The definitive guide to Sharia Banking & Islamic Finance in the UK

Whether you're looking for a place to save or invest, want to buy a property or simply open your first bank account, here's how to find a Sharia-compliant solution.

What is Sharia banking?

Sharia banking covers types of personal finance that adhere to Islamic religious laws. Some of these core principles include:

• Not charging interest (Riba) to borrow money or paying interest to savers

• Not benefiting from restricted practices like gambling, pornography, alcohol or tobacco

• Not speculating in high-risk investments or in deals with extreme uncertainty

• Sharing profit and risk between banks and consumers

To ensure their products follow these teachings, Islamic banks usually appoint a Supervisory Board to scrutinise any new products before they are offered to customers to ensure they're up to scratch.

Who can open a Sharia account?

Anyone can open one. You don't need to be a Muslim or actively practicing Islam to choose a Sharia account.

Sharia banking is something the Bank of England is fully behind. It is, after all, a £5bn market. In early 2021, the Alternative Liquidity Facility was launched by the BoE to allow all banks to hold assets ‘in a non-interest-based environment.’ It’s expected that this will see more Sharia products and services entering the UK market over the coming few years.

Is Sharia banking more ethical?

Sharia banking follows ethical guidelines set down by Islam, but many of these rules will appeal to non-Muslims as well.

If you’re looking for ethical banking, a Sharia account could be an option worth investigating if its principles align with your own.

However, there are other ethical banking products on the market that aren't Sharia compliant so make sure you shop around to find the right account for you.

Sharia saving accounts

The main difference between a Sharia-compliant savings account and a normal savings account is they will not pay interest.

You will not earn any interest from a Sharia savings account. Instead, it’ll usually pay a share of the account's profits, which may not be guaranteed.

Accounts that work in this way usually advertise an expected profit rate, which tells you the percentage return the bank expects to pay you each year.

This rate isn't guaranteed because it’s based on the estimated profits the bank could make from investing your money in a Sharia-compliant way.

Are Sharia savings accounts covered by the FSCS guarantee?

Yes, funds up to £85,000 that are held in a sole account run by a UK-authorised bank are protected under the Financial Services Compensation Scheme. The FSCS ensures customers who lose money if their provider goes bust. 

The level of protection rises to £170,000 in a joint account.

Types of Sharia savings accounts

There are several different types of Islamic savings accounts you can choose from, including:

• Fixed term deposit accounts which last for a set period of time, normally between six months and five years.

• Instant access savings accounts which allow you to deposit and withdraw money instantly.

• Notice savings accounts which require you to give notice before withdrawing your savings, normally between 30 - 90 days.

Can I get a Sharia ISA?

Yes, some banks do offer Sharia-compliant ISAs so you can utilise your annual ISA allowance.

Who offers sharia compliant savings accounts?

The following UK banks offer fully Sharia-compliant savings accounts:

• Ahil United Bank

• Al Rayan Bank (formerly The Islamic Bank of Britain)

• BLME

• Gatehouse Bank

• QIB UK

• UBL

Who offers Sharia compliant ISAs?

Al Rayan Bank offer the following types of Sharia ISAs:

• Instant access ISA

• 12 months fixed

• 24 months fixed

Sharia investing

To comply with Islamic finance guidelines any investment must not benefit from restricted practices, including investing in accounts that pay or make money by charging interest.

This means that investment managers have to screen potential investment opportunities to make sure they follow the requirements of Islam.

To get help finding a Sharia compliant investment that's right for you speak to a independent financial adviser.

Sharia investment accounts from non-Islamic financial providers

In addition, some other financial providers offer Sharia-compliant savings accounts as part of their broader range of products and services. These include:

• The Childrens ISA from HSBC Global Asset Management

• The Junior Shariah ISA from Red Rose Assurance

Compare investment ISAs here, including those that offer sharia compliant funds.

Sharia mortgages

You can still enter the property market and be Sharia compliant.

Unlike a traditional mortgage, where you pay interest on the money you borrow, you instead buy the property in partnership with the bank or building society.

You then pay rent on their stake in your new home for the duration of your mortgage.

Home purchase plans

These are based on joint ownership with the bank. Your monthly repayments cover both:

• Increasing your share of the property

• Rent for the part of your home still owned by the bank

There are three main types of home purchase plans:

• Ijara or Ijarah, where the monthly payments you make are kept by the bank or building society until the end of your agreement. It's only at this point that this money is used to pay off your balance and the lender's stake is removed.

• Diminishing Musharaka, or just Musharaka where your payments buy out a little bit of the bank or building society's stake every month. As your stake grows you have to pay less in rent to pay for the bank's stake.

• Murabaha, meaning profit, is also known as cost-plus financing. It sees a seller and buyer agree on the cost of a property (or another asset) as well as a reasonable mark-up price. The mark up is used instead of interest.

To qualify for a home purchase plan you need:

• A deposit of 20% or more

• To show you can afford the repayments

You can find out more about home purchase plans on the impartial Money Helper website. 

Islamic buy-to-let mortgages

As well as normal residential home purchase plans, some lenders also offer Sharia compliant buy-to-let products. With these options the buyer agrees a price for the property with the financial provider and hands over a deposit, which is their stake. 

Once the buyer has made all payments with the finance company, which is the co-owner from day one, the buyer becomes sole owner. 

These products let you borrow money to buy a property to rent out and work in a similar way as standard buy-to-let mortgages.

Who offers Sharia-compliant mortgages?

Among the companies currently offering either home purchase plans or Islamic buy-to-let loans are the following:

• Al Rayan Bank

• Ahli United Bank

• Bank ABC

• Gatehouse

Sharia bank accounts

Sharia bank accounts work similarly to normal bank accounts and allow you to manage your account much like any other banks - you should be able to:

• Use a debit card

• Use online banking

• Set up standing orders

• Set up direct debits

• Use a chequebook

• Transfer money to other accounts

Islamic bank accounts work on the principle of Qard, an ethical interest-free loan. Any money in your account is lent to the bank interest free until you withdraw it.

The choice is much more limited than it used to be after banks such as TSB pulled out of the market but Al Rayan Bank still provides a Sharia-compliant bank account in the UK.

Do Sharia current accounts offer overdrafts?

In line with the conventions of Islamic law Sharia current accounts don’t offer overdrafts.

Sharia loans

Normal loans aren't Sharia compliant because they charge interest - so if you want to follow Islamic principles, you'll need to find an alternative.

While there aren't any high-street options on the market in the UK currently, you may have more luck speaking to a broker.

Sharia student loans

Again, normal student loans charge interest so aren’t Sharia compliant - however a solution may soon be available to Muslim students.

The UK government is working on offering a Sharia compliant student loan where students pay charitable contributions as payment rather than interest on what they borrow.

In the meantime, if you are looking to apply for university try speaking to their admissions team to see what support they could offer.

Sharia car finance

Traditional car finance, including PCPs usually charges interest which is against Sharia rules.

However, if you can find a 0% hire purchase agreement then this may be a suitable option. Companies that currently offer interest-free vehicle finance options include Interest Free 4 Cars and Halal-Cars.co.uk.

Sharia pensions

You can save for your retirement using a Sharia-compliant pension, but there will be significantly fewer options to choose from.

To be Sharia compliant, investment fund managers can't grow their funds by investing in any accounts that pay interest, or that make a profit from restricted practices. Present options include pensions from:

• GetPenfold

• Nest Pensions

SIPPs

Another option is to take matters into your own hands and choose a Self-Invested Personal Pension (SIPP), where you control where your money is invested.

This allows you to manage your own fund and choose investments that comply with Sharia guidelines, such as avoiding investment in alcohol or gambling. Few providers offer a halal pension, although Options UK teamed up with Islamic finance company Wahed Invest to offer a Sharia-compliant SIPP.

Workplace pensions

Workplace pensions are managed by your employer who chooses which firm will manage and invest employee contributions.

You may be automatically enrolled onto your workplace pension, but that doesn't mean you will be given a Sharia option.

If you have a workplace pension you will need to speak with your employer to see if they offer a sharia compliant fund, such as the SmartIslamic pension, provided through Supertrustonline, that you can choose.

If this isn't available you can opt out of automatic enrolment and choose to invest in a private pension or SIPP (Self Invested Personal Pension) where you can control where your money is invested. However, by doing this you might lose your employer contributions, so check they are able to pay into it before making the move.

 Are Sharia pensions risky?

All investments carry a degree of risk, but some argue fund managers are restricted by Sharia guidelines and that this makes them riskier - because they can't spread the investment risk as widely. 

That means funds have fewer options than other providers, as they can only invest in shares that are Sharia compliant.

However, all pensions are still protected by either the FCA if the provider were to go bust, depending on the type you choose. More information on the risks associated with a pension can be found on the impartial Money Helper website.

Sharia credit cards

At the moment there are no UK banks or building societies that offer a Sharia compliant credit card.

These have been available in the past but the lenders offering them have now withdrawn them from the market. This is primarily because Islamic law and traditions frown on the concept of borrowing and charging interest.

Islamic insurance

Sharia insurance is called Takaful and is based on a co-operative system.

Takaful works by policyholders paying into a fund that is then used to compensate members who need to make a claim.

The main difference between Takaful and standard insurance is that the insurer doesn't keep the policy payments, instead they are paid a fixed portion as a fee (Wakala) and the rest is deposited in the shared fund.

Who offers Takaful insurance?

At the moment there are very few options for people intent on getting Takaful insurance. 

The good news is that, where it is a legal requirement, Islamic scholars have said traditional insurance can be considered Sharia compliant. However, to stay halal you might need to take back in claims no more than you have paid in.

If you are looking for Takaful insurance, the best option would be to approach a specialist broker, such as Howden Group. They currently offer:

• Home insurance

• Motor insurance

• Private medical insurance

• Travel insurance

• Life insurance  

Sharia business banking

If you run your own business then there are Sharia compliant banking options available in the UK, including:

• Bank accounts

• Savings accounts

• Property finance

• Investment portfolio

Who offers sharia banking for business?

The following UK banks offer Sharia-compliant business products:

• ADIB

• Al-Rayan Bank

• BLME

• UBL

What is Zakat?

Zakat is an obligation to give money to worthwhile causes as set out by the Quran - they include:

• The poor (Fuqara')

• The needy (Al-Maskin)

• Zakat collectors (Aamileen)

• The poor and newly converted to Islam (Muallafatul Quloob)

• Slaves to purchase their freedom (Ar-Riqaab)

• Stranded travellers (Ibnus-Sabeel)

• A debtor (Al Ghaarimeen)

• In the service of Allah (Fi Sabeelillah)

Zakat donations are not usually automatically deducted from Sharia accounts, so it is down to you to work out how much you owe and to arrange the payment.

Some banks also offer a service to businesses to help them work out and pay the required amount of Zakat from their profits.

How much should you give?

Typically, 2.5% of your wealth annually is payable on investments and savings above a set threshold called the Nisab. Maximise the value of your savings by hunting down the best rates available.

Use the Islamic Help calculator to work how much Zakat to pay.