What is a Sharia savings account? How Sharia-compliant savings work

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Several of the savings accounts at the top of the best buy tables are Sharia compliant. What is a Sharia savings account? How do you earn a return and what are the risks?

What is a Sharia savings account?

With most savings accounts, the bank or building society pays interest on the money you have. Under Islamic law, a Muslim cannot lend money and charge interest (called ‘Riba’). Instead, any money deposited in a Sharia-compliant savings account will be managed and invested in a way that complies with Islamic law.

This means money must be used in a productive way (essentially, for goods and services that will be traded) and invested in line with Sharia values. The person who provides the money (the savings account holder) is called the Rabb-al mal and the expert who invests it is called the Mudarib.

Instead of receiving interest, you will receive a percentage of the profits that are generated.

How much profit will I receive?

In the same way that banks publish an interest rate for interest-bearing savings accounts, Islamic banks publish an ‘expected profit’ rate for their savings accounts. This is the amount of profit that they expect to distribute to people who have a Sharia savings account.

Is the expected profit rate guaranteed?

No. The expected profit rate is not guaranteed. It can be changed if the investments held by the Islamic bank for the savings account don’t generate enough profit.

With interest-bearing savings accounts, a bank can change the interest rate on variable rate accounts, but cannot change it on fixed rate accounts. However, with Sharia-compliant savings, a bank can change the expected profit rate on fixed term savings accounts. However, it’s very rare for a bank not to pay out the expected profit rate.

SAVVY TIP: If the bank is going to pay less than the expected profit rate on a savings account, it will write to you. You can then withdraw the money you’ve saved so far and receive a payment at the profit rate that was advertised (and pay no penalty for withdrawing). If you prefer, you can leave your money in the account and earn the new, lower rate of expected profit.

How is the money invested?

Money that generates a profit for Sharia-compliant savings accounts is invested in line with Sharia values. This means that certain investments are not permitted.

They include:

  • Alcohol: companies producing alcohol or those that sell alcohol.
  • Banks that create a return by paying or charging interest.
  • Gambling outlets and casinos.
  • Tobacco companies or those involved in the production of tobacco-related products.
  • Pornography: companies involved in the production or distribution of pornography.

SAVVY TIP: An advisory board determines which investments can go into a Sharia-compliant fund. The board can exclude other investments that it believes are not in the interests of Muslims.

Is my money protected if the bank goes bust?

Yes, in the same way that your money is protected if a bank with interest-bearing accounts goes bust. As long as the bank is fully authorised by the Prudential Regulatory Authority (PRA), it will be covered by the UK’s savings protection scheme called the Financial Services Compensation Scheme. This protects savings in a bank or building society up to £85,000 (or £170,000 for joint accounts).

Who offers Sharia-compliant savings accounts?

There are several Islamic banks that offer Sharia-compliant savings accounts. A number of UK-based banks also offer them.

Al Rayan Bank  is the UK’s oldest and largest bank offering Sharia-compliant products. It was formed in 2004. It is fully authorised by the PRA so your savings are covered by the Financial Services Compensation Scheme.

Bank of London and the Middle East This bank was set up in 2006 and offers a range of Sharia-compliant accounts. It is fully authorised by the PRA so your savings are covered by the Financial Services Compensation Scheme.

Gatehouse Bank offers Sharia-compliant accounts. It was authorised in 2008. It is fully authorised by the PRA so your savings are covered by the Financial Services Compensation Scheme.

United Bank:  This bank was formed by the merger of two Pakistani banks in 2001. It is fully authorised by the PRA so your savings are covered by the Financial Services Compensation Scheme.

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