It’s nearly two decades since the first fully-compliant Sharia Bank launched in the UK offering savers an expected profit rate (EPR).
Back in 2004, The Islamic Bank of Britain – now known as Al Rayan Bank – carved its name in the financial industry to share the Islamic principles associated with Sharia law.
More than £5bn is currently held with Sharia-compliant banks, according to The City UK’s latest Islamic Finance report, with savers enticed by some of the best rates available on cash, along with their ethical principles and practices.
As Sharia banks’ popularity grows and brands become familiar names, they’re having to innovate in a highly competitive savings market.
Just recently, Gatehouse Bank launched the UK’s first Sharia-compliant regular saver account paying a competitive 7% on up to £300 a month.
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But, rather than paying 7% AER or gross as we typically see on standard savings accounts, it pays an expected profit rate (EPR) of 7%.
And it is this EPR which sets Sharia banks apart from other challengers and competitors.
Anna Bowes, co-founder of Savings Champion, says: “Islamic banks are founded on faith-based ethical principles that are derived from trade, entrepreneurship and risk-sharing. As money by itself is not considered to be a commodity from which you can profit, no interest is paid or received by Islamic banks. Instead, the providers will partake in Sharia-compliant activities with the intention of generating profit, which is then shared.
“The ethics and values which underpin Islamic banking include inclusivity, transparency, integrity, respect and fairness.”
Sharia banks: Islamic principles and profit
Sharia-compliant providers and accounts operate under Islamic principles, meaning customers cannot earn interest on their funds as it is seen as promoting unfairness in society – known as ‘riba’.
Instead, customers are offered an EPR. Now while this may seem at odds with a guaranteed rate, to date, none of the providers operating in the UK have failed to meet the EPR.
Bowes says: “As Sharia fixed term accounts pay an EPR rather than a fixed interest rate to comply with the strict ethical code of Sharia banking principles, this means that the rate is not guaranteed. However, it’s worth noting that to date, the offered EPRs have always been paid on the fixed term accounts, as they are provided with that objective in mind.
“And, even if the provider felt that they would be unable to pay the EPR, the providers will offer their customers the option to break the bond, having earned the EPR up to that point.”
The accounts are available for people of all religious beliefs or none at all; you don’t need to be a Muslim or practice Islam to open a product.
Another important detail which sets Sharia banks apart from the high street giants and digital challengers is that money is not used to invest in or fund practices considered unethical such as alcohol and gambling.
Sharia savings and protection: Is your money safe?
Savers may question if their money is safe, particularly if they’re unfamiliar with Sharia banks or their products.
As long as the bank is fully authorised and regulated by industry regulator, the Financial Conduct Authority, the funds are protected through the Financial Services Compensation Scheme (FSCS) up to £85,000 per person, per bank. So, you’re covered in the same way as with your high street bank.
According to Moneyfacts, these six UK banks are fully Sharia-compliant with savings covered by the FSCS:
- Al Rayan Bank
- Bank of London and The Middle East (BLME)
- Gatehouse Bank
- Habib Bank Zurich plc
- HBL Bank UK
- QIB (UK).
Bowes says: “In short, there is really no difference between Sharia and non-Sharia savings accounts. The key difference is simply that rather than being paid interest, you will earn an expected profit rate.”
If you want to open an account with one of those banks, Moneyfacts data reveals each brand offers an online method to get going. While some accounts can be opened by phone or via a mobile app, the banks may not offer branch or postal opening methods. However, some do offer postal method as a way of managing the account once it’s opened.
How do the Sharia banks maintain their competitive rates?
Many challenger banks offer an introductory deal but can no longer keep the higher rate up for savers. But the expected profit rates on savings accounts from Sharia law banks like Gatehouse are quite often market-leading – so how does the bank manage to do that?
Ravi Kumar, senior product manager at Gatehouse Bank, says it is all down to investment and lack of reliance on the base rate.
Kumar said: “Gatehouse Bank generate profit by investing deposits into Shariah-compliant, socially responsible investments and sharing it with the customer.
“Although we monitor the Bank of England’s base rate as a market rate in a bid to remain competitive within the market, Gatehouse Bank’s rates are not directly dictated by the base rate, but instead depend on the investment.”
What about other ethical bank accounts?
Sharia-compliant banks aren’t the only providers who offer ethical products. For example, the Co-operative Bank has ‘three pillars’ to its ethical policy, involving planet, people and community.
As part of the pillars, there are commitments to reducing climate change, promoting human rights and social development. The high street bank also aims to preserve animal welfare and campaign for ‘meaningful change in society.’
With this in mind, it’s up to individuals to pick a bank which best aligns with your own morals, ethics and needs.
Bowes says: “Your ethical preferences are very personal – so if you feel strongly about not investing in a particular industry, you’ll need to do some research to make sure that the provider you choose meets your needs.”
