Businesses – A force for good, the Islamic concept

Often businesses are considered to be secular, money-making entities that have nothing to with religion or morality.

 

Attributes such as cheating, tax avoidance, aggressive marketing, deception, and exploitation at the cost of preventable harm and wellbeing are by which businesses and corporate world in general are sometimes identified with.

 

This is not the case as far as the Islamic concept goes.

 

Prophet Muhammed (pbuh) was a businessman when he became a Prophet at the age of 40. At the time he was married to Khadijah RA, a prominent businesswoman In Makkah. Makkah was in the middle of some famous trade routes. One route was to Shaam (Syria) in the north during the hot summer months and the other to Yemen in the south during the winter months.

 

The nobles in Makkah were mainly traders. This is why some of the early noble companions of the Prophet Muhammed (pbuh) were traders and businessmen. They continued their trades and businesses after accepting Islam whenever they had the opportunity to do so. Some prominent companions known for their successful businesses and wealth are Abdur-Rahman ibn ‘Awf (RA) and Uthman ibn Affan (RA), both were among the ten promised paradise and glad tidings.

 

Islam promotes business and trade – this activity becomes a force for good for humanity. Islam therefore provides a comprehensive framework for businesses to operate within. Unfortunately at times this is overlooked and ignored by Muslims over technical debates concerning permissibility of individual business transactions.

 

Some aspects of this framework are as follows:

 

Islam focuses on consumption, and this dictates production and supply

 

In Islam what is not permissible (Harram) to consume is also not permissible to produce. This sets an important principle. A moral guide for businesses. Businesses become champions of promoting what is permissible (Halal). Mosques and Scholars can educate and give advice, but the actual Halal activity is facilitated by businesses, and this is what then influences consumer behavior – In Islam, business is not just about profits, they promote the good (Halal) as well.

 

The approach of Islam to Halal and Harram is set by the Holy Quran. It allows everything and prohibits exceptions (Quran 02:173). Being religious does not restrict business thus Islam provides ample opportunity for businesses to supply and produce.

 

Honesty and accountability should be at the heart of business ethics

Prophet Muhammed (pbuh) was known for his honesty and accountability in his business dealings. This is what stood him out and led to his marriage to his first wife Khadijah (RA). Even his enemies vouched for his honesty and accountability in his business dealings. His companions followed his example.

Quran refers to the story of the Prophet Shoaib (RA) and how God punished the people of Madyan (Midian) for not giving full measure and weight in their business dealings and for creating mischief (Quran 07:85).

 

In Islam honesty and accountability is at the heart of business dealings and reporting. As part of the Islamic faith, one may be able to dodge earthly regulators, the belief dictates the ultimate accountability to be in the grave and on the Day of Judgement. This is what focuses the mind and ensures honest and transparency in business dealings and reporting.

 

Social responsibility is a mandatory worship (Zakat) for businesses in Islam

 

It is obligatory on every able Muslim adult, and this includes business owners to give Zakat (religious donation) each year. This is traditionally 2.5% of one’s savings more than a year less short-term liability. Islam prescribes those that should benefit from Zakat funds, these individuals being the most vulnerable in society.

This way the most vulnerable in society became stakeholders in businesses and businesses contribute to the uplifting of the society they operate within.

 

Another aspect of Zakat contribution is the way it is calculated. Its not based on in year profits as traditionally business taxes are instead the focus is on the top half of the balance sheet, being the net savings more than a year. Through this mechanism God ensures wealth is not accumulated in fewer hands in savings assets and that instead assets are put into use for generating further economic activity and charity.

 

In Islam business performance generates and decreases wealth

Usuary is prohibited in Islam and it is replaced with trade and business. Money is not treated as a product that can be hired out instead it is invested in business. The investor becomes a stakeholder in the business with success and failure resting with all. This ensures wealth is generated and decreased based on business performance and effort and not on social class and privilege.

 

The consequence being that an Islamic business mind then becomes focused on business activity and performance and not on maximising wealth without effort or risk.

 

The concept of business success and failure rests with the Almighty

Business performances often very much rely on nature and factors outside the control of humans, business owners, employees, and suppliers. The recent pandemic has taught us this lesson in a very hard and real way.

 

Quran (18:32-44) refers to a story of two businessmen. One boasted of his wealth and business strength and while the other reminded him of his limitations before the Almighty. The one that boasted eventually saw his crops destroyed by nature overnight with nothing left.

This way the most vulnerable in society became stakeholders in businesses and businesses contribute to the uplifting of the society they operate within.

 

Another aspect of Zakat contribution is the way it is calculated. Its not based on in year profits as traditionally business taxes are instead the focus is on the top half of the balance sheet, being the net savings more than a year. Through this mechanism God ensures wealth is not accumulated in fewer hands in savings assets and that instead assets are put into use for generating further economic activity and charity.

 

In Islam business performance generates and decreases wealth

Usuary is prohibited in Islam and it is replaced with trade and business. Money is not treated as a product that can be hired out instead it is invested in business. The investor becomes a stakeholder in the business with success and failure resting with all. This ensures wealth is generated and decreased based on business performance and effort and not on social class and privilege.

 

The consequence being that an Islamic business mind then becomes focused on business activity and performance and not on maximising wealth without effort or risk.

 

The concept of business success and failure rests with the Almighty

Business performances often very much rely on nature and factors outside the control of humans, business owners, employees, and suppliers. The recent pandemic has taught us this lesson in a very hard and real way.

 

Quran (18:32-44) refers to a story of two businessmen. One boasted of his wealth and business strength and while the other reminded him of his limitations before the Almighty. The one that boasted eventually saw his crops destroyed by nature overnight with nothing left.

Islamic Finance, Mosques & Charities – the Missed Opportunity

This blog represents the well received presentation by the author, he gave as a guest at the launch of the Birmingham City University’s UK’s first Islamic Finance undergraduate degree course.

 

Islamic Finance has become a multi-billion dollar industry and is fast growing. Despite this growth and reach, this industry has had little to offer Mosques, charities and for the wider uplifting of the state and economies of disadvantaged Muslim societies worldwide.

 

Islamic Finance has worked to make wealthy Muslims wealthier by helping them avoid the guilt that comes with breaching shariah guidelines – Although there is nothing wrong with that, in my opinion Islamic Finance has a bigger role to play in promoting the finances and impact of Mosques and charities, especially in the UK context.

 

Islamic Finance is a component of the Islamic Economic system which aims to create a fairer and just society in which hard work is rewarded, those that are at disadvantage are supported, business and entrepreneurship is promoted, and infrastructure is built that benefits all – Mosques and charities play an equally important role in achieving these objectives.

 

In UK, the top 20 International Muslim charities raise around £400m with around £100m raised in Ramadan alone (see blog). In total when combined, the UK Muslim charity sector can be estimated to be raising around £500m each year. This is despite it being a relatively young sector (only 30 years +) but a fast-growing sector.

 

Mosques are built using Qard-e-Hasan financing

The majority of Mosques in UK are successfully built using Qard-e-Hasan, interest free community loans, and this is also the case when they extend their facilities. There is no Islamic Finance solution in UK that provides this interest free facility to Mosques in spite of the underpinning strong business model of Mosques.

 

Each Mosque has a ever growing number of worshippers and donors. They are engaged in a never-ending cycle of Friday prayers and Ramadan worship, during which funds are raised to return the loans.

 

Mosques are the heart of Muslim community – this is where everything starts from (i.e. marriages), sustains (i.e. prayers and education) and ends (i.e. funerals) – promoting them should be the first priority of the Islamic Finance sector.

 

Islamic loans for buildings and ICT systems

 

The UK Muslim INGOs have seen a significant growth in their income. With this growth, a time comes to upscale the back-office facilities and the ICT systems – this is crucial for good governance. Some of these required investments are significant and can’t be covered by the general funds raised in one year and therefore the financing solution makes business sense.

 

Despite the fact that these charities have stable income and have the ability to payback loans, there are no interest free solutions available to them. The existing solutions are too focused on private and commercial initiatives.

 

Ultimately the beneficiaries suffering in the most remote parts of the world pay the price for the inefficiencies and weak governance caused by this lack of investment.

 

Foreign exchange (forex) costs with no hedging solutions

 

UK Muslim charities transfer around £250m each year worldwide to support beneficiaries. Sometimes the transferred currency has to exchanged up to three times before it reaches the beneficiaries. This poses a significant cost on the charity finances.

 

Unlike the mainstream non-Muslim charities where they have hedging products available to mitigate their forex costs, the UK Muslim charities have none.

 

Surplus cash – nowhere to go

 

In 2020, I analysed the accounts of the top 20 Muslim charities and noted that they held around £107m in cash balances (see blog). UK Muslim charities raise around 40% of their annual income in the month of Ramadan. This is then spent through out the year based on the need and ability to deliver.

 

The business model of the UK International Muslim charities is such that there will always be surplus cash held by them. It is unfortunate that there are lack of suitable Islamic Finance short term investment / finance solutions in place that can provide low risk returns and at the same time provide benefit to the UK community.

 

Islamic Finance products – Sustainable relief of poverty

 

The UK Muslim sector often lacks the required focus and priority on activities that are at the heart of sustainability and capacity building for the long term relief and impact in UK and worldwide. The nature of these activities requires Islamic Finance input and initiative. For example:

 

a) Micro Finance – building capacity and self-reliance

 

These are small interest free loans to the poor and disadvantaged individuals for business and self-reliance. Micro finance projects are carried out by some household UK Muslim charities worldwide but not on the scale needed and required on the ground – partly because this is not popular with UK fundraisers and also due to local registration restrictions.

 

However, In my opinion this activity has a significant potential in UK where a significant number of unemployed or disadvantaged youth and old can benefit. For this to work, an Islamic Finance approach is needed where businesses, professionals, charities, and government agencies need to partner and devise solutions.

 

b) Endowments (Waqf) – investment in the future

 

Waqf has historically been at the heart of Muslim charity with its long-term benefits in this world and in the hereafter. However, this approach is often ignored by donors over activities that provide benefit today (i.e. food projects) and also by charities due to their lack of ability to deliver such projects – these projects could be investments in self-sustaining buildings, infrastructure and businesses.

 

Endowments are investments and although are a charitable product, there delivery is no different from any commercial endeavor. This requires the right and experienced business and commercial skill, hence endowments projects to succeed have to be large in scale so that they can afford the required delivery cost efficiently and effectively.

 

Muslim charities often lack the right corporate structure, skill and will (due to the long-term nature) to understand and manage the risks associated with endowment projects – this is where Islamic Finance sector can play a role in coming up with large scale funds and delivery partners.

 

In summary, there is a significant role Islamic Finance sector can play within the Mosque and Muslim charity sector – this is often ignored over profits for the wealthy. By focusing on the Mosque and charity sector, the impact of Islamic Finance can reach far and wider in UK and beyond.

 

End –

 

Author: Nasir Rafiq is the Founder and Director of Dua Governance Chartered Accountants and Business Advisors – He is a widely experienced Fellow Chartered Accountant (ICAEW) and a Charity Financial Governance Expert.

 

Email: info@duagovernance.com