About Sharia Compliant Finance

Many people when asked for their understanding of what Sharia-compliant finance means will say, “You don’t pay interest”. It is perfectly true to say that Sharia-compliant funding does not allow for the charging of interest (whether called that or by a less emotive term such as “finance charge”), but it does not mean that the entity providing the finance isn’t entitled to earn a return on their investments.

Although the interdict on interest on loans is central to Sharia law on finance, there is much more to Islamic banking. Some examples are the requirement on those who make a profit through business to contribute towards those less well off, and the need to strive for a more equitable distribution of income and wealth and increase equity participation in the economy. Sharia principles on finance integrate a social justice ethos into the regulation of economic and financial relationships.

These principles are not exclusive to Islam, and our Sharia-compliant fund is similarly not limited to any particular religious or ethnic group. Like all our funding programmes it is open to all nationalities provided they have the right to work and live in the UK (for detailed guidance see our terms and conditions).

There are various forms of financing that may take place under Sharia finance principles, within the context of an ethical fund that promotes financial inclusion. The main ones are:

Mudaraba: This is the form of finance currently offered by Financing Sharia Enterprise (other types may be added later), and is a mechanism by which capital and labour are brought together to achieve a harmonious and profitable end. It means the capital provider is providing backing to an entrepreneur possessed of specific skills and ideas needed to run a profitable business. The capital provider (rabb-ul-mal) may invest through the entrepreneur (mudarib) needing the start-up funds.

Islam clearly states that capital as a factor of production deserves to be rewarded. Islam allows the owners of capital a share in the surplus, though the amount of surplus is uncertain and there is an element of risk involved. In the context of Shariah, investors cannot demand a fixed rate of return for their investment, and for this reason every case is examined by our Sharia Advisor to ensure it is eligible, and to calculate repayments of capital and share of profit. This is done both before the investment is made, and at regular intervals thereafter.

Ijara or Leasing System: This is a leasing agreement. Under this model, the provider of capital buys capital equipment and leases it to its customers, who may opt to buy the items eventually. In effect, the monthly payments will consist of two components: i) rental for the use of the equipment and ii) instalments towards the purchase price.

Musharaka: This is financing through equity participation between various organisations, shareholders or partners. The partners use their capital through a joint venture or a limited partnership in order to generate a profit. These profits will be split between the shareholders according to some pre-agreed formula that is dependent on the amount of investment which each party puts in.

This financial instrument can be used in venture capital financing and is less risky to all of the parties concerned. In effect, all of the partners must come with some form of capital instead of only their skills, and this instrument will therefore not be applicable to a credit union where entrepreneurs have little or no capital to bring into the relationship.

Murabaha: There is usually a physical commodity traded and in a Murabaha transaction for example, a bank will finance the purchase of an asset by buying it and selling it to the client for a profit. The price can then be paid in cash, installment or deferred. The bank stands in between the buyer and the supplier and is liable if anything goes wrong prior to selling the asset to the client. Title to the goods finances passes to the bank;s client upon completing the sale however the registered title may be mortgaged in favor of the bank as a security for the deferred payment.

For full terms and conditions of the finance offered through Financing Sharia Finance please follow This Link