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Sharia banking and Islamic bank accounts
If you want to bank more ethically, opening an Islamic bank account is an option worth considering.
Islamic banking is becoming increasingly common in the UK, so if you want to know more about how it works, our guide explains all you need to know.
What is an Islamic bank account?
Islamic bank accounts work in a similar way to traditional bank accounts, but they must follow the rules and laws of Islam or Sharia law, and be guided by Islamic economics.
One of the key principles of Islamic finance is that money itself has no value. Muslims are not permitted to lend or receive money and expect to benefit. This means that no interest can be paid on Islamic bank or savings accounts, and interest cannot be charged on loans or mortgages.
The money kept in an Islamic bank account must be ring-fenced and cannot be used for non-Sharia approved activities. This means money will not be lent to businesses that provide goods or services such as alcohol, tobacco or gambling. Instead, money is generated through profit from investments which are compliant with Sharia law.
If you have an Islamic savings account, some of this profit will be passed on to you, allowing you to grow your savings without earning interest. You’ll earn an “expected profit rate” rather than an “annual interest rate”.
With an Islamic current account, there is no credit or debit interest, no planned overdraft, no minimum balance requirements and no charges for transactions. Other than that, an Islamic bank account operates in a similar way to a traditional current account, typically offering a debit card, joint account options and Internet and mobile banking.
How to open an Islamic bank account
You can open an Islamic bank account in much the same way as any other bank account. Depending on the bank, you may be able to open your account online, by phone or at a branch.
You’ll usually need to provide proof of ID such as a passport or driving licence, and proof of address, such as a utility bill or bank statement.
Are Sharia bank accounts safe?
If the bank or building society you’re considering is authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA) it must protect customer deposits under the Financial Services Compensation Scheme (FSCS).
This means that up to £85,000 of your money will be protected per person, per banking institution in the event your bank went bust. If this happens, you’ll be able to make a claim to the FSCS and get your money back.
Can non-Muslims open an Islamic bank account?
Yes. Even though Islamic banks follow Sharia financial rules, they are open to everyone, no matter what their religious belief. This is on the condition that you meet the standard eligibility criteria.
Pros and cons of Islamic bank accounts
Pros
- More ethical way to bank.
- Expected profit rates on savings accounts can be competitive.
- No overdraft provided, so no risk of getting into debt.
- If authorised by the FCA or PRA, your money will be protected by the FSCS.
- Open to all.
Cons
- No overdraft to fall back on.
- Fewer banks to choose from.
- Limited account features.
Bottom line
If you want to bank according to Sharia law or you would prefer not to lend your money to businesses that provide goods or services such as tobacco, gambling and alcohol, an Islamic bank account could be right for you. In fact, Islamic accounts are often very competitive, with savings accounts topping the best buy tables. This makes them well worth considering when comparing your banking options, whether you practise Islam or not.
Frequently asked questions
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