Shari'ah-compliant finance is essential for devout Islamic followers to get access to the working capital they need to grow their businesses, in ways that support and deepen their beliefs. This makes Shari'ah-compliant finance organisations an essential avenue of investment. Fortunately, this lending sector is becoming more and more established in South Africa. So here is what you need to know when it comes to Shari'ah-compliant finance.
Islamic Finance- A Snapshot
The main ideas behind Islamic finance go all the way back to the beginning of Islam. But it wasn't until the 1960s that Islamic Finance began to resemble what it does today, and even since then Islamic Finance has grown in important ways over the last twenty years. It's interesting that Islamic finance has grown not only in Muslim countries, but also in secular Western financial hubs. Because of this, Islamic Finance is gaining notoriety. In fact the Islamic Finance industry is steadily growing by 15 - 25 % every year.
What is Islamic Finance?
To put it simply, Islamic Finance is a way of handling money that follows Islamic Law, which is also known as "Shari'ah." Under Shari'ah, it includes all the different kinds of moral practices when it comes to finance and funding. In this way, Islamic Finance follows rules about how to save, trade, and lend money that are based on Islamic morals and best practice.
Principles of Islamic Finance
Charging Interest
If you lend money to someone and charge interest, Islamic law deems this unfair as it benefits the lender over the borrower. Because of this, Shari'ah law says that you can't charge interest, or "riba," under any circumstance.
Investing in Prohibited Activities
Islam doesn't support certain economic activities, like making or selling alcohol or pork. Because these ideals are against Islamic law (called "haram"), investing in companies that produce them is also against Islamic law.
Extreme Risk
Shari'ah law says that people shouldn't be involved in businesses that create too much danger or uncertainty. Too much risk, or "gharar," is seen as a way to make quick money, which is also against Islam.
Gambling
Gambling, also called "maisir," is a very risky activity and is therefore prohibited. Because of this, Islamic Financing Institutions are not allowed to be a part of contracts where the ownership of goods relies on something risky with unforeseeable outcomes .
Revenue Sharing
Muslims believe that when two people make a deal or agreement, they should share both the gains and losses as well as the risks that come with it. The only person who can gain from that deal is the other party and no third party is allowed to benefit.
Islamic Banking Products
It is important to note that Islamic banking is not only for specific individuals or denominations; anyone can open an investment account and apply for the range of services on offer. Like conventional banks, Islamic banks accept deposits for savings and transactional purposes.
Types of contracts in Islamic Finance
1. Mudarabah (profit and loss sharing)
One person, called Rabul-Mal, gives the other person, called Mudarib, money to start a business, and the two agree to work together and split the earnings fairly. This is called mudarabah.
2. Musharakah (joint venture)
Musharakah is a financial agreement between two or more people to start a business based on cash and labour. It's not the best option for business owners who want to stay sole owners of their company. The profit and loss are split in a way that is fair, based on how much each person contributed.
3. Wakalah
This agreement says that the main person, or business owner, (Muwakkil), must choose a representative, or agent, (Wakil), to do the required deals on their behalf. Most of the time, the Wakil is someone who knows a lot about money and can look out for the Muwakkil's best interests. Any money made (or lost) belongs to the Muwakkil alone, and the Wakil can get a set amount of money for their work.
Merchant Capital’s Shari’ah-compliant Cash Advance
Since 2019, our Cash Advance solution, certified by Standard Bank Shari’ah, is one of the first products of its kind in South Africa and has helped many devout followers of Islamic faith to fund their professional ambitions. Providing fast access to funding in under 48 hours with minimal paperwork, flexible repayment terms and remaining true to the wisdom and guidelines required under the auspices of Shari’ah law