Islamic compliant marketplace financing

By Jonathan Lawrence

It is estimated that 29.7% of the global population will likely be Muslim by 2050, against 23.2% in 2010. The proportion of Muslims in Europe is currently around 6% of the population and is projected to be 8% by 2030. This creates a large business and consumer base to consider for FinTech ventures. How can you make your business platform compliant with the principles of Islam to appeal to this market?

One way has been to create a financing platform using the Murabaha method. This is an Islamic finance technique used to provide financing on terms compliant with Islamic principles. For example, there is no direct interest rate return made by the financier as charging interest is not considered to be compliant.

In a Murabaha transaction, a financing party buys an asset that has been identified by its customer from a third party and then sells that asset to the customer for the original purchase price plus a profit element (generally calculated based on a benchmark figure such as LIBOR). Rather than retaining the asset for use in its business, the customer on-sells it, either back to the original supplier or to a third party. In this way, the customer obtains a cash sum in return for periodic instalment payments that have the same broad economic effect as interest. Murabaha transactions are in compliance with Islam because until the asset is sold (however immediately) to the buyer, the financing party bears the risks associated with the ownership of the asset.

Platforms have been established using this method. However, the market dictates that there is a large growth potential in the FinTech space for those seeking new ways to deal in an Islamic compliant way.

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