With over 3 million Muslims in the UK, it seems strange that it's only been a few years since Islamic finance has been on offer. And even now, it's still only a few financial institutions offering such services.
Islamic life is governed through Shariah law, which sets out how Muslims should live in every way. In financial terms, it's fairly simple, with the precept being 'neither a borrower nor a lender be'.
Islamic law specifies money should be made from something, and making money out of money is wrong. This means that adherents of Shariah should neither earn nor pay interest. It doesn't mean they should not avail themselves of the financial services on offer, however, just that they should be careful about how they use them.
Bank accounts
Muslim bank accounts are relatively straightforward – after all, even traditional bank accounts have pitiful interest rates, and there are some that pay no interest at all. But they also need to be overdraft free, as banks certainly aren't going to be lending money for nothing.
Some banks, such as HSBC, have specific Islamic current accounts, but realistically any account that pays no interest will do, so long as the option of an overdraft is refused.
Saving and investing
Western cash savings accounts are not an option as they pay interest. It's perfectly acceptable, however, to invest in the stock market where shares in companies rise, or even in commodities like gold, whose value should go up.
When investing in the markets, certain companies are off limits. Those that manufacture alcohol or pork products are obviously not an option, but Shariah law also forbids investing in financial institutions, because they make money from money.
There are now a number of Sharia-compliant investment funds on offer to British-based Muslims. Some are from UK banks, but a number are from Arabic financial institutions that have a foothold in this country. Their portfolios are very similar to those of ethical funds, but they will generally have an advisory body made up of Imams who can give direction to the fund managers.
Housing finance
Because mortgages charge interest, they are not available to Muslims. In truth, many simply bite the bullet and take on a mortgage as that's really the only viable option.
But Shariah compliant housing finance is available. Traditionally, Muslim homebuyers have either rented property or purchased a home outright with cash to avoid dealing with interest. But with house prices now so high this option has become increasingly redundant.
Such products will be approved by an independent committee of world-renowned Islamic scholars and work like a lease and buy back scheme. The bank buys the property and leases it back to the customer over an agreed term – typically 25 years. The customer makes monthly payments made up of rent and payments towards the purchase price and the bank owns the property until the customer has made their final payment.
In Islamic terms the rent is not another name for interest – it is seen as a fair payment for use of the property rather than a charge for borrowing money.The customer can arrange for the property to be sold at any time – at the same price the customer purchased it and the rent rate is reviewed twice a year.
An increasing number of banks are now offering these products. In addition to the Arabic banks, who often have tie-ups with local building societies, both HSBC and Lloyds TSB have offerings that they hope will fit in with their Muslim clients' beliefs.
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