Table of Contents
- What is Islamic banking?
- What's different about Islamic banking?
- Is Islamic banking the same as Sharia banking?
- Islamic savings accounts
- What to consider when opening Islamic savings accounts
- How do Islamic-compliant savings accounts work?
- Why is the profit rate expected?
- Can anyone apply for an Islamic savings account?
- Are Islamic savings accounts secure?
- Applying for Islamic savings accounts
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. Under Islam, being in debt is not encouraged. In the UK, Islamic banking is typically only offered by Islamic banks, but accounts are available to everyone.
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 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.
Compare fixed rate bonds from islamic banks
Is Islamic banking the same as Sharia banking?
Islamic savings accounts
Instead of offering interest rates, Islamic savings accounts offer an expected profit rate. Rather than seeing an interest rate listed against an account, Islamic savings accounts list how much profit you can earn from your deposits through the expected profit rate.
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 to consider when opening
Islamic savings accounts
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
- You 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
- You 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 just want a great rate from your savings account.
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 they don’t earn interest.
Opening and managing Islamic savings accounts will be familiar if you have any other similar types of savings accounts. Most of the processes are the same, although some of the terminology is different.
Why is the profit rate expected?
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 a return on investments. That means there’s a small amount of risk that the profit rate won’t be met, but this risk is shared between you and your bank, and it’s unlikely that you will experience a loss of profit from a savings account in the UK.
Can anyone apply for an Islamic savings account?
Anyone can apply for an Islamic savings account as long as they meet the eligibility criteria. 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 FSCS protects the money you deposit with any regulated UK savings provider. The FSCS protection limit is £85,000 per person, per banking group, and if you have a joint account this will double to £170,000.
Applying for Islamic savings accounts
According to The Telegraph, “more than 20 banks in the UK offer Islamic services, and five of these banks are fully Sharia-compliant.” There is a growing list of Islamic banks in the UK to choose from, and you can find Islamic savings accounts in the Raisin UK savings marketplace. Just register for a Raisin UK Account, log in and apply for the savings account that suits you. Don’t forget that it’s free to open an account.
The highest profit Islamic savings account in our marketing place is currently a fixed rate bond with a profit rate of 1.25%.
If you have any questions, our UK-based Customer Services Team will be happy to help.
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