Why Muslims have the best savings accounts
The UK is home to more than 2.7 million Muslims, many of whom want to use Sharia-compliant accounts.
The way these accounts operate means that they can provide good rates of return to savers - 2-3% - and a strong moral code that many will find appealing.
What makes savings Sharia?
Sharia law, as set down in the Qur'an, prohibits Riba - often translated as interest. Read within the broader context of the verses, it can also be taken to mean any form of financial arrangement where risk is unequally shared between the parties.
Very broadly, these prohibitions have two practical consequences.
Under Sharia law, Muslims may not benefit from lending out money, so Islamic banks refrain from lending to other banks for interest, or offering their customers an overdraft facility or other lines of interest-generating credit.
In the case of savings, Islamic accounts run on a risk-sharing model where the customer and bank share the risk of any investment, then divide any profits (or losses) between them.
Sharia also prohibits participation in unethical investments - those, for example, that bolster trade in betting, tobacco, alcohol or pornography. Investments are therefore monitored by a panel of advisers to ensure that profit-generating activities are Sharia-compliant.
Who's offering them?
There is just one wholly Sharia-compliant bank in the UK, Al Rayan Bank - previously known as the Islamic Bank of Britain - and at the time of this update just one of the main high street banks offers a Sharia-compliant account, Lloyds Bank.
Their Islamic current account can only be opened in branch, but once it's set up it can be operated online, via mobile banking and over the phone. It comes with a debit card and most of the usual current account features - except it's approved by a Sharia committee of "two independent scholars".
People in one of the UK's larger cities may also have a branch of United Bank UK nearby. UBL UK Ameen offer current, standard savings and fixed term accounts, as well as Islamic mortgages.
Al Rayan Bank, being wholly Sharia-compliant, offer the widest range of accounts and products, including a wholly interest-free current account - while they pay no interest, they also don't expect holders to pay interest.
For Muslims, the main benefit of these accounts is, of course, being able to manage money in keeping with Sharia law.
For non-Muslim savers, however, the biggest draw is likely to be the decent rate of return.
Rates of return
As we noted above, this return is not interest but the expected return on the investments the bank makes on the account holder's behalf.
Al Rayan Bank, for example, have a number of Sharia-compliant savings accounts on offer - and one or more of them is almost always included in any list of accounts offering the best returns.
Just as with standard savings accounts, the return increases the less access the holder has to their money. The figures quoted below were correct at the time of this update:
|Savings account||Expected profit rate||Minimum deposit|
|12-month fixed term||1.9%||£1,000|
|24-month fixed term||2.3%||£1,000|
|36-month fixed term||2.5%||£1,000|
They also offer a range of cash ISAs with rates ranging from 1% to 2% depending on how much access to the cash the holder wants.
Returns are also greater for those with significant amounts of money to invest.
At the time of this update, for example, Milestone Savings are offering a range of accounts for those with more than £10,000 to invest, offering expected profits ranging from 1.8% for a one year fixed term to 2.8% for their five year account.
To open a Sharia bank account, customers must meet the eligibility requirements such as a minimum age, identification and proof of address.
Non-Muslims are welcome to open accounts.
Beyond savings: Sharia mortgages and loans
Sharia-compliant borrowing tends to be done according to one of two Islamic principles, Ijara and Murabaha.
Ijara involves a bank buying an asset and then leasing it to its customer for a fixed period of time.
In the case of a customer wishing to buy a house, the bank buys it and the customer gradually pays off the lease, plus an acquisition fee, much like paying off a mortgage. In essence, customers are renting their home from the bank.
Murabaha is a form of credit that enables a bank's customers to buy items without having to take out an interest bearing loan.
Again, the bank buys the items on the customer's behalf, then resells them to the customer on a deferred basis - adding an agreed profit margin.
An offshoot of this form of borrowing is "commodity Murabaha", which involves the sale and subsequent repurchase of a commodity such as metal, which is then traded on an exchange, such as the London Metal Exchange.
Profit is made in the difference between the sale and repurchase price.
Al Rayan Bank also offer home payment plans that use the principle of diminishing Musharaka, or co-ownership, in which case the repayments act to increase our share of equity in the property, gradually transferring ownership across.
Again the profit for the bank comes from each payment also including an agreed extra fee, in the form of an occupancy fee (or rent) at a set percentage rate.
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