Sharia’a compliant savings accounts

Sharia’a compliant savings accounts usually differ from mainstream accounts in just one way; rather than pay interest, which is against Islamic law, savings are grown through the payment of Sharia’a compliant profits. Any money invested won’t be used to generate interest or to fund prohibited businesses, such as alcohol, tobacco or gambling, as these are against Islamic principles.

By abiding with Islamic beliefs, Sharia’a accounts are aimed primarily at the Muslim community. However, they are not restricted to Muslims, and can offer an ethical alternative to all UK residents. They also tend to be highly competitive among their peers, with offerings from Sharia’a compliant banks regularly featuring among the top deals.

Sharia'a law, as set down in the Qur'an and Sunnah, forbids the earning or paying of interest. This poses a problem for Muslims, particularly those living in the West, where traditional deposit-taking and lending methods are fundamentally based on interest payments.

In addition, Sharia'a requires an element of shared risk in the growth of money – so it's more like profit and loss. This is another issue in the UK, where a savings account must have what is known as capital certainty. In other words, savings accounts should not carry investment risk – you will get your money back in full when you want it, or at the end of an agreed notice period or term.

Islamic savings accounts may at first glance appear to be the same as any other account, but there are several key differences that allow UK Muslims to save in accordance with their faith:

• Profit rate, not interest

Islamic savings accounts offer an anticipated or expected profit rate, not an interest rate. Although in practice this profit rate is usually achieved, crucially, it may not be. If it looks like your savings will not be on course to achieve the anticipated profit rate, the bank may write to inform you. Any profit you earn is taxed in the same way as interest earned on a non-Islamic savings account.

• Choose to take a loss

UK regulation means that savings must be capital certain – you cannot lose money in a savings account because of bad investment performance. That is, unless you choose to. If your savings account generates a loss, you can choose to take your portion of the loss and receive less money back. This allows Muslims to remain faithful to Sharia'a law while enabling the account to still be described as a savings account.

• Ethical investment

Money held in an Islamic savings account is invested, not lent out (as that would involve interest). Also, the money is not used to fund businesses that engage in unethical activities, as defined by Sharia'a law. So, you can be confident that your money will not help fund the alcohol, tobacco, gambling or pornography industries, for example.

As stated in the previous paragraph, savings in UK accounts must be guaranteed under UK regulation. Islamic banks mitigate the risk of savings loss in many ways, so that the customer’s deposits and return do not suffer.

For instance, Bank of London & The Middle East (BLME) says that if a customer’s deposit is not producing the agreed profit rate, the account can be closed early without penalty, the original deposit will be returned in full, and the profit at the original expected profit rate will be paid anyway.

It should be noted that, to date, these banks have always achieved the expected profit rate offered to its customers.

There are some specialist Islamic banks that only offer Sharia'a compliant services. There are also some banks that offer Sharia'a compliant accounts as part of their savings range. These are some of the banks offering Sharia’a compliant savings at the moment:

• Al Rayan Bank only offers Sharia'a compliant accounts
• Bank of London & Middle East (BLME) only offers Sharia'a compliant accounts
• United Bank UK offers both Sharia'a compliant and interest-paying accounts
• Gatehouse Bank offers only Sharia'a compliant accounts