New model rules and resources to support Shariah compliant community share offers

This advisory work was delivered by Mufti Faraz Adam at Amanah Advisors who provided a comprehensive Shariah compliance review of their governance and business model. Amanah Advisors is an independent, globally recognised Shariah advisory firm based in Leicester. They take a holistic and ethical approach to enabling Shariah compliant finance solutions.

It was found that the community share offer as it stood was not quite Shariah compliant, but the process itself was enlightening for both Co-operatives UK and Amanah Advisors.

Mufti Faraz Adam says: "Co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others."

This opened conversations on how community shares and the society model they are based on had real potential to become a Shariah compliant method for community-based, co-operative, and other social sector organisations to raise flexible, ethical finance.

Most mainstream social investment options are variations of debt finance which for the most part is not Shariah compliant, therefore excluding Muslim communities from accessing this type of finance. It was theorised that community shares represents an alternate form of social investment that could be made available to organisations working in Muslim communities in the UK.  

In 2021, Co-operatives UK and Amanah Advisors successfully applied to the Connect Fund under their Equality and Diversity programme for funding to explore this concept further. The Connect Fund is managed by Barrow Cadbury Trust in partnership with Access – The Foundation for Social Investment.  

As part of the project, detailed analysis of the community shares model and Co-operatives UK Model Rules have been undertaken and revised models developed and approved by the Financial Conduct Authority to enable Shariah Compliant Community Share Offers. The guiding ethical principles which have been underpinned the models include: 

• Ethical and value adding business models (no deemed harmful activities) 

• Financial return not based on a percentage of capital invested, I.e. interest rate 

• Equitable and just treatment among shareholders 

• Bearing risk proportionate to capital, shared risk and reward.  

These specific Multi-stakeholder Co-operative and Community Benefit Society models make this unique form of equity available to Muslim communities in the UK. 

The Multi-stakeholder Co-operative model allows for a financial return to members and investors through an equitable distribution of dividends if the society has made a surplus. The nature of that equitable distribution cannot be simply based on transactions and cannot be a percentage of capital. Withdrawal of capital is available on the same terms as usual, if the society can afford them. This model is better suited where there is more of a trading relationship with the co-operative.  

The Community Benefit Society does not allow for neither interest on the investment nor dividends. It allows communities to buy shares which confer equal membership in the society with withdrawal of capital on the usual terms. This model is better suited where the focus is on social return and collective ownership.

Both models allow for the issuance of shares which could be eligible for tax reliefs, such as Social Investment Tax Relief (SITR) and the Enterprise Investment Scheme (EIS).  

We are looking to work with interested businesses or groups who think the model may align with their mission and finance requirements.