For the SME looking to open a company bank account, sign up for a business credit card or take out a loan to finance an expansion, they can go to a conventional bank or an Islamic bank. But Islamic financial institutions work in a different way to conventional banks.

According to Islamic law, banks are forbidden from making money by simply lending it. Therefore, a sharia-compliant bank cannot earn interest (riba) on money it loans to customers – and this naturally applies to business finance products as well as to personal finance products.

So how does the bank make any profit? Well, the basic principle of Islamic banking is based on risk-sharing, which is a component of trade. Therefore banks can use the money deposited by customers to trade in sharia-compliant investments. They then share the risks and profits between themselves and the customer.

This is why a business account holder may earn a profit rate on his deposits or pay a profit rate on a loan.

Any business can sign up for sharia-compliant business products, as Islamic banking is open to Muslims and non-Muslims as long as a company meets the bank’s approval criteria. This can include the type of business the SME is in – with any core activities that are not sharia-compliant (say a gun or cigarette factory) not considered.

Islamic SME bank accounts

For SME Islamic bank accounts – whether current or trade accounts – the bank will not pay the account-holder any interest on deposits. However, Islamic banks may issue a profit rate instead.

Generally, sharia-compliant accounts do not charge for everyday transactions as long as the account stays in credit and above the required average monthly minimum balance.

This can mean zero fees for issuing a new checkbook or gaining access to internet banking, making the overall cost of running the account cheaper.

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However, one factor to consider is that Islamic bank accounts do not offer overdrafts, so business customers must ensure they always have enough cash to meet their monthly expenses.

For SMEs requiring accounts that also handle trading, Islamic banks are often equipped to handle all forms of letters of credit or guarantee, whether a company is importing or exporting. The institutions can draw up documents in a manner that complies with sharia principles.

Islamic SME credit cards

Sign up for a conventional business credit card and you will pay interest on the amount spent, along with any service fees. But this concept is unworkable for Muslims, who need to avoid interest. Therefore an Islamic business card allows Muslims to spend on items with a card that conforms to Sharia principles by avoiding any forbidden, or haram, financial practices.

In doing so, it still manages to retain the convenience and added extras that a standard credit card can offer, such as discounts on business services or travel perks – air miles, airport lounge access, travel insurance and so on – while also ensuring no religious or ethical beliefs are compromised.

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No interest is charged on a card’s outstanding balance. Instead the card works by the principle of ujrah, which means service charge. This means a small fee is charged instead of interest – generally an annual fee issued once a year or spread across the year through monthly installments. However, customers who do not pay off their outstanding balance may also be hit with a charge for not clearing the card.  Unlike conventional banking, though, the profit rate levied is non-compounding.

[ Related: A guide to credit cards for SMEs | A guide to SME loans | Guide to bank accounts for SMEs ]

Islamic SME finance

Banks have a number of Islamic instruments available to assist SMEs with their financing needs. For the SME in search of a business loan, the first factor to consider is what type of loan the business wants – whether a straight cash loan to ease company cash-flow, a commercial mortgage to invest into real estate or equipment finance to fund the purchase of vital machinery to help grow the company.

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They can use the murabahaconcept, for example. This is a sales contract that fixes the price of any goods or items a company wants to buy, such as machinery or office furniture, and includes a pre-agreed profit margin.

This means the bank effectively purchases the goods the business customer wants and then sells them back to the SME at a profit, which replaces the conventional interest rate.

How much a business can borrow will depend on the type of purchase and the company’s working capital cycle.


Alternatively, banks can use the ijarah concept, which is effectively a lease contract – where a bank buys equipment or machinery and then leases it back to the company in return for a rental payment over a set period of time.

For a commercial mortgage, instead of lending a customer money to purchase a property and charging interest on that loan – the norm in conventional banking – an Islamic commercial real estate loan might see the bank buy the property on behalf of the customer and then re-sell it to them at a profit. The buyer pays the bank back through monthly installments.

Both murabaha and ijarah concepts can be applied to commercial mortgages. These different methods of facilitating a business loan means that Muslim business can sign up for a business loan product safe in the knowledge they are doing so in accordance with Islam.

We also have a series of six guides to personal Islamic products: Islamic Banking – how does it work? | Islamic bank accounts explained | Islamic credit cards explained | Islamic personal finance explained |  Islamic car finance explained | Islamic home finance explained.