Islamic banking is becoming increasingly common in the UK as the financial service industry aims to meet the needs of more savers. With more Islamic banks now in the UK than ever before, opening a Sharia-compliant savings account is quick and easy

NMTBP learns more about Islamic banking, what to consider when opening a savings account from an Islamic bank, and how Islamic-compliant savings accounts work.

What is Islamic banking?

Islamic banks and, by extension, Islamic bank accounts follow the rules and laws of Islam, or Sharia law, and are guided by Islamic economics. Islamic rules forbid earning interest from savings and charging interest on loans and mortgages. Being in debt is not encouraged under Islam. In the UK, Islamic banking is typically only offered by Islamic banks, but accounts are available to everyone, even those who don’t practise Islam

Islamic banking and Sharia banking are two different names for the same thing. Sharia law is the religious law of Islam

What’s different about Islamic banking?

Islam considers money as a means of exchange, so the value of one item is equal to the value of another. That means it’s prohibited to earn interest or benefit from lending or borrowing money. Islamic banks operate slightly differently in that they don’t charge interest, and savers can’t earn interest in the traditional sense. The money you earn on your savings comes instead from the profit the bank makes from investing your money in various projects rather than interest

Money invested in an Islamic bank won’t be used to fund businesses that are prohibited under Islamic law, such as alcohol, tobacco or gambling, making them a good choice if you’re looking for an ethical savings account

Islamic banks in the UK

As Islamic banking becomes more popular, the number of UK banks offering Sharia-compliant products is also growing. Around 20 banks in the UK now offer Islamic financial products and services, and five of these banks are fully Sharia-compliant. In fact, the UK is considered a leader in Islamic banking among Western countries. It has the highest Islamic Finance Country Index ranking of any European or non-Muslim majority nation

Institutions such as QIB UK, Gatehouse Bank, and Al Rayan Bank are just some of the banks that offer Islamic finance services in the UK, although there are many more to choose from

What are the advantages of Islamic banking?

There are several advantages to Islamic banking:

• Transparency – guiding customers through the risks and costs associated with each product is paramount in Islamic banking
• Strong ethical practices – Sharia law stipulates that banks cannot invest in practices that could be considered unethical, including gambling, weaponry, pornography and alcohol
• Fairness – a core principle of Islamic banking is profit-sharing, where the risk is shared between both the bank and the customer. This allows a more equitable distribution of income and wealth
• Open to all – you don’t have to practise Islam to bank with an Islamic bank, which enables anyone to access its services
• Discouraging speculation – Islamic banks are prohibited from engaging in speculative transactions. This lowers the overall risk of banking with a Sharia-compliant bank

How are Islamic savings accounts different?

Instead of offering interest rates, Islamic savings accounts offer an expected profit rate. The expected profit rate (EPR) is the rate an Islamic bank expects to receive as profit from its investments in Sharia-compliant companies. It is “expected” as there is no way of guaranteeing investment returns. While it’s theoretically possible that the predicted profit rate may not be met and so you may earn nothing on your savings, you would be hard-pressed to find an instance of this happening with a UK deposit-protected Islamic savings account. Additionally, the money you deposit in Islamic savings accounts in the UK is backed by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person, per banking group

Money deposited into Islamic savings accounts is invested in companies that comply with Sharia law, rather than being loaned to them. This rules out companies that produce weapons, tobacco and alcohol, as well as gambling companies

What should I consider when opening an Islamic savings account?

An Islamic savings account might be right for you if you:

• want to save your money in a type of ethical savings account, and Islamic principles are similar to your own
• are a Muslim who wants to bank according to Sharia law, so you have the peace of mind that your money is used in a way that’s faithful to your beliefs
• don’t want your money to be lent to cigarette, gambling or alcohol companies

An Islamic savings account might also be right for you if you’re simply looking for a competitive rate on your savings

How do Islamic-compliant savings accounts work?

The basis of all Islamic-compliant savings accounts lies in the principles of Sharia, or Islamic law. Islamic banks operate without interest, which is not permitted in Islam. Instead, money is generated through profit from investments

Each Islamic bank has a panel of Muslim advisers who ensure that these investments are compliant with Sharia law. Some of the profit your bank earns from their investments is returned to you, so you will see your savings grow even though you’re not earning interest

How do Islamic-compliant loans work?

Islamic banks avoid using the term ‘loan’, instead choosing to offer Sharia-compliant finance agreements. For example, if you take out a mortgage with an Islamic bank, you need to provide a deposit and you’d have the choice of three different ‘Home Purchase Plans’

1. Ijara means that the bank purchases the property you would like to buy, and then leases it to you for a fixed term at an agreed monthly cost. When the term is over, full ownership is transferred to you
2. Mushakara is a co-ownership agreement, where you and the bank each own a share of the property. Each time you make a repayment, you are buying the bank out of their share
3. Murabaha is where the bank buys the property on your behalf  based on your promise to repay them. The bank will then sell the property back to you at a higher cost which you pay in equal instalments over a fixed period of time. The difference in the market value of the property and the price the bank sells it to you is deemed a reward to the bank for taking on the initial risk

Can anyone apply for an Islamic savings account?

Anyone can apply for an Islamic savings account as long as they meet the eligibility criteria for that specific bank or savings account. If you want to deposit your money into a savings account that has similar ethical principles to your own, an Islamic savings account might be right for you

Are Islamic savings accounts secure?

The Financial Services Compensation Scheme (FSCS) protects the money you deposit with any regulated UK savings provider. The deposit protection limit is £85,000 per person, per banking group, and if you have a joint account this will double to £170,000