Ethical financial products, Sharia bridging loans have only grown in popularity. Here’s what you must know about how they work.
Islamic bridging finance is an ideal option for bridging the gap between quick financing and ethical financing. It’s a product designed in accordance with the financial principles set down by Islam. Crucially, these loans prioritise transparency and are structured as payment plans, rather than with interest.
Believe it or not, the UK is the leading Western hub for Islamic financing, with $19.6 billion USD in Islamic financing assets under management in previous years. As more individuals and businesses demand more ethical financial products, Sharia bridging loans have only grown in popularity. Here’s what you must know about how they work.
What is Islamic bridging finance?
Sharia bridging loans are short-term, asset-backed loans that comply with the financial principles of Islam. Although they follow a similar structure to conventional bridging loans, three principles separate them.
1. No Interest – All profits are earned either through profit sharing or previously agreed mark-ups.
2. Asset-Backed – Islamic bridging loans are linked to tangible assets. In most cases, this is a property.
3. Ethical Use – Lenders examine what the money will be used for to determine whether your needs are “ethical” according to Islam. For example, financing can’t be used for speculating or in industries like gambling and alcohol.
That doesn’t mean you can’t be charged late penalties and other extra fees if you don’t hold up your end of the bargain. The difference is that the lender can’t use these fees as an extra income stream.
Under Islamic rules, extra fees can be levied but cannot be retained by the lender. Instead, all penalty fees must be immediately donated to charity, thus eliminating the worry that your lender is looking to add fees to increase their profit margins.
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Islamic bridging finance vs. conventional bridging loans
Islamic bridging finance has several differences that distinguish it from traditional bridging loans. Here are the primary differences:
It’s a model that has become increasingly popular, including among non-Muslims. It’s why the Islamic Finance Development Report 2023 estimates the global Islamic financing industry will grow to $6.67 trillion USD by 2027.
Of course, the need to adhere to Islamic values means that you can expect to contend with stricter compliance requirements. Moreover, applicants must remember that the necessary due diligence can take longer. Still, many applicants see this as a small price to pay for availing themselves of the unique benefits associated with these products.
How Islamic bridging finance works through Hilton Smythe
Sharia-compliant financing is an intricate world that can be confusing. That’s why Hilton Smythe provides independent financial advice and guidance on negotiating these financial products.
Typically, there are two primary models within Islamic bridging finance:
An alternative to an Islamic bridging loan is the Ijarah agreement. If you choose this option, you can access property and equipment via lease agreements. Many also come with ownership options.
But which one is right for you? At Hilton Smythe, we use our independent position in the market to help businesses determine which financial product is right for them. We retain our objectiveness, allowing you to access a range of exclusive Islamic lenders you won’t find through conventional means.
Who can use Sharia-compliant bridging loans?
Many believe that these financial products are designed for Muslims only, but this is far from the case. No restrictions exist on non-Muslims being able to access these products under the same terms as Muslims.
More and more non-Muslims are using these loans because of the emphasis on ethical financing. Property developers may champion these loans because of their interest-free and transparent structure. In contrast, business owners may use them to cover short-term funding gaps without worrying about interest constraints.
Some of the ways you might use these bridging loans include:
The only two restrictions on what you can use your funds for are that they can’t be used in an industry that contravenes Islamic values and they can’t be used to fund investments considered to be speculative.
If you’re unsure whether your business or intended use qualifies, get in touch with an Islam bridging loan expert at Hilton Smythe to learn more.
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The benefits of Islamic bridging finance
Islamic financing is ideal for businesses concerned with the ethics of financing and prefer an extra layer of transparency and peace of mind. Typically, the costs of Sharia-compliant bridging loans are similar to conventional loans, but they offer advantages you won’t find with the usual array of commercial bridging loans.
No interest payments
The primary reason businesses opt for Islamic loans is the absence of interest payments. Many consider interest payments exploitative, which is why they’re considered against Sharia law.
The models lenders use rely on cost-plus financing methods, such as the Murabaha model, to ensure that parties share risk and profit from the transaction.
Total transparency
Sharia bridging loans are entirely transparent from the moment of approval. Under Islamic law, all terms and costs must be agreed in advance to ensure the transaction remains halal.
Anyone who has taken out a standard bridging loan knows about the dangers of hidden fees that kick in during your loan or the risks associated with variable interest rates. None of this applies to Islamic loans, regardless of what happens in the broader lending market.
Ethical use of funds
All financial institutions dealing in Islamic bridging loans must use their funds ethically and productively, as outlined by Islamic financial principles. You know that your funds won’t be used within morally questionable industries, including the production of alcohol and the gambling industry.
Sharia-compliant bridging finance
Bridging loans are highly flexible financial products that support businesses undergoing expansion and development. However, conventional bridging financing options aren’t right for everybody, which is where Sharia bridging finance comes in.
With the market growing rapidly in the UK, businesses have more lending options than ever. At Hilton Smythe, we’ve been providing dedicated, objective support to businesses in this sector since 2018.
If you want access to an exclusive panel of lenders offering the best-value deals on bridging loans, speak to the team to start the process.