The Chancellor Rishi Sunak announced a cash and tax-break measure today amounting to 15% of the UK’s GDP. It is a massive and unprecedented move to try to stave off as much as possible the economic effects of coronavirus.
In this article we:
- explore in brief what Sunak has come up with
- discuss changes particularly relevant to Muslim businesses
- and finish with a joint fatwa from Mufti Faraz Adam and Mufti Billal Omarjee that, provided certain stringent criteria are met, government loans may be permissible in these extremely worrying times for some businesses if it will stave off certain collapse.
(For all our coronavirus-related personal finance articles please see here.)
What did the Chancellor announce?
Starting with the biggest policies first, the Chancellor announced:
- state loan guarantees worth £330bn. These will be delivered in 2 different ways.
- For big businesses, the Bank of England will be offering cheap money to the banks to lend out to big businesses.
- For small businesses, the Enterprise Finance Guarantee scheme is going to be temporarily replaced by the Coronavirus Business Interruption Loan Scheme (details here). What this means is that the government guarantees 80% of the loan for small and medium-sized businesses to encourage lenders to give such businesses money they would otherwise not be able to get. The Chancellor has increased the maximum a business can get from £1.2m to £5m. The minimum loan is £1000. The scheme is not fully live yet but will be live within a few weeks.
- There will be support for businesses who are paying sick pay to employees up to 2 weeks per employee.
- There will be a one-year break from business rates as well as government grants of up to £25,000 for struggling retailers, leisure, restaurants and other hospitality businesses.
- There will be increased grants to small businesses eligible for Small Business Rate Relief from £3,000 to £10,000.
- For struggling home owners with mortgages, lenders have agreed with the government to give a mortgage holiday of up to three months.
Changes relevant to Muslims businesses
A number of hajj and umrah and travel businesses have undoubtedly struggled during this period, as have restaurants and Muslim clothing retailers. For them provisions 1(b), 2, 3 and 4 will be welcome.
For all of us with houses, (5) will be a relief – though it remains to be seen whether this also applies to Islamic banks. We fully expect that it does, but are confirming with them on this.
Unfortunately there isn’t much support for startups in the Chancellor’s package, but we may see that in the days to come.
But hang on, aren’t loans haram?
Loans are haram and should be avoided in all but the direst of situations. Taking interest is as haram as eating pork is.
But given the circumstances we find ourselves in, for some businesses the direst of situations could well be a reality in the coming weeks and for them taking an interest-bearing loan could become permissible.
We expect that, given self-isolation measures are expected to continue for a number of months, businesses that are based entirely on people coming to them and spending time on their premises, will be quickly brought to the brink.
So what is a “dire” situation?
Here are some indicators:
- If the business does not take a loan, the business will go bust – and, crucially, that going bust will have a severely negative impact on the individual employees and directors of the business (i.e. they will not be able to afford day-to-day necessities such as household bills).
- If the business cannot get any alternative halal funding.
- If the business cannot get its creditors to agree lenient terms with it for the coronavirus period.
Here are some indicators of when a business should not resort to taking a haram loan:
- The business does not need money now, but thinks it might need some in 6 months’ time. The business should wait and see.
- The business expects that it will be able to weather the storm by running some short-term losses, but ultimately return to profitability thereafter.
- The business has other avenues of funding, grants or qard hasan options available to it.
- The collapse of the business will not have a material impact on the lives of its employees or directors (perhaps it is just a small business and the employees and directors have other sources of income).
If a business resorts to taking an interest-bearing loan it must only do so to the amount it needs to survive. Once it has returned to even keel the prohibition will apply once more.
A Muslim-owned business should also not take out a loan to then fund its haram activities (e.g. some restaurants sell alcohol) – it should only seek (like at any time) to do halal activities. We are strongly of the opinion that there are enough halal opportunities today to not have to resort to haram ones.
If your business is in a dire situation, as defined above, then Mufti Faraz Adam and Mufti Billal Omarjee agree that it temporarily becomes permissible for you to avail of the government Coronavirus Business Interruption Loan Scheme. However you must have exhausted all other means available to you, such as raising equity financing, obtaining grants, obtaining interest-free credit (and paying off the money within the interest-free period) before you decide to go for the loan option.
Given the severity of the prohibition of interest in the Qur’an, it is worth reiterating here that such a temporary fatwa is only applicable in these extraordinary times.
If you are unsure if the fatwa applies to your particular business, then please do consult a scholar you trust.
We at IFG will be picking up with the British Business Bank to see if we can convince them to offer a sharia-compliant lending solution to Muslim SMEs, but given the enormous amount of work the BBB is busy with right now, we are not hugely optimistic. In light of that, we have worked with our Mufti advisors to set out when the governmental loan scheme becomes a permissible option for Muslims businesses.