There is a place for Shariah-compliant peer-to-peer lending opportunities in the UK market, according to global consultancy firm Capco.
In a series of white papers released over the past year, Capco has explored the viability of P2P lending within an Islamic finance framework.
The firm concluded that Shariah-compliant P2P lending is possible in the UK market, as long as all loans are secured against assets.
Under the principle of Riba, interest earned on loans is prohibited in Islamic finance. However, P2P lending is still possible if both parties sign a ‘murabahah’ contract at the beginning of each transaction. This contract is sometimes referred to as cost-plus financing, where the seller and buyer agree to the cost and mark-up of an asset before any money changes hands.
Rahul Rajagopalan, is a management consultant and Islamic finance lead for P2P lending at Capco. He advises on how to make P2P lending Shariah-compliant.
“There is a convergence between Shariah-compliant finance and P2P lending,” Rajagopalan said.
“The only way we could see it being done is by using an asset-backed lending process as opposed to debt because debt is fundamentally prohibited in Shariah-compliant instruments because of the concept of Riba. So the only way this would be possible is through a concept known as murabahah, which is cost-plus financing where the borrower and lender pre agree on the kind of mark-up on that transaction.
“By using the murabahah master agreement, the lender essentially protects themselves against any issues that they might have and the borrower is able to elicit funding for his project. But this can only be done if it’s for an asset-backed project.
“Another hypothetical solution to protect investors in the event of a default would be to present the investor at the time of joining the platform the option to enrol in a ‘takaful’ or group insurance that the platform maintains for investors and pays out in the event of a default,” he added.
“This would be very similar to a provision fund which many conventional firms use today to pay out investors in the event of defaults, however due to the interest bearing nature of many of the assets held in these provision funds it would be more appropriate to use a ‘takaful’ for a Shariah-compliant P2P firm.”
Shariah-compliant P2P lending is still a relatively new concept in the UK market. Earlier this year, Qardus launched an Islamic crowdfunding platform providing Shariah-compliant finance to small- and medium-sized enterprises. Qardus provides unsecured loans of up to £100,000 in the form of a commodity murabahah.