In this interview with Danish Reyaz, Raashid Sherif, the Chief Operating Officer of Rehbar Financial Services, offers valuable insights into the journey of Rehbar and principles of its unique Islamic finance model. Raashid shares information about the inception of Rehbar, challenges faced, and significant strides made over the years. The interview explores the distinctive features of Rehbar’s financial model, its impact on both investors and businesses, and the future prospects of Islamic finance in India.
Could you please tell us about yourself?
My name is Raashid Sherif, and I am the Chief Operating Officer (COO) of Rehbar Financial Services. Incidentally, I was also the first employee of Rehbar when it was founded in 2013.
In terms of my educational background, I have done my Islamic studies, including Hifz and Alim courses and studied from the leading Islamic seminaries like Nadwatul Ulama and Darul Uloom Deoband. Following that, I pursued modern education, and by the grace of Allah, I earned both B.com and MBA degrees.
What led you to transition from Islamic studies to modern education?
While doing my Aalim course, I picked up an interest for Islamic economics. I also translated some works on the topic from Arabic to English. During this time, I realized that in today’s world, it was essential to complement my Islamic studies with knowledge of how economics and finance work in today’s world. Only when one knows the Islamic teachings on worldly dealings or mu’aamalaat and also understands the prevailing practices in the market can one give guidance to those who want to follow the teachings of Islam in their day to day life. This combination has proved very useful and played a strong role in whatever I have been able to contribute to the field of Islamic finance so far.
We really appreciate that. Could you please tell us about the idea behind Rehbar?
It was around the latter part of 2012 when discussions started around doing something in the field of Islamic finance. The individuals leading these discussions were my father, Mr Sherif Kottapurath, Mr M.H. Khatkhatay, a veteran in Islamic finance, Mr Mudassar Baig, a finance professional along with some other sincere individuals.
Initially, one of the proposals was to get involved in the stock market, but eventually, it was decided that we should focus on the unaddressed area of assisting small and medium businesses seeking funds in a Sharia-compliant manner, who do not have access to such funds. In doing this, we were also able to cater to individuals looking to invest in a Sharia-compliant manner, avoiding excessive risk while seeking safe returns.
The idea was to bridge the gap between these two groups by structuring a deal and facilitating the transactions. This marked the inception of initial Rehbar model in 2013, which essentially brought investors and businesses together on one platform to mutually benefit from each other. Rehbar collected fees from both sides for the deal making and monitoring activities involved.
Looking back from 2013 to 2023, how do you view the journey you have undertaken?
It has been a fascinating journey, filled with numerous ups and downs and valuable learning experiences. In the beginning, we started small, intending to test the waters. For the first one and a half years, we focused on research and development, conducting modest business operations. Most of the funding were to very small and unstructured businesses. It wasn’t until around 2014-15 that we engaged in more significant deals, with ticket sizes ranging from 30 lakhs to one crore.
During this time, we also facilitated smaller deals, often referred to as social deals, to assist small business owners and entrepreneurs, including small shop owners and auto drivers. This approach not only provided satisfaction to our investors, who were receiving returns but also helped these small businesses earn their livelihood.
However, in these social deals, there were some losses because the businesses overstated their profits and understated or concealed their liabilities. What made matters more difficult is that such businesses lack proper records for us to validate their claims. After the deal, the funds get utilized to pay off the other liabilities and the business is unable to generate enough profit to compensate all the stakeholders, As a result, our investors had to bear some losses in these deals. In some cases, Rehbar compensated them for their losses by raising funds from our shareholders.
Putting that experience behind us, we engaged in larger deals with businesses such as Trojan Plywood, ID Fresh Foods, Primecare Hospital and others. These deals included asset leasing arrangements and project financing, but still on a P2P model. These deals proved to be successful, with our investors securing good returns.
In 2018, we also changed our model, where we pooled investors’ funds in special purpose vehicles and distributed them across various businesses to minimize the risk through diversification. This model has been running successfully since.
How has the community responded to the initiative of Rehbar?
Many individuals aspire to adhere to Sharia-compliant practices, avoiding loans from banks and interest from fixed deposits. However, they often lack interest-free avenues. After providing them with such opportunities, we have observed a growing trend of people moving away from or reducing their exposure to traditional banking.
Our investors, recognizing the potential for healthy returns, chose to invest with us instead of parking their money in gold and real estate. While the investors prioritize the security of their principal amount and seek good returns, businesses aim for funds at lower cost with risk-sharing provisions built in to the contract. At Rehbar, we address the needs of both parties, resulting in widespread acceptance from the community.
How does Rehbar balance the interests of investors and businesses, especially when it comes to risk management and choosing investment opportunities?
We safeguard the interests of both investors and businesses by opting for low-risk deals with businesses that have a track record of profitability. We refrain from using our investors’ money in new ventures or startups due to associated risk.
If businesses have proven themselves with let’s say a turnover of around 20 crores and seek investment to reach 25 to 30 crores, those are the businesses we consider. We don’t get carried away by people projecting turnover growth of 10x or 100x, as such deals come with high risks.
How does Rehbar differentiate itself from various Ponzi schemes?
We have consistently cautioned our audience against the dubious nature of Ponzi schemes, advising people to stay away from them. We’ve highlighted the misleading promises of high returns, pointing out the disparity with other companies in similar businesses who are either operating at minimal profit or making losses.
In contrast, our commitment to transparency is evident in our operations. Unlike fraudulent schemes that conceal their team and business details and hide behind the veil of business secrets, we openly showcase the businesses and assets that we invest in. Our financial statements are available for review and they reflect the business that we are doing. The investors can also interact with the businesses we have funded or research them to understand their scale of operations.
Also, I would like to emphasize that the typical people who invest with Ponzi schemes and those who invest with us are different. Such schemes primarily target the low-income and financially illiterate sections of society. In contrast, our investors are educated individuals well-versed in financial matters. There is essentially no comparison between us.
Do you fall under the regulatory oversight of SEBI or RBI?
We are primarily engaged in operating lease business, which is not classified as a financial activity by the Indian regulators. Therefore, there is no requirement for regulatory clearance from RBI or SEBI. We operate as a private limited company registered under the Companies Act, and our Special Purpose Vehicles (SPVs) are also private limited companies into which investors entrust their funds.
Could you explain the financial model that Rehbar follows?
There are two aspects to understand: how we raise funds and how we deploy them, both based on Sharia principles. The funds we raise are on a Wakalah basis, which is essentially an agency contract. In Wakalah, Rehbar is the Wakeel or agent, and investors are the Muwakkil or principals. Rehbar charges predetermined fees from the managed funds for the agency activity.
In terms of fund deployment, we follow Ijarah. In this approach, we purchase assets to be used by the businesses and lease it to them, receiving rental payments. We also engage in Musharaka to finance businesses, providing loans on a profit-sharing basis in this model for their working capital needs.
We have two private limited SPVs, namely RERL I and RERL II, which are subsidiaries of Rehbar Fin Services which is the parent company. Our investors invest their money in these RERLs, and Rehbar allocates that money, spreading it across several businesses. This way, if losses occur in a couple of businesses they are compensated by gains in all the other businesses, ensuring minimal impact on the profits paid to our investors.
Every quarter, profits are calculated, and returns are accordingly paid out to our investors. So far, we have provided returns ranging from 9% p.a. as the lowest to 13% p.a. as the highest to our investors. Over the past five years, we have consistently delivered healthy returns, surpassing what one can get from bank deposits. Furthermore, these returns are ethical and in line with the values of the investors. As a result, even senior citizens are investing their retirement funds with us to receive good regular returns without the guilt associated with earning interest money which is prohibited in Islam.
In 10 years, how many investors and businesses have benefited through your services?
To date, we’ve been a source of support for around 120 businesses, with approximately 1500 investors benefiting from our services. Our cumulative disbursal of funds stands at 200 crores, out of which 170 crores were disbursed after we switched to the new model in 2018. In the previous model, where we essentially connected investors to businesses, we had disbursed 30 crores.
Could you please provide information about the average funding amount done by Rehbar and average investment amount from each investor?
The minimum average turnover for companies to qualify to approach us is Rs 3 crores per annum. Typically, businesses need to maintain audited financials once they cross a turnover of Rs 2 crores, so that is why we have set a Rs 3 crore threshold to consider businesses for funding. This decision is also influenced by our previous experience with small businesses.
Usually, we start with funding ranging from Rs 50 lakh to 1 crore for these businesses, but in some cases, we can also start with Rs 10-15 lakhs. Most of the companies with us opt for multiple rounds of funding going upto Rs 5-10 crore funding. In terms of cumulative funding, we have even crossed Rs 20 crores for a couple of businesses. On the other hand, when it comes to our investors, they typically contribute an average of 8 to 10 lakhs each, with our minimum ticket size set at one lakh, which is the face value of the CCD which our SPVs issue.
What does the future hold for the Rehbar model of Islamic finance?
To be honest, we have just scratched the surface. Although a disbursal of Rs 200 crores is a substantial amount, it is still like a drop in the ocean in the world of finance. There is enormous potential for us to grow because ours is an inclusive model. We have raised funds for companies owned by non-Muslims on an operating lease basis. They recognize the commercial value in this model, and currently approximately 30% of the businesses we deal with are run by non-Muslims. Additionally, awareness among Muslims about Sharia-compliant investment and financing is on the rise, so our model has the potential for further growth in the coming years.
Not many Islamic finance models exist in India. Do you have plans to expand to other regions, especially northern India?
We plan to expand our operations to other parts of the country so that more investors and businesses can benefit from our model. Currently, we are currently active in southern states, and to some extent in Maharashtra, but have not yet expanded into north and east India. It is not that we don’t intend to go to these regions, but that we would like to consolidate in the regions where we are present and then expand. It might take a year or two for us to take that step.
Currently, we don’t have the capacity to extend our reach to the north because not only is it far off, but it would also be challenging to evaluate businesses and monitor our investments there, considering our limited bandwidth. Therefore, our focus is only on south India and Maharashtra right now. Having said that, I would like to inform you that one can invest with us from any part of the country as they do not necessarily need to visit our office to invest. We have a significant number of investors from Delhi, UP and Bihar.