There are a number of crowdfunding platforms online, each of which offers a different approach to both risk and reward for their members.

The Qardus option for business funding

We provide finance to small and medium-sized enterprises with growth potential that the business owners want to unlock. The funding available is from £50k to £200k with terms of between 6 and 36 months.

Our funding process is rooted in Islamic community principles and is certified as Sharia-compliant. As a result, we don't charge interest and we don't work in business sectors considered damaging to society, such as alcohol, tobacco or gambling.

Because of our principles, our funding solution is an attractive option for Muslim business owners, but we also provide funding to business owners outside the Muslim community.

We offer fast, flexible and affordable business growth funding that's firmly grounded in ethical principles.

Halal investment opportunities are those financial products and services that comply with Sharia rules about transactions. Investment is permitted in Islam, but the way you invest is important. Halal investments can span different products including stocks, real estate, commodities and business-to-business investment.

Types Of Halal Investments

There are many different types of halal investments available on the market today. Previously people may have questioned whether specific investment vehicles such as bonds, stocks, cryptocurrencies, and real estate are permissible Islamically.

However, there are now many Islamic and halal alternatives to these investment options that are Sharia compliant and screened for compliancy with Islamic rules about finance.

Let's have a look at some of the most common halal investment vehicles:

• Property/ real estate: property has always been a good investment opportunity but often these opportunities come with interest based products. Investing in real estate using Islamic finance vehicles (interest free) is a great way to grow a portfolio and build tangible assets with potential rental value.
• Islamic bonds (sukuk): sukuks are essentially financial certificates that represent ownership. The returns on sukuks are based on performance rather than interest, and often a fixed return is available.
• Islamic mutual funds: as the name suggests these kinds of funds are halal. The way they operate is that multiple investors pool funds into a diverse portfolio of halal stocks, bonds, and assets.
• Venture capital and private equity: investing in Sharia compliant companies can grow wealth in a halal way.
• Precious metals (gold, silver): you can hedge against inflation and unpredictable market conditions and fluctuations by investing in precious metals that hold their value.
• Halal crypto: As the Islamic finance market has grown, so too has the availability of halal bitcoin and crypto.

ARE INDEX FUNDS HALAL?

Whether an index fund is halal or not depends on how it was formed and how it operates. There are halal index funds available to those who want them. Any index fund that is Sharia compliant should have the following components:

• avoiding haram industries (gambling, pork, interest)
• be Sharia screened by experts in Islamic finance
• avoid debt leverage and riba
• have thresholds relating to revenue and debt

ARE ISAs HALAL?

ISAs (individual savings accounts) are a very popular saving account in the UK. They enable people to save money without paying tax on the interest or gains. You can specifically look for halal ISAs and if you do then look out for the following:

• If you are looking for a stocks and shares ISA make sure the stocks and shares are not linked to haram industries.
• Ensure there is no riba attached to the ISA - cash ISAs tend to be interest based which is not permissible in Islam.
• Search for halal funds that are available.

HOW CAN I GROW WEALTH AND INVEST WITHOUT ENGAGING IN INTEREST?

This is a common question many Muslims ask themselves. The answer to this question is simple - it is possible to grow wealth and invest without breaching Islamic rules.

The very first step is to seek our Islamic finance organisations, banks, lending institutions, services and products.

Make use of halal investment products already on the market. If you have non halal investments currently, these can be transferred to halal investment options with the right guidance and support.

There are many alternative finance and investment vehicles including peer to peer lending and crowdfunding. In addition, Islamic banks are now offering interest free services.

The most important thing would be to educate yourself on Islamic finance and what halal investment entails.

Avoiding Interest

One of the best places to start when wanting to grow and develop your halal investments is to avoid interest. Interest is strictly prohibited, and Muslims should do everything they can to avoid any financial vehicle that includes interest.

If you can actively avoid interest then you are on your way to long-term financial compliance with Islamic finance. This not only aligns with the teachings of the Quran but enables Muslims to fulfil their Islamic duty to remain Sharia-compliant.

Some people worry that avoiding interest will limit the growth of their investments but this is not the case. You can grow your portfolio of investments AND remain compliant with Islamic rules. In fact, there is evidence available that demonstrates that the growth potential of Islamic finance products matches that of more conventional investment models and is actually more sustainable.

Invest Ethically

Halal investments are centred on the notion of investing ethically. In fact, faith based investments not only lead to material growth but also spiritual growth. Ethical investment aligns itself with Islamic principles.

Ethical investments are not only Sharia compliant, but they also avoid harmful industries and practices. This not only supports ethical businesses but leads to greater social responsibility. The ethical investment market is growing fast as the demand for ethical investment opportunities continues to grow across the world.

Islamic banks in the UK and abroad offer ethical investment opportunities. When determining if a bank or products is Sharia compliant it is always important to ask the experts and scholars. In the UK the Islamic finance market is regulated, but you should always ask your own questions if you have any doubts.

Halal Investment Strategies

For those looking for halal investment strategies, the best place to start is always with a reputable Islamic finance organisation. Once you have found the bank or platform to use the following strategies will help you:

• Screening - make sure you screen products and services to ensure they are Sharia-compliant.
• Filtering - if you have any doubts about compliancy then remove these investments from your portfolio.
• Ongoing assessment - keep reviewing and assessing your investments for Sharia-compliancy.
• Diversify - keep your portfolio diversified and apply your capital to different sectors.
• Long-term planning - focus on the long-term and don't expect quick short-term gains.
• Focus on profit and loss sharing arrangements to spread the risk.
• Remain engaged - stay actively engaged with your investments.
• Education - awareness is key.
• Ethical evaluations - make sure you check the ethical valuation of your investments.
• Reinvestment - use returns well!

Debts And Leverage

When it comes to debt, Islam focuses on ensuring that debt is riba free. What this means is that no interest is charged in debt and no interest is paid. In the context of conventional mortgages and loans this can create issues for Muslims as many mortgages in conventional markets are based on interest.

However, there are an increasing number of halal mortgages available on the market. These halal mortgages help Muslims get onto the property ladder without breaching Sharia rules.

Halal mortgages operate without any form of interest. Usually a bank will buy the property outright and sell it back to the purchaser at a marked up price. The purchaser will then pay the price over a series of instalments.

Another version of the halal mortgage is where the bank will lease the property back to the buyer for a specified time until the buyer buys out the bank.

Halal Investment Opportunities

The important thing to note with halal investments is that no investment activity can involve any form of interest (riba).

Any form of investment instrument that includes interest is not permissible.

The division of profit should be equitable between the parties. The profit and loss sharing elements of the investment should be based on a joint venture structure. No one party to the transaction should have an excessive benefit.

Investment activities must stay clear of haram industries such as the pornography, gambling, alcohol, and pork industries.

Investments should not be speculative or uncertain (gharar). Uncertainty in investments goes against the Islamic finance notion of fairness and transparency between the parties. This means that investment activities such as options and futures are prohibited.

Investments should operate within a real and functional economy. Look for the following when investing:

• Fair trade enterprises
• Renewable energy
• Environmental projects
• Waste reduction
• Healthcare
• Education
• Affordable housing
• Social welfare projects
• Community development

Avoid the following:

• Stocks that are based on interest/ riba
• Stocks or companies/ businesses with high levels of debt
• Any haram business or product
• Mismanagement or poor corporate governance
• Exploitation within society
• Poor distribution of wealth and profits
• Poor performance when it comes to demonstrating ethical adherence.
• Adherence to Sharia rules relating to financial transactions and investments. Invest your money now

Unsecured loans are popular with businesses looking to raise money. The borrower receives a lump sum of cash, from their bank or other lender, and they repay it over a number of months or a few years. The money is put to work in the business and if all goes well, it should help generate revenues and profit that enable repayment of the loan plus any associated costs.

What is an unsecured business loan?

An unsecured business loan is where a business borrows money without providing security. This security is usually in the form of an asset, such as a building or valuable piece of equipment, which the business owns. This asset becomes a form of guarantee to the lender. Should the business be unable to repay the loan, the lender is given the right to take control of the asset and use it to recover some or all of the debt - typically by selling it.

An unsecured business loan is not linked to an asset in this way, which means the lender is taking a greater risk. If the business can't afford to repay the debt it will be more difficult for the lender to get the money back.

In recent years, it's become common for company directors to sign personal guarantees when taking out an unsecured loan. This gives the lender more confidence they have some recourse should the business become unable to make repayments.

Reasons for taking an unsecured business loan

One of the main reasons why businesses borrow is to fund growth plans. This growth requires investment in advance - it could mean opening a new office, hiring new staff or purchasing new equipment. Many businesses don't have the working capital needed for such investment, meaning they need to find a way to raise the funds. An unsecured loan is a common choice.

As part of the growth plans the business owner will usually have prepared a business plan. This sets out how they intend to spend the capital they have borrowed and includes a budget for repayments.

If a business wants to borrow because it faces cashflow difficulties in its daily operations, it's unlikely to be approved for an unsecured loan. Before they agree to make a loan, potential lenders will perform a series of checks on the business and business owners, in order to assess the credit risk. This includes looking at the firm's credit history, its credit rating, and reviewing information supplied by the business such as financial accounts, budgets and cash flow projections. These checks help the lender to quantify the financial health of the business.

For businesses facing short-term cash flow problems, other forms of funding could be more accessible, such as invoice finance or merchant cash advances.

Benefits of an unsecured business loan

Ideal for smaller amounts - Unsecured loans are typically for smaller amounts, usually less than around £15,000.

Quicker to arrange - Because the amounts are smaller and there are no assets involved, the legal and financial application processes are faster. It's often possible to arrange an unsecured loan in just a few days.

Good for businesses with trading history - Finance providers look more favourably on businesses and owners who can demonstrate a history of growth over a number of years. Such businesses will have a better credit score, because they have managed their finances well.

Assets not put at risk - An unsecured loan leaves control of all the assets with the business.

Alternatives to an unsecured loan

While they can be a convenient way to raise money for your business, an unsecured loan is not always the most cost-effective solution, as the fees tend to be higher to reflect the risk to the lender. These loans can also be hard for startup businesses to access, because they lack the trading history needed to demonstrate creditworthiness.

Alternatives to unsecured loans include:

• Equity finance, such as funding from an angel investor or venture capitalists.
• A private loan, from friends or family.
• A secured loan.
• An overdraft facility with your bank.
• A mortgage on property.
• A startup loan, designed for very new businesses.
• Peer-to-peer crowdfunding.

The range of funding options continues to increase, with a growing number of fintechs bringing innovation to the business finance market.

Funding for growing businesses from Qardus

We help business owners get access to growth finance. The funding we provide is ​of between £50k and £200k on terms of between 6 and 36 months.

You can use this finance for a variety of business purposes, such as purchasing new equipment or other assets, hiring and training new employees, investing in improved processes or boosting your inventory. Our funding allows business owners to invest for growth. Because we want to see businesses do well, we work with firms that have a proven product and a strong management team.

Our clients are drawn from across the UK, operating in different industries. What they have in common, in addition to their growth ambitions, is a commitment to the wider community, good governance and strong ethical principles.

The funding we provide is certified Sharia-compliant, meaning it's operated in line with Islamic finance principles. This does not mean it's only available to Muslim-owned businesses. Many of our clients are outside the Muslim community but they share our values, and operate in industries we are open to supporting.

If your business is looking for growth funding that's fast, affordable and ethical, get in touch with us today.