Drawing on her background in banking, Maria Zain goes in search of contemporary solutions avoiding interest-based transactions.
Housing loans, education loans, personal loans – they are everywhere. Sometimes there comes a need for extra financing. But before engaging in a conventional loan for your new home or car, brainstorm other ways that would allow you to come up with your required funds. Ask yourself:
Do Islamic financial services providers exist in your area?
Islamic banking and finance is gaining a foothold in the West. For example, the Islamic Bank of Britain provides halal personal financing, sans interest. However, not all countries cater for Muslim borrowers, so ask yourself:
Are there any other ways of coming up with funds?
In many Muslim communities it is common to turn to family for a loan. Borrowing from parents and repaying them back later is a viable option. Saving collectively amongst siblings can help pool sufficient funds to purchase property – taking turns to buy houses, with siblings contributing with ongoing installments. Saving plans amongst peers may work too, again, provided that all participants are honest and trustworthy.
Are there methods to reduce interest repayments or eliminate them totally during the repayment period?
Paying installments in larger amounts that originally contracted, curbs interest payments and shortens the payback of the loan. Some more fortunate Muslims are able to repay loans before interest payments take effect. When Fadhilah Zainuddin's sister-in-law, Nini, graduated from University, her father repaid her loan in full, completely avoiding interest. Now that she is working, she repays him in installments without interest. "It works well for both of them," she says, "it is less of a hassle and less stressful for Nini."
If you find that you have other forms of investment, such as unit trust portfolios that are outperforming the market, consider selling off your units to reimburse or even refinance your car loan.
REDUCING CREDIT CARD HEACHACHES
If you are concerned about how credit cards may affect your life, here are ways to avoid problems in dealing with plastic money.
Have you shopped around for the perfect card?
Credit card companies compete with each other continuously to reduce prices (interest payments / annual fees). Take advantage of the competition and shop around before applying for a card. You need to know what you are dealing with before committing to plastic money. Some credit companies cut attractive deals with retail brands, such as by offering a specified period (for example, 12 months) in which you can repay the debt interest-free.1
Do you really need more than one card?
Credit cards are attractive because they enable you to buy almost anything you want, with money you do not have. There is a flip side to this – an incredibly detrimental one. Buying things in advance immediately reduces your real income, especially when repayments are of large amounts. If you are unable to repay the entire amount on time, you will be charged interest. If you need a credit card for emergencies or online shopping, apply for just one. The more cards you have with you, the more likely you will use them – hence, the higher the risk of interest-related debt.
Are you able to repay your expenditure in full?
Be prudent in your spending. Always record your expenditure and do not depend on an incoming cheque until the cheque has been deposited and cleared. Realistic budgeting will allow you to balance how much you have swiped onto your card with your ability to make the full repayment within the month. Reimbursing your expenditure immediately with cash is the only way to avoid interest when using credit cards.
WHAT TO DO WHEN YOU RECEIVE INTEREST
When it comes to saving accounts, your money will be "rewarded" with interest for subscribing to the financial service. As Muslims, such easy money does not belong to us, and is a product of "laziness," which is severely shunned in Islam.
Consider a few factors:
Does your bank offer dividend-based saving accounts?
Like Islamic loans, dividend-based saving accounts offer profit sharing between yourself and your bank. Dividend is based on your bank's activity and profitability. This is most likely to be found in an Islamic bank. However, there are banks that offer Islamic products by their Islamic divisions.
Once again, this option may not be available to all Muslims, but there are the alternatives to saving accounts.
Have you researched other saving instruments?
Financial planner, Saverinea Jayus, specialises in insurance and unit trusts. Both are long-term savings plans and are alternatives to savings accounts. Both are generally halal, according to Islam. Insurance plans help you save by forcing you to "pay yourself first." Automatically deducting your income and placing the portion into an insurance plan will firstly, allow cash to be stashed away as savings and secondly, protect your money from being withdrawn (by yourself). Open ended unit trusts allow you to pool money into a basket of different stocks – they also allow you to continue purchasing units in the long run. Both investment instruments pay dividends and allow withdrawal of funds after a stipulated number of years.
Provided that the shares they invest in are not haraam, these savings options allow you to avoid interest all together.
In most cases, you would still need a savings account and in many places, only interest-based accounts are available to the consumer. What do you do with the interest?
Get rid of it!
Dispose of the money immediately. This does not constitute as zakat but as charity money that does not "belong to any one person."
It can be difficult to avoid interest payments and income, especially living in economies that are based on conventional banking. However, with a little effort, thought and determination, it is possible for Muslims to find shariah-compliant ways of meeting the challenges of personal finances. Avoiding riba and dealing with today's external environment with an optimistic and innovative mindset is part and parcel of being a Muslim.
This article was first published in SISTERS, the magazine for fabulous Muslim women. Visit the SISTERS website at www.sisters-magazine.com to read more articles - and download a complimentary issue!