Q&A with Al Rayan Bank

Founded in 2004, Al Rayan Bank is an inclusive Islamic bank which welcomes customers of all faiths and beliefs. As the oldest and largest Islamic bank in the UK, Al Rayan Bank serves over 85,000 customers throughout the UK with Sharia-compliant and FSCS protected banking products. We asked them some frequently asked questions to find out more about Sharia banking.

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Firstly, what are the key differences between conventional banking and Sharia banking?

The absence of interest in Islamic finance is one of the key factors that differentiate Islamic banks from conventional banks. However, there are other important differences:

  • The business investments and the profits Islamic banks generate cannot be in/from businesses that are considered unlawful under Sharia, i.e. companies that deal in interest, gambling, pornography, speculation, tobacco and other commodities contrary to Islamic values.
  • The whole premise of Islamic banking is to provide a way for society to conduct its finances in a way that is ethical and socially responsible. Trade, entrepreneurship, and risk-sharing are encouraged, and these are the financial principles that underpin Islamic finance and the products offered by Al Rayan Bank Islamic banking is asset-backed which means that an Islamic bank does not conduct business unless it is backed by a physical asset.

What would you say are the key misconceptions about Sharia banking?

A common misconception is that Islamic banks in the UK are not regulated in the same way as other UK banks. This is incorrect. Al Rayan Bank, and other UK Islamic banks, are regulated in the same way as any other UK bank or building society. All eligible deposits with Al Rayan Bank are protected by the Financial Services Compensation Scheme (FSCS) too, meaning customers are entitled up to £85,000 in compensation if the bank comes into financial difficulty – just as with any other UK bank.

Another misunderstanding is often around the risk, which is shared between bank and customer in Islamic finance transactions. Like other Islamic banks, Al Rayan Bank offers an expected profit rate (EPR) rather than interest on our products. However, in the nineteen years that Al Rayan Bank has been in operation, we have always paid the EPR quoted to customers.

Is Sharia banking the same as ethical banking?

Yes, Sharia banking could be considered as a type of ethical banking, as money invested in a Sharia bank cannot be used to fund businesses forbidden under Islamic values, such as alcohol, tobacco or gambling. This makes Sharia bank accounts a good choice if you’re looking for an ethical savings account.

How does EPR work, and how is it different from AER?

EPR (expected profit rate) is an indication of how much profit you can expect to earn from your Islamic bank account. Islamic banks pay profit to their savers rather than interest. This is because interest is strictly forbidden in Islam, as Muslims believe that it promotes unfairness in financial transactions, which leads to social inequality and injustice.

Therefore, instead of paying a guaranteed interest rate to their savers, Islamic Banks, such as Al Rayan Bank, invest customers’ deposits in ethical, Sharia compliant trading activities in order to generate a profit. Islamic banks do not quote the AER (annual equivalent rate) as it could be misinterpreted as an interest-based calculation. Therefore, to avoid any confusion, the return that you can expect to receive is always stated as EPR.

What would happen if the bank couldn’t pay the EPR?

The Bank was established in 2004 and has always paid the expected profit rate quoted to customers. However, as the return is “expected profit,” rather than “guaranteed interest,” there is a small element of risk, which is shared between the customer and the Bank. If, for some reason, the Bank were unable to meet the expected profit rate it had quoted on its fixed term deposit products, the customer would be notified and given the option of ending the agreement with their original deposit and profit earned to date intact, or they could accept a different “expected profit rate” moving forward. Al Rayan Bank savers are covered by the UK Financial Services Compensation Scheme, which currently protects eligible depositors’ savings up to £85,000.

In almost 20 years of operation, Al Rayan Bank has never failed to pay the expected profit rate quoted to customers.

Do savers have to follow Islam to open a Sharia savings account?

No, Islamic banking products are for anyone regardless of their faith. There are a number of reasons Islamic finance has become popular in recent years. Firstly, people are more aware of their responsibility to lead ethically conscious lifestyles than ever before – with research showing 37% of all British adults believe that choosing an ethical financial service provider is as important as issues such as recycling*

*The survey of 2,028 UK adults was conducted by YouGov on behalf of Al Rayan Bank between 30 September and 2 October 2019.

Finally, why should savers consider a Sharia savings account?

Sharia compliant savings products let you profit from your savings in an ethical way. Al Rayan Bank does not offer you interest on your savings, instead, we undertake ethical, Sharia compliant activities with the intention of generating profit, which we then share with you.