Islamic Finance Explained – For Kredit

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Summary:

  • Currently, there are 3.3 million Muslims in the UK.
  • The Islamic financial industry has been prominent in the UK over the last 40 years, with there currently being 500,000 Islamic finance customers.
  • In this article, we explain what Islamic finance is and how it works.
  • This article also looks at some of the popular Sharia-compliant funding options available on the market at the moment.
  • For Kredit does not currently provide any Islamic finance products or services.

What is Islamic finance?

Islamic finance in business is a way in which companies can raise capital whilst respecting the principles of Sharia law and ensuring that they operate in the Halal way. Islamic finance is sometimes referred to as ‘Sharia-compliant’ funding.

Currently, For Kredit does not provide any Islamic finance products or services.

What are the main principles of Islamic finance?

One of the ways that Islamic finance distinguishes itself from ‘conventional banking’ is that it needs to follow a number of fundamental principles in order for it to be considered Shariah compliant.

The avoidance of riba

One of the key concepts of Islamic finance is that interest should not be charged, as it is believed within Islamic law that you should not make money from money – also known as Riba. Rather money should be considered a way to measure assets, rather than being an asset itself. Therefore, interest is strictly prohibited and is not charged upon Islamic funding products.

The avoidance of gharar

It is an Islamic belief that there should be no ambiguity or deceptions when selling items where their outcome is not guaranteed. For example, insurance may be considered Gharar as there is no guarantee that the insurance may be used in the future.

Investment should not cause harm

One of the key parts of Islamic finance is that Islamic finance cannot be used to cause harm. This includes using finance to invest in industries such as alcohol, tobacco and gambling which are considered Haram under Sharia law. 

Encouraging partnership

Another fundamental of Islamic finance is that profit and risk should be shared. It essentially means that there should not be one beneficiary of an exchange in finance. Therefore the institution that someone enters business with shares the same level of profit and risk as the customer.

Why is Islamic finance important?

Islamic finance is important for Muslim entrepreneurs who are looking to raise funding for their business whilst adhering to their own religious beliefs that are in line with Sharia law.

Islamic finance can help with a number of business goals that an entrepreneur might have. This can include growing a business, starting a business, buying new equipment or hiring new staff. There are several ways in which a business can use Islamic finance.

What types of business finance methods are sharia-compliant?

Within a Shariah compliant financial system, there are a number of specialist financial instruments available for businesses to consider. Below we have listed some of the more common forms of financing that can aid businesses.

Equity financing

It is allowed under Sharia law for people to invest in company shares providing that the industry the company is in is not haram (tobacco, alcohol, or gambling). This also includes direct investment.

Ijara

The way this funding option works is similar to a standard equipment leasing agreement. Essentially, the provider of the agreement purchases a piece of equipment and leases it to the customer. At the end of the agreement, the customer may choose to purchase the equipment that was leased.

Murabaha

This is a financing arrangement where the financial institution purchases a physical asset such as property or an expensive piece of equipment belonging to the business. Next, the financial institution sells said asset back to the business owner for a profit. The price of profit is then repaid upfront or can be deferred into monthly payments until it is considered repaid.

How can I apply for sharia-compliant finance?

In order to apply for funding, business owners will need to find a financial institution that has been approved to provide Islamic finance instruments that are compliant. In the UK there are a number of Islamic financial services to choose from. 

A common way is by going to and applying via specialist Islamic banks, although recently there has been a growing amount of new independent institutions that are providing halal funding options. 

It is important to check whether the institution that a business owner uses has the right certificates and documents which prove that it is a truly sharia-compliant financial institution.

How popular is Islamic finance in the UK?

Currently, there are over 500,000 retail customers based in the UK. The UK has been the Western centre of Islamic finance for over 40 years, with London and many other UK cities providing a number of Islamic finance products. The global Islamic finance industry has also grown in recent years and as of 2019, the industry had assets worth up to $2.4 trillion which was an 11% increase on the previous year.

Who can apply for Islamic finance?

Islamic finance is available for both Muslims and non-Muslims. As it is often seen as a more socially responsible form of raising capital, it can often be a great funding option to consider for people whose beliefs align with the ethical ideals of Islamic finance.

FAQs

What is Islamic finance?

Islamic finance is a financial instrument that is based on Islamic principles. It is a type of financial system that was developed in the 7th century, and it is used in many countries around the world. It provides a funding option that allows businesses to raise capital whilst maintaining Islamic principles.

Is Islamic finance popular in the United Kingdom?

Currently, there are over 500,000 customers in the UK that use Islamic finance. Globally, Islamic financial institutions own assets worth $2.4 trillion as of 2019. Furthermore, the use of Islamic finance institutions is extended to all faiths, so you do not need to be a Muslim to apply for funding.

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