Islamic financial products conform to the ethics laid out by Muslim teachings. It’s possible to find Islamic savings accounts, investments, mortgages and insurance policies, and last year the Government even committed to developing a Sharia-compliant student loan.It sounds as if such products would be fairly niche, yet more savers than ever are turning to Islamic accounts.
Tim Sinclair is head of marketing and retail sales at Al Rayan Bank, formerly known as the Islamic Bank of Britain. He says that business has taken off in the past 18 months; last year the bank posted a profit for the first time and its operating income rocketed by 168 per cent. A large part of this growth was driven by non-Muslims.
“We estimate that 83 per cent of our fixed-term deposit savings customers and 47 per cent of our Isa customers who joined the bank last year were non-Muslim.”
Mohammad Khan, head of Islamic finance at PwC, says there are two key tests of whether a product complies with Sharia. “There has to be no interest involved and it has to be extremely transparent. It has to be really clear where all the fees are,” he explains.
“To qualify, a Sharia board has to sign it off; that’s where at least three Islamic scholars look at the product, its marketing, its terms and conditions, and its fees.
“It’s essentially an independent audit done by an independent body,” he adds. “I would describe it as an ethics audit.”
And the ethical criteria applied to Islamic financial products could easily be shared by many non-Muslim savers.
Mr Sinclair says: “Deposits are invested in asset- based, relatively secure commodities such as property or metals. They are never invested in any activity not in keeping with the values of Islam, such as any activity connected to gambling, alcohol, pornography, arms, tobacco or any interest-bearing activity – or any speculative activity.
“Non-Muslim customers are attracted to Islamic finance because of the ethical way we conduct our business and also our approach to customer service. Islamic finance appeals to those who agree with the underlying principles of equitable distribution, fair trading, prudent spending and the well-being of the community as a whole.”
Mr Khan thinks that ethical concerns are one driver of interest in sharia-compliant products, but not the main reason.
“If you look at the most developed market for Sharia-compliant products, it’s Malaysia. And if you look at the people investing in those products, they range from Muslims to non-Muslims – but people are simply investing in the most competitive products at the time.”
It’s certainly true that Sharia-compliant savings accounts are highly competitive. For example, six of Al Rayan’s savings products are currently listed in the Moneyfacts “best buy” tables, with three accounts offering market-beating returns. Since December 2012, Al Rayan has consistently offered at least one market-beating savings account.
But if Sharia-compliant savers can’t receive interest, how do they earn a return on their money at all, let alone a market-beating return? The answer is that, instead of lending out their customers’ savings for interest, the bank invests the capital in industries that are consistent with Islamic beliefs. The profit earned is returned to savers, allowing their money to grow without earning interest.
By Felicity Hannah