Islamic Finances

If you’re Muslim and are concerned about financial products that comply

with Sharia Law, there are more and more options available to you

today. The first Islamic bank in the UK, the Islamic Bank of Britain,

opened its headquarters in Birmingham in 2004, offering a range of

products and services such as pensions, mortgages and loans.

The main requirement for financial products and services under Sharia

Law is that they neither charge interest nor pay it out, as making

money from money is considered usury, and that they do not invest in

companies that are deemed unethical, such as those connected with

alcohol, tobacco, pornography or gambling.

What often happens when providing loans is that the bank will purchase

an item for the customer at a set price and rent it or sell it to them,

with repayments made in instalments. The bank makes its money by

levying a charge on the customer’s payments.

With investments, Islamic finance works on the basis of sharing the

risk as well as the reward. Both the customer and the bank agree on

terms for sharing the risk of any investment and split any profits

equally between them.

The four main modes of Islamic banking are known as murabaha, where a

purchase is made by the bank and re-sold to the customer without any

interest payments; musharaka, a partnership in which the rewards and

risks – i.e. the profits and losses – are shared by both the bank and

the customer in an investment; mudaraba, where someone places their

investment in the hands of an expert who invests for them and shares

the profit but doesn’t bear the risk of any losses; and ijarah, a

rental agreement made in order for the customer to obtain goods, in

which rental payments are made over a specified period and the bank

reclaims the goods at the end of it.

Many of the high street banks offer Islamic products, and there are

some Middle Eastern banks with branches in the UK that provide

financial products and services suitable for muslims.

Trust funds

The government introduced child trust funds in 2005 to help new parents

to start saving for their child’s future. Upon the birth of a child,

they are given £250 in vouchers to invest on their behalf, and an

additional £250 on the child’s seventh birthday. Additional

contributions of up to £1,200 can be made annually, and the money

can be invested in savings accounts or in stocks and shares, or a

combination of both (a stakeholder account).

A Sharia-compliant child trust fund is also available for the children

of Muslim families, and is provided by the Children’s Mutual. It’s a

stakeholder account, which invests in the stock market until the child

turns 13 and then transfers the funds into a savings account or lower

risk investments such as government bonds. This aims to reduce the

impact of any stock market slumps in the run-up to their 18th birthday.

All investments are made in funds that don’t compromise Islamic

principles, and no interest is paid on the savings.

Mortgages

As mortgages are interest-charging loans, they are not considered

acceptable to the Islamic faith. However, as most people can’t afford

to pay cash to buy a property outright, there is a demand for Sharia-compliant mortgages

among the Muslim community. Many high street banks now offer such

products, as does the Islamic Bank of Britain. An Islamic mortgage

normally works by means of ijara, a leasing agreement in which the bank

purchases the property on behalf of the customer and charges rent to

them (including a handling fee) until the purchase price is repaid, at

which point the customer owns the property outright. As with other

mortgages, the bank retains the rights to the property until this point.

Bank accounts

To comply with the Islamic faith, bank accounts should neither charge

nor pay interest. This normally means that there will be no overdraft

or credit card facilities on current accounts, and that savings

accounts invest money to make a profit rather than receive interest on

it.

Pension schemes

A few financial organisations now offer Islamic pension schemes,

allowing Muslims to invest for their retirement without having to

compromise their beliefs. Such schemes invest only in funds considered

to be ethical under Sharia Law – i.e. no investment in companies

involved in alcohol, tobacco, betting or pornography, or any companies

such as banks that profit from charging interest. If any dividends

arise as a result of business involvement in any of these areas, the

money is ‘purified’ by giving it to charity rather than awarding it to

those investing in the scheme.