Britain has long been an important Western centre for Islamic finance, and specialist providers have been offering Sharia-compliant financial products here for around 30 years. But now this niche section of banking has seen an upsurge in popularity – and not just among Muslims. So how does it work and could it be the right choice for even more UK customers?
Islamic financial products conform to the ethics laid out by Muslim teachings. It’s possible to find Islamic savings accounts, investments, mortgages and insurance policies, and last year the Government even committed to developing a Sharia-compliant student loan. It sounds as if such products would be fairly niche, yet more savers than ever are turning to Islamic accounts.
Tim Sinclair is head of marketing and retail sales at Al Rayan Bank, formerly known as the Islamic Bank of Britain. He says that business has taken off in the past 18 months; last year the bank posted a profit for the first time and its operating income rocketed by 168 per cent. A large part of this growth was driven by non-Muslims.
“We estimate that 83 per cent of our fixed-term deposit savings customers and 47 per cent of our Isa customers who joined the bank last year were non-Muslim.”
Mohammad Khan, head of Islamic finance at PwC, says there are two key tests of whether a product complies with Sharia. “There has to be no interest involved and it has to be extremely transparent. It has to be really clear where all the fees are,” he explains.
“To qualify, a Sharia board has to sign it off; that’s where at least three Islamic scholars look at the product, its marketing, its terms and conditions, and its fees.
“It’s essentially an independent audit done by an independent body,” he adds. “I would describe it as an ethics audit.”
And the ethical criteria applied to Islamic financial products could easily be shared by many non-Muslim savers.
Mr Sinclair says: “Deposits are invested in asset- based, relatively secure commodities such as property or metals. They are never invested in any activity not in keeping with the values of Islam, such as any activity connected to gambling, alcohol, pornography, arms, tobacco or any interest-bearing activity – or any speculative activity.
“Non-Muslim customers are attracted to Islamic finance because of the ethical way we conduct our business and also our approach to customer service. Islamic finance appeals to those who agree with the underlying principles of equitable distribution, fair trading, prudent spending and the well-being of the community as a whole.”
Mr Khan thinks that ethical concerns are one driver of interest in sharia-compliant products, but not the main reason.
“If you look at the most developed market for Sharia-compliant products, it’s Malaysia. And if you look at the people investing in those products, they range from Muslims to non-Muslims – but people are simply investing in the most competitive products at the time.”
It’s certainly true that Sharia-compliant savings accounts are highly competitive. For example, six of Al Rayan’s savings products are currently listed in the Moneyfacts “best buy” tables, with three accounts offering market-beating returns. Since December 2012, Al Rayan has consistently offered at least one market-beating savings account.
But if Sharia-compliant savers can’t receive interest, how do they earn a return on their money at all, let alone a market-beating return? The answer is that, instead of lending out their customers’ savings for interest, the bank invests the capital in industries that are consistent with Islamic beliefs. The profit earned is returned to savers, allowing their money to grow without earning interest.
How is it possible that savings accounts with a tougher set of restrictions than the rest of the market are able to compete with more mainstream products? According to Mr Sinclair, this is also part of Sharia compliance: “As an Islamic bank, we are not allowed to charge arbitrary fees to our customers. Our charges only ever reflect the time and effort that our employees have put in, which typically make them lower than charges made by conventional banks.”
Customers who have not heard of Islamic financial products might wonder if their savings are safe, and if Sharia-compliant loans, insurance policies, investments and bank accounts come under different regulations to more standard products. Mr Khan says: “I think people get obsessed with the word Sharia. The key point to stress is that any financial product, whether Islamic or not, has to comply with UK rules. So an Islamic bank in this country has to comply with UK regulations; it’s not like they are operating under a different rule set.”
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