Financing Challenges and Solutions for Sharia-Compliant Businesses

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Financing Challenges and Solutions for Sharia-Compliant Businesses

Even as new Islamic FinTech platforms emerge, UK Sharia-compliant businesses are struggling to secure growth funding. Hilton Smythe can help you navigate the complex and limited options.

Islamic finance is one of the fastest growing sectors of international banking, with Islamic institutions based in the UK holding assets of over £5.4 billion, and with the UK serving as Europe’s regional hub. However, despite this progress, challenges persist for Sharia-compliant businesses seeking commercial finance.

The core challenge lies in Sharia law’s prohibition on riba, which translates to interest. This restriction prevents Sharia-compliant businesses from accessing many conventional debt-based financial products, which are mainstays of business financing.

However, the tide is slowly turning for Islamic finance. At the beginning of 2024, the House of Commons submitted a briefing on its plans to introduce Sharia-compliant student finance in England, while established Islamic banks like Gatehouse Bank, Bank of London and the Middle East, and Al Rayan Bank are grabbing headlines for their competitive savings rates for consumers.

Nevertheless, the menu of Sharia-compliant finance options for UK SMEs remains limited. In this blog, we’ll be looking at some of the available options for UK SMEs – from traditional Islamic banks through to the most recent disruptive FinTechs.  

Traditional Islamic banks continue to buttress the Sharia-compliant SME lending ecosystem. 

Corporate property debt investing, for example, is largely sustained by the likes of Al Rayan Bank and Gatehouse, while digital Sharia banks such as Nomo offer property finance for buy-to-let properties, and smaller players like Offa provide Islamic commercial bridging facilities. 

Qatar Islamic Bank (QIB UK) also offers a comprehensive range of Sharia-compliant products, from asset finance and project finance, through to working capital finance and contracting finance.

Some financial products, such as asset-based financing, are often already inherently Sharia-compliant, offering leaseback arrangements that do not involve charging interest. The Issa brothers’ £1.7bn sale and leaseback of Asda’s warehouse network in 2021 is one example of a leaseback arrangement in action.

The key principles of Sharia-compliant/Islamic finance include:

The giving and taking of interest (riba) is prohibited;

there is a prohibition on uncertainty (gharar) and speculation (maysir); and

the underlying asset or investment must be acceptable from a Sharia perspective. For example, Sharia prohibits activities connected with alcohol, pork-related products, tobacco, entertainment such as music, TV or cinema, conventional financial services, gambling, arms sales and conventional insurance.

UK Islamic Finance Challenges and Solutions for Sharia-Compliant Businesses

Some challenger Fintech platforms that cater specifically to Sharia-compliant businesses have also cropped up in recent years, offering working capital solutions through structures like Musharaka (partnership financing) or Ijara (leasing). 

Qardus, which launched in 2020, is a halal SME lending platform that uses a trade-based mechanism to transfer liquidity from the investor to the business owner. The P2P platform aims to serve both sides of the market – businesses seeking Sharia-compliant investment, as well as investors looking to receive profit rather than interest. 

Quardus, however, is a better-fit for financially-robust brick-and-mortar businesses like pharmacies, dentists and factories, rather than for more speculative investments.

Nester, the UK’s first Sharia-compliant, peer-to-peer, and property-backed investment platform, has also emerged onto the scene, having launched in 2021. It provides buy-to-let, refurbishment and bridge financing for corporates, offering investors returns of up to nine per cent, secured on UK property. In Islamic finance terms, this kind of contract is known as a “commodity murabaha”, on which the borrower and investor agree a deferred purchase and sell a debt obligation based on an agreed cost and mark-up. 

And even Sharia-compliant start-ups can now access finance through organisations like the Financing Sharia Enterprise, part of the Financing Startup Enterprise Group. 

Accessing person-centred, honest and impartial advice from a qualified broker is all the more crucial in this still nascent industry.

With a limited number of providers, navigating the available Sharia-compliant commercial finance options will be challenging, especially with no reliable online comparison tools available. However, a broker can assess your specific business needs and match them with the most suitable financing solution offered by various Islamic banks or alternative lenders. 

Specialist brokers like Hilton Smythe also have a strong understanding of Sharia-compliant financial instruments and can ensure the chosen option aligns with your business’s ethical and commercial requirements.

They can also advise on finance structures such as asset finance which might already be Sharia-compliant. 

Let's discuss your financing needs and explore the best options available to you.

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