Funding a Company Without Riba: Contracts, Providers and Process

Why a business looks for interest-free funding

Many Muslim entrepreneurs refuse to build their company on interest-bearing debt, which many scholars equate with riba. Other owners mainly value financing tied to real assets and a fairer sharing of risk with the party providing the funds.

Matching each need with the right contract

The starting point is describing exactly how the money will be used. Inventory calls for murabaha, a machine for ijara, premises for diminishing musharaka, and a growth project for musharaka or mudaraba. A vague need is almost impossible to structure in a halal way.

Murabaha for inventory and merchandise purchases

The financier buys goods from the company's supplier and resells them to the company at a markup payable later. Murabaha works well for clearly identified one-off purchases but becomes cumbersome for small daily purchases.

Repeated murabaha under a financing limit

Some companies negotiate an overall limit within which each purchase is a separate murabaha. The arrangement resembles a line of credit, but every transaction requires an invoice and a genuine transfer of ownership, which calls for careful administration.

Ijara for business equipment and vehicles

For a truck, a machine tool or computer hardware, the financier buys the asset and leases it to the company, with ownership transferred at the end. Rents may be fixed or revised according to a formula agreed in advance in the contract.

Diminishing musharaka for commercial premises

The company and the financier buy the building together; the company rents the financier's share and buys it back gradually. This arrangement, covered under halal commercial real estate, may trigger land transfer tax that a lawyer or notary should check.

Working capital, the hardest need to cover

Paying wages, rent and suppliers does not match any specific asset, which is why halal working capital is hard to structure. Solutions involve murabaha on inventory, mudaraba or partners' contributions rather than a conventional line of credit.

Salam and istisna for manufacturing and construction

Salam allows output to be sold in advance for immediate payment and delivered later. Istisna finances the manufacture or construction of an item to order with staged payments. These contracts suit manufacturers, farmers and construction contractors.

Providers serving Canadian businesses

Tjara, headquartered in Mississauga, says it offers halal commercial financing in all provinces and relies on an ethical and sharia advisory board. Muevmnt states that it finances businesses nationwide. Cooperatives and community funds round out the supply.

Legal and tax framework to confirm

Canada has no statute specific to Islamic finance; these contracts rest on ordinary law governing sales, leases and corporations, as explained under the Canadian legal framework. The tax treatment of the markup should be confirmed by an accountant.

Screening the activity being financed

A halal financier will not back a company whose main activity is considered unlawful, such as alcohol, gambling or interest-based lending. It also looks at the use of funds: a lawful restaurant can be financed, but not the purchase of an alcohol inventory.

Personal guarantees and security required

Like a bank, a halal financier may ask for the directors' personal guarantee or security over the company's assets. According to many scholars, a guarantee is acceptable when given free of charge. Have these commitments reviewed by a lawyer before signing.

Building a halal financing file for a company

1. Describe each need separately: inventory, equipment, premises, working capital or expansion, with amounts and timing.
2. Match each need to a possible contract and identify halal providers that finance that type of asset.
3. Prepare financial statements, cash flow forecasts and quotes from the suppliers of the goods.
4. Ask the financier for the exact structure, total price or rents, fees and its sharia board's opinion.
5. Have the contract reviewed by a lawyer and an accountant, especially security, levies and tax treatment.
6. After signing, keep invoices and proof of ownership transfer for each financed transaction.

Cost items in halal business financing

Financial file expected from a company

• Articles of incorporation and shareholder register
• Financial statements for the last two or three fiscal years
• Cash flow forecasts covering twelve to twenty-four months
• Company bank statements for the past six months
• Quotes or pro forma invoices for the assets to be financed
• Personal Notices of Assessment for directors giving guarantees
• Commercial lease or offer to purchase for premises
• List of existing debts and their terms

Reasons a halal business application is declined

• Requesting an unallocated lump sum when a halal structure needs an identified asset or project for each transaction.
• Keeping a large interest-bearing line of credit that contradicts the goal and may complicate the Islamic financier's review.
• Submitting incomplete financial statements or forecasts with no assumptions, which makes it impossible to assess repayment capacity.
• Buying the asset yourself before the financier steps in, which many scholars say rules out a murabaha resale.
• Overlooking land transfer tax and other levies in a property structure, only to discover them at closing.

Owners' questions on halal company financing