Use Islamic Finance For Your Small Business – What Is It?
What is Islamic Finance?
Islamic finance is a means of financing or banking in a way that respects the principles of Sharia law and is oriented towards the Islamic economy. Sharia means the clear, well-trodden path to the water in Arabic. The basic principle of Islamic finance is to avoid financial activities that could be considered either harmful (haram) or risky for the user.
The main difference between Islamic finance and standard finance is that charging interest for prohibited purposes is prohibited. Traditional banks and credit facilities make money by collecting fees and monthly interest fees on borrowers.
The main features of Sharia-compliant funding are:
- A ban on what the Quran calls “Riba” and we would call it paying interest
- Share losses and gains
What is Sharia-Compliant Funding?
Sharia-compliant funding prohibits undue risk or uncertainty, as well as restricting any form of gambling or speculation.
Companies involved in the following activities cannot use Islamic finance:
- pork meat
- Entertainment such as music, television or cinema
- Arms sales
Do you have to be Muslim to use Islamic finance?
No, you do not have to be a Muslim as long as your business is halal (legal) or promotes a social good.
What Kind of Small Businesses Fit Islamic Financing?
Islamic finance dictates that a company should be of benefit to the entire community rather than just making a profit.
Are there any benefits to sharia-compliant funding?
When you get a loan from a traditional bank and something goes wrong, the lender’s top priority is to get their money back, even if it means the entrepreneur is stranded. Islamic banks, on the other hand, are obliged to share in both the risks and the opportunities.
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What does Islamic finance mean in practice?
The most commonly used instruments of Sharia-compliant financing are profit and loss sharing programs (musharaka). The financial services provider takes on a certain amount of ownership or equity in the business so that it can benefit from participating in the profits generated. However, losses are also shared in proportion to each partner’s investment capital.
Another agreement is ijara, which allows the financial institution to make a profit by charging lease rents rather than borrowing money and earning interest.
A Murabaha agreement is a form of Islamic finance contract in which an asset is sold for a cost plus profit. It is considered both halal (permitted) and Sharia-compliant.
A basic Murabaha agreement gives the small business owner the resources he needs to develop his business. These resources are assets that they can use in the company, such as: B. Machines and systems or inventory. In the context of a Murabaha transaction, the financial institution may not charge interest on any financing. Instead, the vendor simply buys an asset from the company and then sells it back to the business owner along with a single additional fee. This one-time fixed fee is of course agreed in advance by both the lender and the entrepreneur.
If a small business defaults on repayments, late payment fees are acceptable. However, the financial institution must distribute the amount of late payment fees it receives – after deducting its actual costs – to charitable foundations, which can be selected at the discretion of the Sharia board of directors.
What are the disadvantages of Islamic funding?
Since some financial aspects of Sharia law can be interpreted, some instruments may be offered by some institutions, but others are not.
Some non-Muslim customers may also find that the conditions imposed by Islamic banks prevent them from taking advantage of immediate opportunities. This is because speculation or the use of short-term market trends are prohibited, which gives the Islamic banking sector more stability, but also slows the pace of product innovation.
Where can I find Islamic finance in the UK?
The UK is a leader in Islamic finance, enabling the creation and implementation of several all-Islamic banks, including:
Al Rayan Bank
Bank of London and Middle East
In addition, several mainstream UK banks have opened Islamic windows, including Barclays, Lloyds and HSBC.
And last July, Qardus launched an Islamic finance crowdfunding platform for small businesses. Qardus hopes to arrange Islamic finances worth £ 2 million to £ 2.5 million in the coming year.
Is Islamic Financing Regulated?
The UK has adapted existing legislation to take account of the structures used in Islamic finance. The rules for Sharia-compliant financing products and services are set out in the Finance Act 2005, which will be amended by the Finance Act 2007 and governed by the Financial Conduct Authority.
Why aren’t more non-Muslim entrepreneurs using Islamic finance?
Howard Kennedy law firm’s Nada Jarnaz believes the main obstacle is psychological. It is not easy to accept a new system when you think the existing system is unique and perfect. However, if a company or project complies with Sharia law, Jarnaz sees no reason why an SME should not seek funding from an Islamic bank or financial institution. According to Qardus, it is open to approaches from non-Muslim-owned companies as long as they comply with Sharia principles for promoting social welfare.
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