Sharia-compliant investing with liwwa

Before discussing how liwwa delivers Sharia-compliant loans and investment opportunities, let's first understand what Sharia-compliant investing means.

Sharia is law based on religion and is derived from the sacred scriptures of Islam, namely, the Quran and the Hadith.

Sharia-compliant investing involves investing in accordance with the set goals and values set under Sharia and governs that you must be ethically and socially responsible while investing your money. It also indicates that your investments should not only benefit you but also contribute to the overall development of society.

Sharia-compliant investing principles include:

• Prohibition of Interest – Under these guidelines, you are not allowed to either pay or receive interest as it is considered unjust.

• Prohibition of investing in certain businesses and industries - It is also forbidden to provide financing towards businesses that earn their income through sale of goods or services that are not permissible such as providers of alcohol, gambling, or weapons.

Murabaha loan – one form of a Sharia-compliant investment

Murabaha, also referred to as cost-plus financing, is an Islamic financing structure in which the seller and buyer agree to the cost and fixed markup of an asset. Within this transaction, the fixed markup takes the place of interest. Therefore, Murabaha is not an interest-bearing loan but is an acceptable form of credit sale under Islamic law.

Example of a Murabaha Loan

Laith owns a farm and would like to buy a tractor from a local retailer that is on sale for $50,000 to be able to expand his business.

Since Laith doesn’t have the cash on hand to purchase the tractor immediately, with liwwa’s help, Laith is able to receive the financing he needs to be able to grow his business. This involves liwwa purchasing the tractor from the retailer, and selling it to Laith for $55,000, to be paid over 11 monthly payments of $5,000. The total amount paid is fixed, and there is no compounding interest or additional charges introduced if payments are made early or late.

Once Laith receives the financing and the tractor, liwwa adds the loan to its investment platform as a Sharia-compliant investment opportunity. Interested investors are then able to buy a portion of the loan during the time before the first repayment. Once repayments begin, investors will receive monthly payments of their original principal and fixed profit according to their share of the loan. For instance, if you invested $1,000 in Laith’s loan, you would expect to receive 11 monthly payments of $100, for a total fixed repayment amount of $1,100.

liwwa’s Murabaha model was developed in consultation with legal experts in Jordan and modeled after Murabaha transactions at Islamic banks in Jordan. Scholars from the Ministry of Awqaf (وزارة الأوقاف) in Jordan reviewed liwwa’s Murabaha contracts and have verbally confirmed their compliance with Sharia principles. However, liwwa is not licensed as an Islamic lender at this time.

Why aren’t all loans provided by liwwa Sharia-compliant?

Sometimes small and medium businesses have specific needs that require financing solutions which do not follow Murabaha principles. Therefore, we provide our borrowers with different forms of financing to meet their diverse requirements. Examples of our other types of loan offerings are outlined below:

• Working capital: These loans are used to fund day-to-day business expenses such as payroll, rent, or operational costs and assist SMEs in managing cash-flow gaps during a slow business season.

• Check discounting: In a nutshell, this involves a business receiving cash today against a check provided by one of their customers for a future date. This way a business receives funds quickly to maintain operations without needing to wait to receive payments from its customers.

• Invoice discounting: Similar to check discounting, this involves a business receiving cash today against an invoice billed to one of their customers for a future date.

• Merchant cash advance: With this form of loan, liwwa provides a business with working capital based on its proven sales via a point of sale machine. liwwa uses a business’s data of customer credit/debit card payments to project future revenues which will repay the loan.

While these loan types are not Shariah-compliant, when you invest, you can be sure that you are taking the lead in providing financing to local small and medium-sized businesses, who are often unable to attain such funding alternatively - and you are allowing the backbone of our economy, SMEs, to grow and prosper!