For believers in the Islamic faith, finding fully Shari'ah-compliant finance organizations is an excellent way to invest or access working capital without compromising their beliefs. As Shari’ah-compliant banking becomes more mainstream, it’s essential to explore some key points further.
The Four Main Principles of Islamic Finance/Shari’ah
Although many products may be “Shari’ah-aligned,” fully Shari'ah-compliant products must strictly adhere to the following four principles:
- Prohibition of Interest: Islam prohibits the charging of interest, as it is viewed as an exploitative practice that favors the lender at the expense of the borrower.
- Avoidance of Haram Activities: Financing businesses that engage in haram (forbidden) activities, such as producing or selling pork, alcohol, or tobacco, is strictly prohibited.
- Avoidance of Gharar: Investments or financing any business with a high probability of gharar (risk, uncertainty, or potential harm) are not to be undertaken and are strictly forbidden.
- Prohibition of Maisir: Shari’ah prohibits any form of speculation or gambling (known as maisir). Involvement in transactions where the ownership of products depends on uncertain future events is not allowed.
Types of Contracts in Islamic Finance
According to Reuters, the global Islamic financial market has grown by more than 300% over the last decade, reaching nearly $200 billion. As Shari’ah's popularity increases, it's beneficial for Muslim business owners seeking working capital to understand some popular types of contracts or financial products available:
- Mudarabah (Profit and Loss Sharing): Mudarabah is a contract between two parties where one party (the Rabul-Mal) provides the capital, and the other party (Mudarib) provides the labor to form a partnership. The profits are shared according to mutually agreed proportions.
- Musharakah (Joint Venture): Although not ideal for business owners wishing to remain sole proprietors, Musharakah is a financial contract between two or more parties to establish a commercial enterprise based on capital and labor. Profits and losses are shared in proportion to each party's contribution.
- Wakalah: This contract requires the principal or business owner (Muwakkil) to appoint a representative (agent or Wakil) to act on their behalf in necessary transactions. The Wakil typically possesses the relevant financial knowledge or expertise to act in the best interests of the Muwakkil. Any profits earned (or losses incurred) belong solely to the Muwakkil, while the Wakil may receive a fixed fee for their services.
Merchant Capital’s Shari’ah-Compliant Cash Advance
Since 2019, our Cash Advance solution, certified by Standard Bank Shari’ah, has helped many individuals fund their ambitions and is among the first products of its kind in South Africa. This solution offers access to funding within 48 hours of application, with minimal paperwork and flexible repayment terms.
