In the UK, we are leading the way in creating and implementing Islamic banks. Here we take a look at Sharia-compliant finance, more specifically Halal loans for your business needs.
What Are Halal Loans?
The guiding principle behind Sharia-compliant finance is to avoid any activity which may be deemed harmful (Haram), and therefore charging interest payments (what the Koran calls Riba) is forbidden.
Islamic finance aims to respect the integrity of Sharia Law.
This means lending facilities earn money whilst ensuring the business owner maintains their principles. This works by the financial institution setting up different contractual agreements that adhere to Sharia Law.
How Can I Get a Halal Loan?
With Islamic financing becoming a more popular option for banking money, the UK has adapted pre-existing legislation to accommodate the fundamental principles of Islamic finance.
Anyone can get this kind of funding as long as the financing facility agrees that their business is Sharia-compliant.
This rules out financial activities that pose any kind of excessive risk, such as alcohol, gambling or arms sales.
Halal loans are available through Islamic financing companies and even some high street banks. They are easy to apply for, with most companies offering an online application service.
How to apply for Islamic finance?
With numerous “pure” Islamic banks coming to the market in the UK and several mainstream banks now implementing Islamic financing, it has never been easier to apply for Islamic finance.
The process is simple and can be completed online. All you need is your business model and the amount of finance you require.
You may be required to provide some basic supporting documentation, such as business statements. In addition, you must show that your company does not come under the prohibited list according to Sharia Law.
How Does Islamic Finance Work?
There are various agreements to consider when searching for Islamic loans. This type of business finance requires the financial institution to share in both the risks and rewards of the business.
Lenders ensure growth is funded through value-based investments.
Rather than the lender charging fees, the fundamental principle behind Islamic finance is a community-centred venture which encourages business growth whilst allowing you to stay in control of your finances.
Islamic financial institutions can offer ways to help finance your future by sharing equity, leasing property or resources or by deferred payment sales.
There are no hidden costs as this way of financing is less profit-based and more about supporting the larger community.
What is Musharaka in Islamic finance?
This is the most commonly used agreement in Sharia-compliant funding and highlights the shared nature of Islamic economics.
It works by the financer acquiring equity or some form of ownership in the business, allowing them to share in the profits instead of relying on monthly interest charges.
It is a mutual agreement meaning the management of the business can be undertaken by all parties.
However, whilst the lender can benefit from the success of your business, it also means they share in the losses. These are shared in relation to each partner’s investment capital.
What is an Ijara agreement In Islamic finance?
Ijara can be broken down into two types; Operating lease (Al-ijarah ‘ain) and Financial lease (Ijarah Muntahia Bittamleek).
Traditionally, the former was the only option, whereby the financing facility owns an asset and rents it to others for a specific period. Rather than charging interest for money loaned, this kind of Islamic finance agreement allows the financing facility to profit by leasing rentals.
In the case of the operating lease, the ownership of the rented assets remains with the lender at the end of the lease period.
It is a shared transaction whereby the provider simply purchases a known commodity and then rents it back to the business without actual ownership of said commodity being transferred.
The duration of the lease and rent charged are mutually agreed upon by the financial institution and business owner.
As Sharia-compliant banking continued to grow, the second option became available. This type of business finance is based on the transfer of ownership of an asset or commodity. The business owner will pay a fixed sum as rent for its use within their company for an agreed amount of time.
At the end of the contract, the bank will offer the opportunity to transfer ownership in one of two ways.
Firstly based on a conditional gift, which means once the final payment has been made, the lender is obliged to hand over ownership.
Secondly, via the sale of the asset, taking into consideration the amount already paid during the term of the lease.
What is a Murabaha agreement In Islamic finance?
Also known as cost-plus financing, the Murabaha agreement is another form of Sharia-compliant banking that sees the lender sell an asset to a business for cost plus profit in the form of an additional single charge.
The seller and the company agree upon the mark-up of the asset.
The price can be marked up in exchange for allowing payments to be made over time.
It is a deferred payment sale, similar to rent-to-own in conventional banks. It will provide finance to the lender without the need to charge interest.
As it is not an interest-bearing agreement, it is a popular form of Sharia-compliant funding.
What Can Islamic Finance Be Used for?
Islamic finance states that a business should aim to benefit the community at large and not just for profit.
With this in mind, there are many services and products that Sharia-compliant finance can be used for.
It can be used to purchase your own home, for savings, as a business loan to acquire assets to help grow your business or even for day-to-day spending. It’s a great way to increase your working capital and make running your business easier.
Does My Business Qualify for Islamic Finance?
Islamic finance is regulated by the Financial Conduct Authority, and there are strict rules regarding Sharia-compliant services and products, which are set out in the Finance Act 2007.
Sharia Law dictates that certain ventures are not regarded as Halal (allowed). These include any business involved with alcohol, pork, gambling, tobacco, arms or entertainment.
If your business falls outside these categories, you will be eligible to apply for Islamic finance.
What Are the Costs of a Halal Loan?
The cost of Halal loans depends on the type of agreement. As there are no hidden charges with Sharia-compliant finance, the cost to you as a business may come in different forms.
For example, a single additional charge if a Murabaha transaction is undertaken, sharing profits under a Musharaka scheme or the cost of leasing assets if taking out an Ijara contract.
Can Non-Muslims Use Islamic Finance?
Islamic finance is available to both Muslims and non-Muslims as it is an inclusive form of banking. So long as your business meets the criteria, your religious background is not important.
What Types of Businesses are Most Suited to Islamic finance?
Any business that aims to benefit the larger community will benefit from Islamic finance.
Businesses that don’t seek to take advantage of immediate opportunities or short-term market trends are ideal candidates for this kind of banking as this type of activity is outlawed in Sharia Law.
Small businesses looking for the opportunity to grow without the fear of getting into financial difficulty are suited to this kind of finance due to a lack of interest payments.
Islamic finance is also seen as a more stable form of banking due to the decreased likelihood of getting into unaffordable debt, and so it is a sensible, inclusive option for most business models.
What is Sharia-Compliant Finance?
Sharia-compliant finance, put simply, is a way of banking that respects Sharia Law and abides by the fundamental Islamic principle of avoiding any financial activities which may be deemed harmful (Haram).
Money itself is not seen as a commodity, and this kind of finance focuses on providing services to the wider community rather than profit for one personal gain.
It is becoming a more popular way to invest and is protected by the Financial Services Compensation Scheme. This means any deposit is backed by the FSCS up to £85,000 per person per banking group.
What Are the Pros and Cons of Islamic Finance?
Pros:
- It is regulated by the Financial Conduct Authority.
- It has strict rules regarding the products and services available as set out in the Finance Act 2007.
- It doesn’t allow interest to be charged and reduces the worry of financial difficulty.
- There are many products and services available.
- It has ethics at its core and is person-centred, not profit-orientated.
- It encourages financial inclusion.
- Any late payment charges must be distributed to a charitable foundation selected at the discretion of the Sharia Supervisory Board, meaning the community still benefits.
Cons:
- Late payment charges may apply.
- Slower pace of product innovation due to conditions preventing short-term market trends from being taken advantage of.
How Does Islamic Finance Differ From Other Types of Finance?
Islamic finance does differ from more conventional types of finance, the main difference being the reduced risk for businesses and their investments thanks to the lack of interest charges.
It provides access to funding for your business in various ways. It ensures that, regardless of if you are Muslim or not, you can grow your business or invest in your future without the worry of getting into financial difficulty.
Conventional finance can be seen as debt-based, whereas Islamic finance is seen as equity-based. It has ethics at its core and seeks to promote members of the community rather than just seeing profits.
Who Offers Islamic Finance in the UK?
The UK is leading the way with the creation of several “pure” Islamic banks, including:
- Al Rayan Bank
- BLME (Bank of London and the Middle East)
- Gatehouse Bank
There is also an increasing number of mainstream banks that have opened Islamic banking windows, including:
Final Thoughts
Whilst the financial market can be a daunting place when looking for products or support for your business, applying for a Halal loan may be the key to unlocking your future.
With ethics at the core of Islamic finance, you could get the help you need safe in the knowledge that there are no hidden charges and no interest repayments.
FAQs
Is Islamic finance regulated?
Yes, like any other kind of business loan, Islamic finance is regulated by the Financial Conduct Authority.
Is my money safe with an Islamic bank?
Your money will be protected by the Financial Services Compensation Scheme (FSCS) regardless of whether you invest in an Islamic bank or not.
Do I have to provide collateral to secure a Halal loan?
Most Islamic finance providers don’t require collateral, but it is always best to check with your lender first.
Can I get a Halal loan if I have a bad credit score?
Most financial lenders will take into account your credit score, so it is best to check your options when choosing a lender.