An ISA is an individual savings account. The aim of an ISA is to encourage people to save money and invest in what is considered to be a tax-efficient way.
Having first launched in the United Kingdom in 1999, ISAs have become a popular way to prepare for your future by making sure you have savings set aside.
Anyone over the age of 18 in the UK can apply to open an ISA, and for anyone under the age of 18 there are options to open a junior ISA account.
The main things to note with ISAs accounts are as follows:
- You can only open one ISA per tax year
- There are limits to how much money you can put into your ISA each year
- The current ISA limit is £20,000
Sharia-compliant ISAs are essentially ISAs that comply with the strict Sharia rules relating to finance and savings. There can be no element of riba or interest as this is not allowed in Islam.
In addition, a halal ISA must ensure that any money generated comes from halal business and investment opportunities. So if you have a stocks and shares ISA you must ensure that the investment fund only invests in Sharia compliant companies and is not involved with industries that are deemed to be haram such as the porn, alcohol, and gambling industry.
The foundation of Islamic finance rules is that money itself has no intrinsic value. It is simply seen as a medium of exchange, therefore it cannot generate money by itself (hence the principle of interest being forbidden).
WHAT ARE THE ISLAMIC FINANCE RULES THAT APPLY TO ISAs?
As mentioned above, money held in Sharia compliant ISAs cannot attract nor pay any interest. In addition, any money held in a halal ISA must be invested ethically under Islamic finance banking rules.
A good bank that is Sharia compliant will go to great lengths to ensure it remains Sharia-compliant and in line with Islamic finance rules. For example, it will steer clear of businesses and industries that are deemed to be haram and unethical (such as gambling, weapons, and alcohol).
A Sharia-compliant will ensure no interest is paid on your ISA, and that you are not charged interest. Instead, many banks will pay what is known as an 'Expected Profit Rate' This is deemed to be profit that is earned on the savings (as opposed to interest which is accrued).
WHAT TYPES OF HALAL ISAs ARE AVAILABLE?
There are a variety of ISAs that are available on the market. These include the following:
- Stocks and Shares ISAs: also known as investment ISAs, these types of ISAs invest your savings into investments including stocks, shares and commodities.
- Cash ISAs: these work like a traditional savings account.
- Lifetime ISAs are popular with people saving for retirement or their first home. They are only available to those over 18 and under 40 years old.
Sharia-compliant banks will invest your money into those ventures that are deemed to be halal and Sharia compliant. Any money that is generated from this investment is then returned to investors.
For cash ISAs, the important distinction between standard ISAs and halal ISAs is that no interest is payable on halal ISAs.
Banks offering their customers halal ISAs will ensure that they have lots of information about the businesses linked to their ISA investments, and potential opportunities are screened for compliance with Sharia rules. Any bank offering Sharia-compliant products and services will have a dedicated team who is responsible for the management and screening of the product against Sharia principles and providing advice about the products.
As ISAs are seen as tax efficient this is a big draw and incentive for people to open an ISA account.
IS MONEY IN A HALAL ISA SAFE?
There are various different banks in the United Kingdom that offer their customers and investors halal ISAs. They include Al Rayan Bank, Ahil United Bank, and Gatehouse Bank. There is further information about the ISAs on the website of these banks. ISAs in the United Kingdom are regulated by the Financial Conduct Authority.
Halal ISAs are available to Muslims and non-Muslims and offer what is considered to be a decent return on investment. Any provider offering halal ISAs and any other Islamic finance product or service in the UK will need to be registered with the regulating authorities and follow the guidance that applies to any company offering financial services. This means that customers have some peace of mind in the event of a collapse.
You should always make sure that any investment product you are interested in is offered by an institution that is regulated. Under UK law, this means that the Financial Services Compensation Scheme protects investors savings of up to £85,000 in the same way as they would be in a traditional bank.