Sharia-compliant savings accounts

These savings accounts are available to Muslims and non-Muslims through several long-standing Islamic financial providers in the UK.

Sharia accounts offer a decent return on savings while being faithful to Islamic principles and maintaining an ethical stance on issues that are forbidden under Islamic law.

Providers offering Sharia-compliant bank accounts should be registered with UK authorities and customers are therefore covered in case of a collapse.

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What is a Sharia-compliant bank account?

Sharia-compliant bank accounts are accounts that comply with Islamic religious laws, however they can be used by anyone.

Sharia accounts follow principles on finance, many of which are not met by 'normal' British bank accounts.

For example:

• Sharia banks don't charge or pay interest. This is because 'money shouldn't be generated from money'.
• Although money is not meant to be 'left idle', Sharia adherents should not benefit from investments that are forbidden (haram), such as gambling, weapons and alcohol.
• Islamic banks should not put money in investments that involve 'excessive uncertainty' or speculation.

Islamic banks usually use a Supervisory Board to make sure their financial products are Sharia-compliant.

Note: Sharia banks may also be referred to as Shariah or Shar'iah banks or described as Islamic finance or Islamic banking. These all refer to the same financial products.

How do Sharia accounts work?

Unlike most bank accounts, which offer Annual Equivalent Rates (AER), Sharia savings accounts do not pay interest.

However, the banks do return a share of generated profit to their customers.

The 'Expected Profit Rate' (EPR) is advertised in much the same way secular banks advertise interest rates. The main difference from a customer's perspective is that the EPR cannot be guaranteed.

If the banks do not expect to reach their expected profit levels, most will offer customers the opportunity to close their accounts and withdraw their savings (plus any profits already earned).

In practice, it is extremely rare for returns to go below the advertised rate. Gatehouse Bank (operating for over ten years) and Al Rayan Bank (operating for over fifteen years) say they have never failed to meet their EPRs.

What kind of Sharia accounts are available?

There are several different types of Sharia savings accounts available that work in the same way as standard savings accounts.

Savers can choose from:

• Fixed term savings accounts where money is put into the account for a fixed period, usually between six months and five years
• Notice savings accounts where customers can withdraw their money but they need to give notice of a certain number of days first
• Easy-access savings accounts which allow customers to deposit and withdraw money easily

We discuss the benefits of these different savings options in our guide to making the most out of your savings.

Who uses Sharia banking?

Sharia-compliant savings are, as one would expect, commonly used by Muslims who wish to adhere to Sharia law.

Although they have both religious and practical advantages, Sharia accounts aren't used by all Muslims. Research released by Gatehouse Bank in July 2019 showed:

• 40% of Muslim consumers used Islamic finance and 46% of users would highly recommend it to others
• 77% of UK Muslims were aware of Islamic finance, although awareness is lower for those who aren't interested
• While 77% are familiar with the term "Islamic finance", only 66% are familiar with the term "Shariah-compliant finance"
• 68% of users viewed Islamic finance favourably
• 61% felt they did not know how Islamic the products on offer truly were

However, while most respondents felt that Islamic finance aligned with their values and beliefs (72%) and was an ethical and trustworthy product (71%), they also believed the products were difficult to purchase (60%) and difficult to compare (62%).

So, there is room to improve the use and awareness of Sharia finance among Muslims, but there is an appetite for the product.

Can a non-Muslim open a Sharia account?

Yes. Anyone who fits the normal criteria (e.g. over 18) can open one of these bank accounts.

Why do non-Muslims open these accounts?

Partly because Islamic finance is seen as an ethical option. Many people, religious and secular, are happy with the idea that their money won't be invested in pornography or gambling.

Sharia accounts are also considered safer. Investments made with Sharia-compliant savings have to be backed by something tangible - that means none of the speculative, risky investments that helped cause the financial crisis.

How secure are Sharia savings accounts?

As long as the bank is regulated in the UK, Sharia-compliant accounts are as secure as any other bank account. Savings up to £85,000 are protected by the Financial Services Compensation Scheme (FSCS).

Find out more in our full guide on how savings are protected by the FSCS and what that means in practice.

Which banks offer Sharia-compliant savings accounts?

The UK is the biggest centre of Islamic finance services outside of the Islamic world. However, most of them focus on business and financing (e.g. mortgage products).

The main banks that offer Sharia-compliant savings accounts are:

• Ahil United Bank
• Al Rayan Bank
• Gatehouse Bank
• Bank of London & Middle East (BLME)
• United Bank UK (UBL UK)

Ahil, Al Rayan, Gatehouse and BLME offer only Sharia-compliant accounts, while UBL UK offer both Sharia and interest-paying accounts.

In addition, Al Rayan Bank offers Sharia-compliant ISAs.

Do Sharia accounts offer better returns than 'normal' savings accounts?

In many cases, yes - but not always, so be sure to compare accounts before deciding where to bank.

We've highlighted some comparisons:

Bear in mind the caveat we mentioned above: Islamic finance is based on an Expected Profit Rate rather than the Annual Equivalent Rate we're used to seeing on standard bank accounts, yet Sharia-compliant bank accounts have a great record of delivering.

All this said, it's worth looking at the unofficial legal system behind Sharia-compliant savings accounts.

What is Sharia law?

Sharia law is the legal system of Islam.

Unlike many legal systems, Sharia tells adherents how to live most aspects of their lives: from prayer, to socialising, to charitable donations.

It also rules on things like family law, criminal law, and finance.

Only a few countries in the world (including Saudi Arabia and Brunei) operate an entirely Sharia-based legal system. Many other Muslim-majority countries have legal systems heavily influenced by Sharia.

Some Muslim-minority countries, such as the UK, allow Sharia councils to operate alongside secular courts (but with no legal authority).

Sharia 'law' in the UK

There are several organisations and services available to UK-based Muslims who wish to adhere to Sharia-based judgements. This includes the Islamic Sharia Council, and the Muslim Arbitration Tribunal.

Sharia courts (more properly known as 'councils') have no legal status or legal authority in the UK. This means that, if a decision goes against UK law, it will not be upheld by UK authorities.

Controversy

There are organisations who strongly oppose the practice of Sharia in the UK. They say that having this parallel legal system leads to the flouting of human rights.

This is largely because many principles of Sharia go against UK law. Critics of its practice focus particularly on the discrimination against women and children, which would not be allowed if the cases were brought before secular British courts.

Although proponents of Sharia's practice say that those attending the religious courts do so voluntarily, their critics counter that many Muslim women are pressured into going; and that they may not have the power to appeal to UK courts in the case of an unfair ruling.

However, it's important to reiterate that Sharia-compliant banking is generally not seen to be a controversial element of Sharia and some non-Muslim customers may prefer to save using an Islamic finance account.

Summary: Is Islamic finance a good choice?

Brits aren't big savers, which is worrying. Having a financial safety net is important for future plans and current peace of mind, ensuring we can afford the things we want and need in our lives.

Even among those who do save, a Sharia-compliant account is not a product considered by many non-Muslims.

This is due partly to lack of awareness of their availability and partly, we imagine, by the stigma attached to terms like Sharia and haram in the UK.

Pros of Sharia accounts include:

• Good rates of return
• Lack of risk associated with uncertain and speculative investments
• Investments which many secular and religious customers would consider ethical

The cons include:

• No guaranteed interest (although EPR is almost always met, it is not a guarantee)
• Lack of choice in institutions offering the accounts
• Association with Sharia, which many consider unethical

Ultimately, the best savings account for an individual depends on the individual themselves.

How much money are they starting with? How long are they willing to leave their savings untouched? How much risk are they willing to take? These fundamental questions are the same whether a saver chooses a Sharia-compliant or secular bank account.