Sharia Commercial Finance, Misunderstood & Underestimated?

Far from me to proclaim to be an expert on sharia finance because I am not, it is an area of commercial lending that is showing some growth and has the potential to grow further.

For most people when you mention sharia finance or ask what it means then the general reply is “you don’t pay interest”. Whilst technically this is true sharia finance does allow a person to benefit from providing a product or service.

The reason for raising sharia finance in a blog post now is that we are starting to see an increase in sharia compliant lenders and expect to see a sharia compliant peer-to-peer platform launch later this year.

It’s Not About Religion

One of the key misunderstandings around sharia finance is that you must be a follower of the Islamic faith to use these facilities. You don’t. It is a type of finance open to everyone and for many people it is the ethical approach that is more appealing than the religious element.

The central point to sharia finance is that money has no intrinsic value, that it is simply a medium of exchange. Each denomination of money is equal in value and that you should not be allowed to benefit from lending or borrowing money.

If you take a sharia equivalent mortgage as an example, then the new property owner would provide a deposit in much the same way as normal. However, instead of paying interest on the balance the property is effectively bought in partnership with the sharia lender and as you pay your rent the property gradually becomes your own. In many ways, it is a rent to buy mortgage.

The difference is that rather than charge interest the sharia lender earns from helping you to acquire your property.

The Ethical Difference of Sharia Finance

The ethical appeal comes from the way in which the sharia banks use the deposits they have taken and to which clients they will work with.
As an example, there would be no investment made in businesses concerned with armaments, tobacco, drugs, alcohol, or pornography. On the face of it you start to have a banking system which is based on ethical beliefs.

That’s not a sentence you hear very often.

As technology starts to play an ever-increasing role in commercial lending we are starting to see more ethically minded borrowers who are looking not only at the deal on offer, but also where the funds come from and the ethical stance of the lender they are using. Increasingly we are seeing that clients are researching the lender and choosing to work with a company that they deem to be more ethical or more in line with their own beliefs.

Part of this has no doubt been one of the key drivers behind the growth in the alternative commercial finance sector.

If you want more details on how sharia finance works then please look it up, it is something that is open to all borrowers and an area which could see significant growth over the next five years driven not by religious beliefs but by borrowers who are more ethically conscious.

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By Dave Farmer

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