Last updated on June 21st, 2015 at 09:13 pm
Ramadan is in full swing and that means Muslims will be fasting for the next few weeks. While fasting is among the more well-known burdens placed on Muslims, many people don’t realize that Muslims are also forbidden from taking out loans that charge interest rates.
So-called “usury”, or the charging on interest, is strictly forbidden on loans. While interest rates are now common and generally benign for the financially prudent, the charging of interest has a long and controversial history. Shakespeare lambasted the practice in his famous plays, Pope Benedict XIV condemned the practice in 1745, and numerous others have denounced usury.
This makes taking out loans very complicated for Muslims. Simply put, banks won’t loan out money for free, and only do so in order to generate profits. The simple task of taking out a loan to buy a car or house presents ethical and religious problems for many Muslims.
Bitcoin startup Blossom Finance is looking to take this challenge on by partnering with microfinance institutions to provide loans to Muslim companies and individuals. Only, instead of charging interest rates, Blossom Finance will provide funding and then take 20 percent of the profits from the companies they loan money too.
Essentially, Blossom Finance invests in firms to produce profits, rather than charging them interest rates. This profit sharing is considered perfectly legal from the point of view of Islam, and is a relatively common concept in the world of Islamic finance.
House loans, for example, are often written as business investments. Islamic Banks simply gain a share of rising property values, rather than making money off of interest rates.
Muslims make up approximately 25 percent of the world’s population, but lack access to sharia compliant lending institutions. It is estimated that only 1 percent of world financial assets comply with the standards laid out by Islamic law.
Emerging firms working in the field of Islamic finance could disrupt the market by providing financial instruments that comply with Islamic law. Blossom Finance, for example, was started by Matthew Martin, who converted to Islam about five years ago, after having spent several years working in the field of finance. Now he is combining his faith and knowledge the finance industry to take on the challenge of providing funding to Muslims.
Blossom Finance received funding from BMT Nusantara Condet, an Islamic investment firm, and is seeking to provide funding for as many as 20 start-ups in Indonesia. The firm is based in the United States, but is seeking to become heavily involved in Muslim dominated countries, such as Indonesia.
Many Muslims live in emerging markets, such as Pakistan, India, and Indonesia. The lack of access to compliant lending institutions could be holding these regions back. A lack of access to finance makes it much more difficult for companies to access the funding they need to get started.
Proponents of Islamic finance argue that companies that must take a vested interest in the well-being of their clients by making investments, rather than loans, will be at less risk of overzealous speculation and asset bubbles.
Now, with the work of company like Blossom Finance, it’s possible that Islamic firms will be able to overcome the challenges of creating a financial industry that does not utilize interest rates.