The peer-to-peer (P2P) mobile app will plug a gap in the real estate financing market.
London: UK-based Sharia-compliant peer-to-peer platform Nester aims to plug the gap in the country’s real estate market by providing financing to buyers and a passive halal fixed-income return for investors.
The start-up plans to formally launch its operations in the early second quarter of 2022 via a mobile app on both Apple and Android. It will focus on buy-to-let, refurbishment and light development facilities and bridging financing.
Nester’s journey began more than three years ago, but rather than follow most Islamic fintech firms as an appointed representative, the founders opted for the longer, more comprehensive route of full Financial Conduct Authority (FCA) authorisation.
It acquired its FCA licence in February 2021 and had a soft launch with a small pipeline of transactions between April and December 2021. Now comprising an 11-strong team, Nester is led by its co-founder and CEO Youness Abidou who has nearly two decades experience in real estate financing, including Sharia compliance.
He is joined by co-founder Mohammed Paracha, a lawyer and Islamic finance specialist at Norton Rose Fulbright where he is Head of the Middle East, and former member of the Bank of England Committee on Islamic Finance.
“We wanted to be fully FCA regulated to ensure we come to market with a robust offering without taking short cuts,” said Abidou. “We designed the tech ourselves to have greater control.”
In the UK, aside from savings accounts at traditional Islamic banks like Al Rayan and Gatehouse, consumers have little to no options for a passive halal fixed-income return.
“People need access to Sharia-compliant real estate financing (and) there (is) a lack of fixed-income investment products in the market. Our product aims to help people find solutions and answers in financing real estate as well as investors seeking fixed-income returns,” said Abidou.
Harris Irfan, CFO, Gateway Global, and Chairman of the UK Islamic FinTech Panel, said Nester was a positive move for the UK Islamic fintech industry as it provided real estate financing and quasi-fixed income opportunities to investors.
“Muslims or those seeking Sharia compliance generally have limited options in income-generating assets, particularly those that apply to pension and similar investment vehicles,” he said.
The minimum size Nester can finance is £250,000 ($330,000) and the current maximum £2.5 million ($3.3 million). Abidou said the majority of financing requests come through brokers, but the platform also has a portal that allows buyers to directly request finance.
In either case, Nester promises to review buyer applications within 48 hours; review the credit and approve within five days and pre-fund the investment within three weeks.
The company’s Sharia-compliant financing is based on a commodity murabaha agreement. Murabaha is an Islamic financial contract whereby one party purchases an asset or commodity and sells it to another party with a mark-up. Nester charges the buyer fees via a buyer arrangement fee, buyer operating fee and buyer exit fee; no fees are charged to the investor.
With capital at risk, investors can expect 6-9% returns. Nester has an investor on-boarding process that involves screening to ensure investors understand the product and investment risks involved. Currently, the platform has hundreds of registered investors with investments ranging from £1,000 ($1,320) to over £100,000 ($132,000), Abidou said, adding Nester will open to the general public in the second quarter.
The commodity murabaha agreement dovetails with the current UK tax laws that do not accommodate P2P platforms offering Islamic (or alternative) financial agreements. This means they are disadvantaged with regards to tax treatment when compared to Islamic banks and conventional P2P platforms offering similar financing.
Consequently, Nester has lobbied the UK government to amend existing tax legislation to include P2P platforms offering Islamic real estate financing. In February the HM Revenue & Customs (HMRC), the UK’s tax authority, published a draft on addressing P2P platforms offering Sharia-compliant home financing, and proposed they fall under the equivalent tax treatment to regulated conventional P2P platforms offering purchase and resale arrangements and diminishing shared ownership arrangements.
“The expectation is this will be passed into law for this coming tax year; however it levels the playing field for income tax treatment for murabaha financings arranged through a regulated P2P platform,” said Abidou.
He said it specifically handled the treatment of profit as interest. Ijara was an ongoing conversation with HMRC where Nester tackled the double stamp duty obligation the product created.
Finding a place in the market
The number of UK-based Sharia-compliant P2P and crowdfunding platforms has been steadily growing in recent years. In real estate the most notable and well-established player is Yielders, a halal property crowdfunding platform and among the UK’s first regulated Islamic fintech firms.
Others include CrowdToLive that also offers equity property financing, while crowdfunding platform Qardus offers Sharia-compliant business financing to small and medium enterprises (SMEs) via commodity murabaha. The recently launched Maydan Capital, a subsidiary of Wahed Invest, offers higher risk, but higher return, equity crowdfunding into start-ups.
Paracha said Nester’s offering was “unique” because investments are secured on real estate. Irfan added Paracha’s strong reputation in the Islamic finance market would also boost the firm’s standing.
“Given their credentials and experience, I expect Nester to have a strong legal and regulatory risk framework,” he said.
Paracha said Nester had also been mindful of its branding to ensure it appeals to customers from all walks of life.
“Early in our inception we wanted to create a product that competes against conventional offerings. Part of that vision is in our name where we want to be Sharia-compliant, but indifferent in name to appeal to both Muslims and non-Muslims,” he said.
Looking ahead, Abidou said the company aims to complete another £4 million ($5.28 million) of pipeline deals over the next five to six weeks. Nester was looking to finance over £10 million ($13.2 million) over the next year.
“We have a pipeline that should result in over £5 million ($6.6 million) of opportunities on the platform by the end of this quarter. Longer-term, we have plans to grow our offering significantly to match the strong demand we’ve seen to date.”
Nester will initially focus on properties in England and Wales and hopes to expand to Scotland, Europe and the Gulf Cooperation Council (GCC) states in the future. In addition to Sharia compliance, the company sees environmental, social and governance (ESG) criteria as an important part of its business model.
“We will introduce social impact analysis on the properties and the buyer’s ESG credentials,” said Abidou.
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