If you are Muslim and want financial products that follow Sharia Law, you have more and more choices today than you did in the past. The Islamic Bank of Britain, which was the first Islamic bank in the UK, opened its main office in Birmingham in 2004. It offers a variety of products and services, such as pensions, mortgages, and loans.
Under Sharia Law, the most important thing about financial products and services is that they don't charge or pay interest. This is because making money off of money is called usury, and they can't invest in companies that are seen as unethical, like those that deal with alcohol, tobacco, pornography, or gambling.
When a customer gets a loan, the bank will often buy an item for them at a set price and rent it to them or sell it to them. The customer then pays back the loan in instalments. The bank makes money by adding a fee to the payments of its customers.
Islamic finance is based on the idea that both the risk and the reward should be shared. The customer and the bank agree on terms for how they will share the risk of any investment and how they will share any profits.
The four main types of Islamic banking are called murabaha. In murabaha, the bank buys something and then sells it to the customer without charging any interest. musharaka is a partnership in which both the bank and the customer share the profits and losses of an investment. mudaraba is when someone puts their money in the hands of an expert who invests it for them and shares the profits but not the losses. And ijarah, which is a rental agreement made so that the customer can get goods. The customer pays rent over a certain amount of time, and the bank takes back the goods at the end of that time.
There are some Middle Eastern banks with branches in the UK that offer financial products and services that are good for Muslims. Many of the high street banks also offer Islamic products.
Trust funds
In 2005, the government set up child trust funds to help parents start saving for their children's future. They get GBP250 in vouchers to invest on the child's behalf when the child is born, and another GBP250 on the child's seventh birthday. Each year, people can put in up to GBP1,200 more, which can be put in savings accounts, stocks and shares, or a combination of both (a stakeholder account).
The Children's Mutual also offers a child trust fund that is in line with Sharia for the children of Muslim families. It's a stakeholder account, which invests in the stock market until the child turns 13 and then moves the money into a savings account or lower-risk investments like government bonds. This is done so that any drops in the stock market before they turn 18 won't hurt them as much. All investments are made in funds that don't go against Islamic values, and savings earn no interest.
Mortgages
Since mortgages are loans with interest, the Islamic faith does not approve of them. But since most people can't buy a house outright with cash, there is a need in the Muslim community for mortgages that follow Sharia law. The Islamic Bank of Britain is one of the many high street banks that now offer these kinds of products. Usually, an Islamic mortgage works through a leasing agreement called ijara. In this agreement, the bank buys the property on behalf of the customer and charges them rent (plus a handling fee) until the purchase price is paid off, at which point the customer owns the property outright. As with other mortgages, the bank owns the property until this point, just as it does with any other loan.
Accounts at banks
For the Islamic religion to be followed, bank accounts shouldn't charge or pay interest. This usually means that current accounts won't let you use a credit card or go overdrawn, and savings accounts will invest your money to make money instead of giving you interest on it.
Pension schemes
There are now a few financial companies that offer Islamic pension plans. This lets Muslims save for retirement without having to go against their beliefs. Such plans only invest in funds that Sharia Law considers to be moral. This means that they don't invest in companies that make money from alcohol, tobacco, gambling, or pornography, or in companies like banks that make money by charging interest. If a business is involved in any of these areas and makes money, the money is "purified" by giving it to charity instead of giving it to those who invested in the scheme.
