8th May 2014 by Kara Gammell
Sharia’a compliant savings accounts are designed to allow the millions of Muslims living in the UK to save money without compromising their faith.
But what was once viewed as a niche product in the savings market has becoming increasingly popular due to the high rates on offer.
Islamic finance offers consumers a different approach to banking. The main difference between Islamic and conventional banking is that Islamic teaching says that money itself has no intrinsic value – it is simply a medium of exchange. Each unit is 100% equal in value to another unit of the same denomination and you are not allowed to make a profit by exchanging cash with another person.
“Interest is considered an inequitable way of generating wealth that does not produce a fair result for both parties,” says Tim Sinclair, spokesman for the Islamic Bank of Britain.
“Instead, Islamic finance is based on trade, partnership and risk/reward sharing.”
To comply with these rules, interest – known a “Riba” – is not paid on Islamic savings accounts. But because of this, it can be difficult for Muslims to make their money work for them while adhering to their faith. That’s where Sharia’a-compliant savings accounts can fill the void.
With a this type of account, offered in the UK by banks such as Bank of London and the Middle East (BLME), Islamic Bank of Britain and United Bank Ltd, instead of lending out your savings and charging interest that gets passed onto you, the bank uses your money in a way that’s consistent with Islamic beliefs.
Your bank will follow the advice of a panel of Muslim bank advisers to make sure that profit-generating activities are Sharia’a compliant. This means that the banks are prohibited to invest in companies involved in unethical activities, such as gambling, alcohol, tobacco or pornography.
Some of the profit the bank earns from these activities is returned to you, allowing you to grow your savings without earning interest. But while the profit you earn is taxed in the same way as interest earned on a non-Islamic savings account, this “anticipated or expected profit rate” is not guaranteed.
Unlike most savings accounts, it is possible to make a capital loss if you invest in a Sharia’a compliant account.
However, providers are keen to point out that this does not happen in practice.
“Instead of interest rates, we predict expected returns – and in 10 years we have never not paid that amount, and in some cases, we have paid more to our customers,” says Mr Sinclair.
While it is important to note that while the rate of return is not guaranteed, your funds are protected.
Any deposits placed with each of the providers mentioned above are safe guarded by the Financial Services Compensation Scheme (FSCS).
Under this scheme, the government guarantees £85,000 per person per financial institution. Those with joint accounts are covered for £170,000 in total. However, bear in mind that the FSCS protection is per institution rather than per account, so multiple accounts at one bank will still be guaranteed only for a combined total of £85,000.
But other than religious reasons, why would savers opt for this type of account over a conventional high street offering?
While Islamic savings accounts offer a Sharia’a-compliant way of saving for the estimated 2.7m Muslims living in the UK – people of all faiths can chose this ethical alternative. And provided you are comfortable with the risk that the rate is not guaranteed in the same way as a standard interest rate would be, Sharia’a compliant accounts can form part of a balanced savings portfolio – and the returns are nothing to be scoffed at.
“As is the case with any type of savings account, in order to attract customers, the rates have to be competitive,” said Susan Hannums, managing director at SavingsChampion.co.uk.
“Some Sharia’a compliant savings accounts, particularly among fixed-term accounts, offer some of best rates currently available on the market.”
For instance, the Islamic Bank of Britain’s one-year Fixed-Term Deposit account pays 1.9pc while its two-year offering pays 2.3pc. Both accounts require a minimum deposit of £1,000 and profits are calculated and paid on maturity. For further details visit islamic-bank.com or call 080 149 3921.
Savers looking to deposit a heftier sum of £50,000 or more, worth a look is BLME’s Premier Deposit Account, which tops all of the best buy tables. Its 18-month fixed-rate bond offers a return of 2.25pc, while its three-year and five-year fixed-rate bonds pay 3pc and 3.5pc respectively.
To find out more information, visit www.blme.com or call 020 7618 0000.
Ms Hannums says: “The bottom line is that if you are aware of the differences and potential added risks of putting money in a Sharia’a compliant savings account and are comfortable with them, then they are another potential home for your money, with the additional benefit of your funds being ethically invested.”