Islamic banks and Sharia banking in the UK

Islamic banking is different to traditional banking in that it avoids interest and focuses on profit-sharing. In the UK, a growing number of banks offer Sharia-compliant accounts and mortgages for people of all backgrounds.

On this page, you’ll find out more about Islamic banking in the UK, what to consider when opening a savings account from an Islamic bank, and how Islamic-compliant savings accounts work.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

Islamic banking, also called Sharia banking, follows the rules of Islam, or Sharia law, and is guided by Islamic economics. Islamic rules forbid earning interest from savings and charging interest on loans and mortgages. Under Islam, being in debt is generally discouraged.

In the UK, fully Sharia-compliant bank accounts are typically only offered by Islamic banks. Islamic banks tend to offer the same types of accounts as traditional banks, but differ in how they structure them. Accounts are available to everyone, even those who don’t practise Islam.

Islamic banks in the UK operate in line with Sharia law, which means that they adhere to Islamic principles and will not pay interest. Instead, savers receive a share of profits that the bank expects to earn by investing pooled deposits. This is known as the expected profit rate (EPR). 

As with a regular bank, an Islamic bank will invest the money you deposit into your savings account, but only into businesses that it considers to be Sharia-compliant. This means money will not be lent to businesses that go against Islamic principles, which include those operating in the tobacco, alcohol, or gambling industries. Each bank is overseen by a Sharia Supervisory Board, made up of qualified Islamic scholars, which reviews the bank’s activities to confirm they meet religious and ethical standards.

The expected profit rate (EPR) is the rate an Islamic bank expects to receive as profit from its investments in Sharia-compliant companies. It is ‘expected’ as there is no way of guaranteeing a return on investments. That means there’s a  risk that the profit rate won’t be met, but this risk is shared between you and your bank.

Islamic banks in the UK are regulated by the same bodies that oversee conventional banks – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

The Financial Services Compensation Scheme (FSCS) protects eligible deposits with any regulated UK Islamic bank. The deposit protection limit is £120,000 per person, per bank, and if you have a joint account this will double to £240,000.

When you open a Sharia-compliant savings account through Raisin UK, you may see a ‘Make Good’ offer. This policy is designed to protect your deposit: if the bank is unable to meet the advertised EPR, any shortfall will be covered.

In the event that the EPR changes, we will contact you. You can then choose to:

• Keep your account open at the new profit rate

• Alternatively, you can withdraw your deposit and any profit earned to date at the original rate

Opting into the Make Good offer means your account will no longer be fully Sharia-compliant, because Sharia banking doesn’t allow guaranteed returns. If you want to maintain the Sharia-compliant status, you can opt out of the Make Good policy when opening your account.

Anyone can apply for an Islamic bank account in the UK, as long as they meet the bank’s eligibility criteria. This typically means being at least 18 years old and a UK resident. Islamic banking is open to everyone, whether you are a practising Muslim or are simply looking for ethical banking options.

Islamic banking is now a well established area of finance in the UK. In fact, the UK is considered a leader in Islamic finance among Western countries. Around 20 banks in the UK now offer Islamic financial products and services, and five of these banks are fully Sharia-compliant:

• Al Rayan Bank 

• Gatehouse Bank

• Bank of London and The Middle East (BLME)

• QIB UK

• Kuwait Finance House PLC (previously known as Ahli United Bank (UK) PLC)

A number of UK high-street banks offer some Islamic finance products alongside their other banking services, including ethical savings and mortgages.

If you’re considering opening an Islamic savings account,  you’ll find a great selection of Sharia-compliant options with Raisin UK.

Islam considers money as a means of exchange. That means it’s prohibited to earn interest or benefit from lending or borrowing money. Islamic banks operate slightly differently in that they don’t charge interest, and savers can’t earn interest in the traditional sense. The money you earn on your savings comes instead from the profit the bank makes from investing your money in various projects, rather than interest.

Money deposited in an Islamic bank won’t be used to fund businesses that are prohibited under Islamic law, such as alcohol, tobacco or gambling. Because of this, some people view Islamic banks as an ethical option for savings.

Islamic savings accounts are typically used by:

• Muslim people who want to bank according to Sharia law, with peace of mind that money is used in accordance with their beliefs

• Those who prefer their money not to be lent to tobacco, gambling, or alcohol companies

• Individuals who are interested in competitive returns through an EPR rather than traditional interest

Islamic banks avoid loans because charging interest (riba) is prohibited under Sharia law. Instead, they offer Sharia-compliant finance agreements. For example, if you take out a mortgage with an Islamic bank, you need to provide a deposit and you’d have the choice of three different Home Purchase Plans. 

1. Ijara means that the bank purchases the property you would like to buy, and then leases it to you for a fixed term at an agreed monthly cost. When the term is over, full ownership is transferred to you. 

2. Musharaka is a co-ownership agreement, where you and the bank each own a share of the property. Each time you make a repayment, you are buying the bank out of their share. 

3. Murabaha is where the bank buys the property on your behalf based on your promise to repay them. The bank will then sell the property back to you at a higher cost which you pay in equal instalments over a fixed period of time. The difference in the market value of the property and the price the bank sells it to you is deemed a reward to the bank for taking on the initial risk.

If you would like your Sharia savings account at Raisin UK to fully comply with Sharia principles, you can choose to opt out of the Make Good offer. You can do so by sending an email to help@raisin.com with “Make good opt-out” as the subject. It’s possible to opt out from the moment you open a savings account up to 28 days before the maturity date (if applicable).

You can find Islamic savings accounts from some of the core providers in the Raisin UK savings marketplace. Just register for a Raisin UK Account, log in, and apply for the savings account that suits you. Don’t forget that it’s free to open an account.