Islamic banking

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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.

On this page, you’ll find out more about what Islamic banking is, what to consider when opening a savings account from an Islamic bank, and how Islamic-compliant savings accounts work.

Key takeaways
  • Islamic principles: Islamic banking is the same as Sharia banking, which is banking that adheres to the principles of Islam

  • Sharia-compliant: Islamic banks make their money through investments in Sharia-compliant companies

  • Ethical banking: Many consumers find Islamic banking more ethical than traditional banking

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, even those who don’t practise Islam.

Is Islamic banking the same as Sharia banking?

Yes, 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, and has the highest Islamic Finance Country Index ranking of any European or non-Muslim majority nation.

Institutions including 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. If you’re considering opening an Islamic savings account, visit the Raisin UK marketplace where you’ll find a great selection of Sharia-compliant products from our partner banks..

From fixed rate bonds to notice accounts and easy access savings accounts, you can easily compare and apply for products from a range of providers in a matter of minutes.

What are the advantages of Islamic banking?

There are a number of advantages to Islamic banking, as shown in the table below: 

Transparency Guiding customers through the risks and costs associated with each product is of utmost importance in Islamic banking. 
Strong ethical practicesSharia 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, enabling anyone access to their services. 
Discouraging speculationIslamic 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. 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 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
  • 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'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.

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. A few examples of Islamic banking terminology can be found below:

ArbunDown payment deposit to retain a right to transact in the future 
Dayn lazim Established debt 
Gharamah Penalty
GhararUncertainty, i.e. unmitigated risk 
HalalPermissible, clean and pure
IjaraLease to own - where a bank makes money from leasing a property to a customer, effectively earning rent
MaisirUnearned or unfair income (i.e. earned from gambling)
MudharabahProfit sharing 
MurabahaDeferred sale finance - where a price for a property above market value is agreed at the outset 
MusharakaA co-ownership agreement where you buy your house in partnership with the bank and buy the bank’s share via regular repayments
Sukuk An Islamic form of security, similar to bonds 

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. 

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.

At Raisin UK, you’ll earn the advertised profit rate on Islamic bank accounts. If you open an Islamic bank account with one of our partner banks and they are unable to meet the advertised expected profit rate, we’ll offer you one of two options:

  1. You can keep your savings account open and earn profit at the new expected profit rate.
  2. You can close your savings account early and move your deposit and any profit you earned at the original rate to your Raisin UK Account. You could then use this money to open another savings account.

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) (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.

Applying for Islamic savings accounts

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.