Islamic savings account are one of the best ways to hold your money. You can put your hard-earned savings to work in an ethical way and usually generate better returns compared to accounts offered by the mainstream banks. They’re open to Muslim and non-Muslims.
In this article, we’ll talk about:
- What is it? How does it work?
- How does it compare to mainstream?
- Is it safe? Guaranteed return?
- Who are the Islamic banks offering this right now? (comparison table)
- Things to watch out for (can be locked in for a while on highest-return options)
1. What is it? How does it work?
Islamic savings account are Sharia-compliant bank accounts. This is because your savings will not accumulate interest.
Islamic banks will grow your money through sharia-compliant investments (usually by giving the money out to people buying their homes).
Based on those returns the savings accounts offer an expected profit rate (EPR). The difference between interest and EPR is that the former must be paid, while the latter doesn’t. However, UK Islamic banks have always paid their EPR. They wouldn’t have a business or any credibility if they didn’t so there’s a very very low chance that will change.
Islamic banks will also not lend money to businesses that provide prohibited activities or services. For example, in alcohol, tobacco and gambling. Usually, Islamic banks will invest in commodities and property. They will also use the money to fund their Islamic mortgages.
2. How does it compare to mainstream?
Interest rates are at historic lows – not great for savers.
However, Islamic savings account are one of the best ways for you to hold your money.
Take this as an example: in 2019, Amir Firdaus, Chief Financial Officer for Al Rayan wrote in the Telegraph that 80% of all fixed-term deposit customers of Al Rayan bank are not of the Muslim faith.
Why is this number so high? How can Islamic banks afford it?
This is because the top fixed savings products – whether they are one-, two- or three-year accounts, are all from Islamic banks .
But how on earth do Islamic banks pay much higher than other banks?
Well, the answer lies in the way banks get their hands on money. You see, banks make money by giving it out and then making a return on that. But to give money out you need to have money.
Conventional banks look for the cheapest possible place they can borrow money. This is the interbank market where you can borrow at as low as 0.25%. They borrow it for cheap and then sell it for higher. They can afford to give a mortgage out at 2% per annum and still make a tidy profit.
Islamic banks cannot borrow on the interbank market as that is an interest-based loan. So they are forced to look elsewhere. Enter the savings account.
Because Islamic banks are much more desperate to get your money – as it is their only option – they offer much higher rates to ensure you go with them. They then give that money out to Muslim home purchasers at around 3-4% and make a profit.
3. Is it safe? Guaranteed return?
FCA protection of up to £85,000
Islamic banks in the UK are regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
Savers are also protected by the Financial Services Compensation Scheme (FSCS). This gives you a protection limit of £85,000 (or £170,000 for joint accounts) per authorised firm. Note though that some Islamic savings account do not offer joint accounts.
However, check yourself before you open an account and read the T&Cs to ensure you’re protected. You can also see which banks are authorised firms on the Bank of England website.
Also, ensure your money is protected by checking if you’re within your limit along with money held in your other bank. Some banks are part of the same authorised firm. Read more on the FSCA website.
Payment not guaranteed, but have always been paid
As we mentioned, the difference between interest and EPR is that the former is guaranteed and must be paid, while the latter doesn’t.
However, UK Islamic banks have always paid their EPR and their business model would collapse if they ever fell short.
4. Who are the Islamic banks offering this right now?
Islamic banks in the UK include Al Rayan Bank, Gatehouse Bank, Ahli United, BLME, Qatar Islamic Bank (QIB) and United Bank Limited (UBL) UK.
Let’s focus on the fixed-term deposit accounts for now. Below are the best offerings at the time of writing:
|Term||Best option||EPR||Market Average|
|One Year||Ahli United||0.65%||0.42%|
|Two Years||QIB UK||0.8%||0.51%|
5. Things to watch out for
When shopping for an account, you need to look out for:
- When you can take your money out (e.g. after one, two or three years)
- The rate (ARE) or rather EPR in this instance
- When the EPR is paid – i.e. at maturity or monthly
- The min/max deposit amount
1. When you can take your money out
You need to consider which type of account to open. This will depend on how quickly you would like to access your money.
Fixed-term deposit accounts
- Fixed-term deposits are exactly that – meaning your money and rate is held for a set period.
- You will be locked in and not have access to your money until the term ends.
- The terms are usually 1-3 years. The longer the term, the better the rate.
- You won’t have to worry about the rate going down as yours is fixed. But in the unlikely event it goes up, you may lose out.
- Any withdrawals before maturity (the end of the product term) are usually subject to a penalty. The product terms and conditions may state exceptional circumstances where you can take out your money early.
- If the bank changes the rate, you should be given notice and permission to withdraw your money.
These types of accounts allow you to withdraw money earlier:
- However, notices can be for a period such as 30 days.
- This gives you much quicker access to your money compared to a fixed-term account.
- This means in an emergency this may cause issues.
Which is best?
If you want quick access to your money or worried about an emergency, these accounts will not be suitable. You should consider an easy-access cash account.