Sharia finance: plenty of interest in no interest

Last Updated: 4:18pm GMT 26/02/2008

The Halal banking revolution is taking off, says Kara Gammell


    The British Government is believed to be planning to raise funds by issuing Shariah-compliant bonds in the Middle East, which would be the first time a Western country did so, but many British banks already provide financial services in accordance with Islamic law.


    Junaid Abbas Bhatti, an expert in Islamic Finance said: “The industry is growing at 15pc a year, so it’s no surprise that the Western world’s financial markets are starting to sit up and take notice of the Halal banking revolution.

    “Islamic banking is far more complex than a simple prohibition on the giving and receiving of interest.”

    Emile Abu-Shakra of Lloyds TSB said there are now 2m Muslims in the UK. He added: “Our research tells us that three quarters want banking services that are in line with their faith.

    ”We have developed a range of products – from current accounts to mortgages – designed to meet the needs of needs of Britain’s Muslim community.

    “Not only has this made its possible for Muslims to bank according to their principles, but it has also helped to make Britain a real centre for Islamic finance.”

    The main difference between Islamic and conventional banking is that Islamic teaching says that money itself has no intrinsic value, and forbids people from profiting by lending it, without accepting a level of risk.

    In other words, interest – known as “Riba” – cannot be charged.

    Sana Ayub-Shah, 26, and her husband Sajib Shah, 30, from Ilford, Essex, opened an Islamic current accounts through their bank, Lloyds TSB, and said: “It means our money was being handled in a way that did not breach their beliefs: “It offers features, like no interest received, that allow me to follow my religion through my bank account.”

    Wealth can only be generated through legitimate trade and investment and any financial gain relating to this trading are shared between the person providing the capital and the person with the expertise.

    So conventional mortgages and loans with interest are prohibited.

    The Islamic Bank of Britain is the UK’s first and only stand-alone Sharia-compliant high street bank, regulated by the Financial Services Authority, and approved by the Sharia Supervisory Committee.

    Now the Government is said to be considering offering Shariah-compliant investment certificates or “sukuk”.

    Sukuk, which are often referred to as Islamic bonds, make similar types of payments to investors as conventional bonds but these are not interest-based.

    The precise way a sukuk works depends on the type of contract used, but one common way is to use a lease – or “Ijara” – contract. Here the money from investors is used to buy an asset, which must accord with Shariah law.

    Once the asset is purchased, it can be leased to generate a rental income, which is paid to investors. At maturity, the underlying assets are sold, allowing investors to get back their original investment.

    It is also forbidden to buy shares in any company that makes money from Riba – such as Western banks.

    Another way some banks do not comply with Shariah law is if they lend to companies that deal in such activities as alcohol, pork products, pornography, arms-trading, not to mention many other prohibited – or “Haraam” activities.

    Islamic Bank of Britain says it generates all its profits through Shariah-compliant trading and investment activities and then share the profits with customers at pre-agreed ratios.

    Mr Bhatti said: “We use the Islamic principle of Qard for our current accounts.

    A Qard is a loan, free of profit. In essence, it means that your current account is a loan to the bank, which is used by the bank for investment and other purposes.

    Obviously it has to be paid back to you, in full, on demand.

    “Our savings accounts give the customer a Halal profit on their money.

    The bank uses the customers’ money to invest in ethical businesses and then shares the profits it has made with account holders. If the bank makes no profits at all, then the customers will get no profits on their savings.”

    The Islamic Bank of Britian also offers an Islamic Home Purchase Plan where the customer and the plan provider purchase the property together, and become joint owners. The home owner then pays rent on the share of the property that they do not own and over time is able to purchase a greater share of the property and reduce rental payments. This is known as “Diminishing Musharaka with Ijara”.

    Lloyds TSB also offers a Shariah-compliant student account which includes an interest-free overdraft of £500 for the first six months, and then £1,000 between months seven to nine, rising to £1,500 after nine months for the remainder of their three year course. Students on longer courses may be offered an interest-free overdraft to £2,000.

    To cater for Muslim families, The Children’s Mutual offers a Shariah Baby Bond as a stakeholder child trust fund with charges capped at 1.5pc a year. This ethical fund invests in the shares of companies that are not involved in activities banned under Shariah law.

    Michelle de Klerk

    When Sana Ayub-Shah, 26, and her husband Sajib Shah, 30 (see above), from Ilford, Essex, found out they could open Islamic current accounts through their bank, Lloyds TSB, they jumped at the opportunity of having the “peace of mind” that their money would be handled in a Shariah-compliant way.

    The couple have held the accounts since their wedding last April. Mrs Shah, an investment banker, said she had been very satisfied with the product and would advocate its use to other Muslim families. Having an Islamic bank account meant their money was being handled in a way that did not breach their beliefs: “It offers features, like no interest received, that allow me to follow my religion through my bank account.”

    The couple also have money invested in Premium Bonds, but would be willing to move their money across if further Islamic product options came on to the market. Mrs Shah said the couple was more than happy to forgo the small amounts of interest paid on normal bank accounts in favour of being “better Muslims”t.

    Mr Shah, a manager in the NHS, has also recently set up an online T-shirt company at and would be investigating the Islamic business account options available.


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