The Complete Guide To UK Islamic Finance

The UK is one of the best countries for Islamic finance and Sharia-compliant banking in the West. Excluding Turkey, the UK accounts for 85% of Islamic finance assets in Europe. That means there are lots of opportunities for UK Muslims to find banking and financial services that work with their faith.

But Islamic finance services aren’t as visible as other UK high street banks. So it’s important to understand what’s on offer, what you’re looking for, and where to find it.

In this article, you’ll find out everything you need to know about Islamic finance in the UK. This includes:

• How Islamic finance works in the UK
• Which UK banks offer Sharia-compliant services
• Which Islamic banking products are available in the UK
• How to make sure your chosen bank is Sharia-compliant.

What is Islamic finance?

Islamic finance refers to banks and financial services that comply with Islamic law. That means they have strict rules around investment, interest, and risk.

Islamic banks must not:

• Invest in industries related to haram products and services, such as alcohol, gambling, pornography, weapons, and pork products
• Pay or accrue interest (interest is also known as riba, which is prohibited in Islam)
• Take extreme or unnecessary risks with money, such as making speculative investments (known as gharar).

What’s the difference between Islamic banking and standard banking in the UK?

Most Islamic finance products offer similar benefits to non-Islamic finance products. For example, just like standard mortgages, Islamic mortgages enable people to buy a home.

But most banks in the UK don’t comply with Islamic principles. Here are the main differences between Islamic and conventional banking in the UK.

Interest

Interest is a standard part of many financial arrangements in the UK. Almost all banks and loan providers charge interest when you take out a loan, and pay interest on your savings.

Riba is considered haram in Islam, so many Muslims are uncomfortable with the idea of receiving or paying interest.

Islamic finances companies don’t charge interest. Instead, they offer expected profit rates (sometimes shown as EPR or AER). Any profits they generate are shared between the bank and its customers at this pre-agreed rate.

Risk and reward

Conventional banking products often have a set interest rate. Borrowers and savers pay or receive the agreed interest rate regardless of the bank’s success.

Islamic banks take a different approach to risk and reward based on profit and loss sharing. The saver and the bank agree to a profit sharing ratio, which means they share the risk and the reward of any investments.

This means that when the bank makes money, you’ll get a pre-agreed percentage of the profits. Profits aren’t guaranteed, but it means you can potentially earn more from your savings if the bank has a successful year.

Investments

One of the most significant differences between Islamic finance and conventional UK finance is where the banks invest.

Financial Conduct Authority (FCA) rules prevent registered banks from investing in harmful products like gambling and tobacco. But they can still invest in some products that are considered haram, such as alcohol.

Islamic banks avoid investing in any type of haram product. Many also avoid other unethical investments, such as fossil fuels.

Is Islamic banking available in the UK?

Yes! A growing number of UK banks and companies are starting to offer Sharia-compliant financial services.

In fact, in 2020, the UK was home to more Islamic fintech companies than any other country. It even has more than Muslim-majority countries like Indonesia, the United Arab Emirates, Saudi Arabia, and Malaysia.

Some of the most popular Islamic banking and finance companies in the UK include:

• Gatehouse Bank
• Al Rayan Bank
• Ahli United Bank
• Qatar Islamic Bank (QIB UK)
• Bank of London & the Middle Eat (BLME)
• Habib Bank
• Qardus
• Wahed Invest (for investing)
• Yielders (property investment).

There are lots of other Islamic money apps and products available, too. Kestrl is an app designed to help Muslims better manage their money, while Bloom’s app enables Muslims to manage their money in a Sharia-compliant way with friends and family.

Can non-Muslims access Islamic finance in the UK?

Yes! The ethical, low-risk Islamic finance model is attractive to lots of non-Muslims.

Anyone can open an Islamic bank account or take out a Sharia-compliant mortgage, provided you meet other requirements (such as passing a credit check).

Types of Islamic finance products in the UK

Islamic finance providers offer lots of products that are widely used among the UK Muslim community. Here are some of the most popular.

Sharia-compliant savings accounts

Islamic savings accounts help you save without generating riba. Instead, when the bank makes a profit, they’ll share a proportion of the proceeds with you. The rest of the profits are shared among other savers or reinvested.

There are lots of Sharia-compliant savings schemes available, including easy access and fixed term savings accounts.

Sharia-compliant mortgages

Sharia-compliant mortgages are designed to help you buy a home without paying interest on your loan. Instead, Islamic mortgage providers use one of these models to turn a profit without charging interest:

• Murabaha — the bank buys the property from the seller, then sells it on to you at a higher price. You pay a deposit, then pay back the remainder in instalments
• Ijarah — you make monthly payments to the bank to pay off rent, capital, and bank fees owing on your home
• Musharakah — you jointly own the property with the bank. With each payment you make, your stake in the property grows.

Sharia-compliant loans

Some companies offer Islamic bridging loans. These short-term loans (usually up to 12 months) often use a Murabaha financing model. That means you won’t pay any interest on the loan, but you will pay back more than you borrow.

Longer term Sharia-compliant loans are quite hard to come by in the UK. This is one of the reasons student financing can be difficult for Muslims in the UK. Standard student loans are haram, and there aren’t many Islamic loan alternatives currently available.

This Islamic Finance Guru video suggests some ways you can avoid taking out a student loan to fund your studies:

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Islamic car finance

Like most types of finance in the UK, standard car finance incurs interest. But recently companies have cropped up issuing Sharia-compliant car finance.

These work in a similar way to Sharia-compliant mortgages. Using a Murabaha or Ijarah model, you’ll pay for the car over a number of months. Instead of charging riba, the car will either be sold to you for a higher price, or you’ll make rental and capital payments throughout the loan term.

Circles, kamitis, hagbad, ayuuto, money clubs are also commonly used to save up for cars as an alternative to loans or PCP finance.

How can you tell if a bank is Sharia-compliant?

Most banks advertise their Islamic finance services on their website and social media pages. Others will have a certificate of compliance from an established Islamic authority like the Islamic Council of Europe.

However, there’s some debate among Islamic scholars (as well as other Muslims) about the legitimacy of certain products. So if you’re unsure, or you want to check if a particular Islamic finance service is truly Sharia-compliant, seek the advice of a trusted, qualified Sheikh or Islamic finance expert.

Islamic finance glossary

You’ll see lots of Arabic terms used when researching Islamic finance. Here are some of the most commonly used Islamic finance terms and what they mean:

• Gharar — speculative investments or purchases
• Ijarah — a rental agreement in which the buyer pays rent, capital, and any other fees to the bank
• Mudaraba — an equitable finance partnership in which one party provides the capital, while the other provides the labour
• Murabaha — a type of consumer loan in which the item is bought by the bank and sold to the buyer at a higher price
• Musharaka — a joint venture agreement in which the bank and the buyer have an initial equal stake, which adjusts as the buyer pays more
• Riba — interest or usury (interest at extremely high rates)
• Salam — a contract that promises an advance payment for goods or services to be delivered later
• Sukuk — a bond that complies with Islamic law
• Takaful — a type of insurance that allows for transparent financial risk sharing.