If you’re a keen reader of our up-to-date guides on the best savings accounts, you may have noticed a number of Islamic finance banks tend to be in regular contention for the top spot. But did you know that these accounts are available to anyone, regardless of faith?
Here’s what you need to know about what is Islamic finance, how it works and why you may want to consider switching your savings account.
What is Islamic finance?
Banks that operate under Islamic law have a handful of key principles that differentiate them from Western peers.
Such banks do not charge interest to customers to borrow money, nor do they pay any interest on savings or current accounts.
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These banks also avoid benefiting from investing in businesses that are against Islamic values, such as armaments, gambling, pornography, drugs, tobacco, pork or alcohol, and tend to steer well clear of any high-risk investments.
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Islamic law states that money has no intrinsic value, meaning banks and lenders seek to generate an “expected profit rate” as opposed to a rate of return. This means that when you open an account with an Islamic bank, your money is invested in a profit-share arrangement.
But it's important to note that any such expected profit rates are not concrete, and the bank could give you less back than you initially put in. This is unlike a standard fixed rate account, which guarantees to pay you a certain rate for a fixed period of time, regardless of how the bank may be performing.
Is my money safe in an Islamic bank?
In a nutshell, yes. It is extremely rare for a UK-operating Islamic bank to not meet its expected profit rate, but if the bank fears it will have to return you less than stated, it will contact you ahead of time.
Al Rayan Bank says on its website, “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 lower “expected profit rate” moving forward.”
As such, you should have a good sense of confidence when it comes to achieving the profit rates set out by Islamic banks, while fail safes such as reserve funds are in place to cover periods where the bank may be running at a loss.
And there’s good reason why Islamic banks want to keep savers as satisfied as possible - they are dependent on savers’ cash. Owing to the constraints of Sharia law, Islamic banks cannot borrow money from other lenders through the interbank system, meaning a steady flow of cash from everyday savers. Happy savers make for a happy bank.
From a saver’s perspective, Islamic banks work in practically the same way as any other lender, and the Financial Services Compensation Scheme (FSCS) sees it that way too. It protects any deposit up to £85,000 should anything happen to your bank, so you can be assured that your money is as protected in a Sharia-compliant account as it is in any other high street bank.
Islamic Banks in the UK
If you’re planning to open a savings account, there are a lot of Islamic finance services where you can put your money. For example, Gatehouse Bank is offering a market-leading 7% rate on its regular savings account where you can start saving from just £1 and go up to £300 per month.
We’ve rounded up some of the most popular banks:
