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.
