Istihsan and Business Loans: Here’s What You Need to Know

Istihsan Definition: Once you understand if you Islamic financing terms like Istihsan, you’ll be able to get a better understanding of how this type of sharia compliant financial system works. For example, this particular Arabic term is used in relation to discretion. It pertains specifically to Muslim law and is used by scholars quite often to express preference for certain judgments over others.

Istihsan is an important part of Islamic financing generally and ijara loans specifically. Of course, if you’re looking for a business loan you need to straddle the line between sharia compliant and traditional loans. However, you’ll need to look at more than the interest rate when you’re looking for a way to get some money to start a business.

Here’s a few tips for meshing istihsan and business financing.

  • You’ll need to look at the size of the loan that’s being offered. One of the best starting points to get anything moving forward in a business sense is finding out what percentage the lender is willing to finance. Depending on the size of your start-up or project, you might want to consider looking at a second banking institution.
  • There should be some kind of flexibility on the repayment schedule as well. When you’re starting a business or financing one that is already developed, unforeseen things can happen. You’ll need to find out what the consequences are if you can’t make repayments on time. It’s possible that a bank will let you suspend a few payments on the principle, but you need to be sure. It’s important to be clear on what the circumstances are too.
  • Find out about the collateral. Istihsan is obviously part of doing business in a different sharia compliant way. Still it’s critical to find out what the consequences are if you default on a business loan from a traditional lender. Quite often, the penalties can include personal assets so you will need to be careful here and get some good advice.
  • Finding the right loan can be a balancing act. For many smaller enterprises, it can mean that you need to figure out how to protect your personal cash from your business cash and keep the two separate. For example, you’ll need to have some financial projections about how much it costs to run your business on a day-to-day basis. That’s where a good business plan comes in.

Running a small business that is sharia compliant isn’t as daunting as it might seem at first. Understanding how trust folds into the whole picture is one of the first steps in starting a successful enterprise.

None of the Islamic financing considerations should interfere with the type of business you choose unless they run contrary to sharia law. Istihsan is a part of getting that mix right and we can help when you contact us.