London becomes huge Islamic finance hub

WHAT IS AN ISA?

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:

1. You can only open one ISA per tax year
2. There are limits to how much money you can put into your ISA each year
3. The current ISA limit is £20,000

SHARIA-COMPLIANT ISAs

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.

INVESTMENTS AND ISAs

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.

WHAT IS ISLAMIC FINANCE?

Islamic finance is a financial system based on Sharia principles - the religious law enshrined within Islam. Islamic finance offers an alternative financial system to the conventional systems, and is based on fairness, transparency, and social justice.

WHO USES ISLAMIC FINANCE?

Islamic finance is a growing industry and is used extensively by Muslims throughout the world. However, more and more non Muslims are also looking at Islamic finance services as they want to operate in a more ethical way.

DO MUSLIMS PAY INTEREST IN THE UK?

Whilst Muslims are discouraged from paying or earning interest in any form under Islamic finance rules, many Muslims in the West do pay interest. However, more and more Muslims are becoming aware of alternative financial systems and products that enable them to access loans and financial services that are compliant with Sharia law.

CAN MUSLIMS TAKE LOANS?

Yes, of course. Taking a loan is not prohibited in Islam. However, it is important to ensure that the loan terms are compliant with Sharia rules.

HOW DO ISLAMIC LOANS WORK?

Islamic loans are structured and developed to ensure they are halal - that is they do not contravene any rules in Islam relating to finances. For example, an Islamic loan will not have any element of interest attached to it.

WHY CAN'T MUSLIMS EARN INTEREST?

In Islam, interest is seen as exploitative as it leads to the lender making a profit at the expense of the borrower. Islam views interest as the unfair accumulation of the wealthy and this can lead to financial distress for those who need to borrow money. Interest is viewed as being against the promotion of social justice and economic fairness which are key concepts underpinning Islamic finance.

WHAT IS HARAM IN ISLAMIC FINANCE?

The following are deemed haram in Islam: riba/interest, gambling, excessive uncertainty, investment in haram industries or practices.

WHAT IS ETHICAL FINANCE?

While there is no universally accepted definition of ethical finance, the Ethical Finance Hub describes it as "A system of financial management or investment that seeks qualitative outcomes other than purely the management of returns. Outcomes sought may reflect ideas from faith, social, environmental and governance theories."

IS ISLAMIC OR SHARIA-COMPLIANT FINANCE ETHICAL?

The World Bank mentions that Islamic finance is ethical, sustainable, environmentally and socially responsible finance. It promotes risk sharing, connects the financial sector with the real economy, and emphasizes financial inclusion and social welfare.

While there is no universally accepted definition of ethical finance, the Ethical Finance Hub describes it as "A system of financial management or investment that seeks qualitative outcomes other than purely the management of returns. Outcomes sought may reflect ideas from faith, social, environmental and governance theories."

Since student loans were first introduced in the United Kingdom in the 1990s they have proven to be problematic for Muslim students. The primary reason for this is that student loans incur interest - something that is prohibited in Islam under Sharia rules.

For many Muslim students who want to be compliant with Sharia laws relating to financial transactions, taking out a student loan is not seen as a viable option.

Riba In Islam

The literal Arabic meaning of the word riba is 'increase', 'growth', 'excess', or 'addition'.

According to Sharia laws, an increase of a debt owed or repayment of a loan is considered to be riba, or interest. This is strictly forbidden in Islam. Both the payment of interest and the receipt of interest payments are considered to be contrary to Islamic Sharia rules.

The reason Islam does not permit interest is that it is considered to be a means through which the poor remain poor, and the rich get richer. There is considered to be an inequality between the parties and within the transaction.

Riba is generally deemed to increase the gap between the poor and the rich in society and this goes against Islam and the social responsibility message that permeates Islam.

Student loans within the UK are currently repayable with interest, so this creates a dilemma for Muslim students.

Interest And Student Loans

As student loans require repayments that incur interest, many Muslims deem them to be an unacceptable way of funding their higher education goals.

There has been a great deal of debate within the Muslim community about student loans and the issue of riba.

Islamic Concept Of Finance

One important thing to note for anyone considering taking out a student loan is that traditional western banks and lending organisations treat money solely as a commodity in business.

By contrast, in Islam, money is considered to be a medium of exchange with a measure of value only.In Islam, money performs a social role.

The value of the money is stored within it, not outside it. This is one of the primary reasons riba / interest is not permitted.

Student Loans - History

Student loans have had a variable history. In the 1960s, 12% of school leavers went on to university. This represented 1 in 10 students. There was no such thing as student loans in the 1960s. University fees were actually paid fully by local education authorities. Students left university with little to no debt.

In addition to having fees paid, university students could also apply for a means tested annual grant to cover their living costs.

In the 1970s the number of school leavers attending university increased slightly to one in seven. By the end of the decade, this figure had dropped again as there was a squeeze on university funding.

The 1980s saw a huge increase in the numbers of students wanting to go on to higher education. The then education secretary, Kenneth Barker, pushed for higher numbers of young people to attend university and increase their skill sets.

By 1990, one in five school leavers was attending university. However, the maintenance grants had not increased by much, so in 1989 the Tory government introduced student loans akin to mortgages. These loans were to account for having no increase in the annual student grants and were intended to bridge the gap between the funds available and the increased cost of living. Grants of up to £2265 were available on a means tested basis.

Higher education and university entry really saw a boom period in the 1990s onwards. More and more young people were going to university and the number of courses available increased.

The Labour government got rid of the grant in 1997 and replaced it with a new policy and system whereby a £1,000 means tested tuition fees was available, alongside low cost loans.

By the early 2000s, many more young people were attending university. The Labour government pledged to raise the percentage of young people going to university to 50% and they wanted to make sure students had an incentive to study further. Tuition fees amounted to £1,100 per year, and this was offset by loans of up to £3,950.

In 2006, tuition fees were raised to £3,000 per year which become payable once students graduated and were earning above £15,000 per annum. Students were informed that the repayments were to be made on the 9% of income over the relevant threshold, with inflation-only interest rates.

Coming to modern day student loans, tuition fees are currently £9,000 per year and additional loans are available that could amount to over £12,000. This means that an average university student who undertakes a 3 year degree will come out of it owing a considerable debt. This debt accrues interest.

In the United Kingdom, it is the Student Loans Company that administers and monitors student loans. The Student Loans Company is the organisation that calculates the amount payable to individuals and ensures the payment reaches the right bank account.

INTEREST ON STUDENT LOANS - IS THIS RIBA?

Opinion is divided about whether student loans are considered to be halal or haram.

There are some Islamic scholars who believe that student loans are inherently haram and non Sharia compliant as they incur interest. However, there are also scholars who have the opinion that student loans are halal.

Let's have a look at the arguments for and against student loans.

Fatwas That Deem Student Loans To Be Haram

The Al Qalam Institute did its own research and issued a fatwa relating to student loans and their permissibility for Muslim students. The issue they looked at in detail was whether the repayment of the student loans was commensurate with inflation rates, or whether the repayments incurred 'bolt on' interest payments.

The research the Al Qalam institute undertook concluded that the student loans at the time of the fatwa (2013) were deemed to incur riba. This meant that student loans were contrary to Islamic laws relating to finance and loans.

The reasoning behind the judgement was that student loans DID attract riba and were not simply attracting inflation based increases in repayments.

According to the Institute, irrespective of the need for the loan (ie to further a person's education, knowledge, and prospects), if a loan incurs interest then it is prohibited.

There is still a great deal of ongoing debate amongst scholars about whether the loans are strictly linked to index price/inflation raises or whether they do actually incur interest outright.

It is likely the debates will continue for some time until any consensus is reached.

Arguments And Fatwa In Favor Of Permitting Student Loans

There are, however, other schools of thought that have the opinion that by their very nature, student loans do not fit the traditional definition of a loan.

Some Islamic scholars have raised the question of whether student loans do in fact incur riba and whether they should fall under the definition of what a de-facto loan is.

The reasoning behind this argument is that any student who obtains a student loan will never fully take ownership of the loan amount.

The student loan itself is seen as an investment towards a future of learning.

As the bulk of the student loan is given straight to the university or institute of higher education, the student never actually receives full ownership of the money. Without ownership it is questionable as to whether student loans are actual loans under Islamic finance principles.

In addition to the above, it can be argued that as the loan only becomes repayable once a student earns over a certain threshold, there is no automatic interest based repayment.

Shaykh Dr. Haitham al-Haddad has issued his own fatwa relating to student loans. It is his opinion that taking out a student loan is permissible. He maintains that no riba is involved in the student loan transaction.

Shaykh Dr Haitham al-Haddad has researched this issue at length and concluded that student loans within the UK are permissible under the rules of Islam.

The Shaykh raises the following points to note when arguing that student loans are halal:

• the student never receives the full loan amount
• the student does not have full control of where the money is spent nor is there any element of profit
• the loan is eventually written off (cancelled if you die)
• the minimum earning threshold applies before any repayment is due

According to the Shaykh, the points mentioned above render the student loan as an entity that is different from the traditional loan, or qard.

The element of human ownership is not fulfilled as the monies are paid (mostly) directly to the university in lieu of tuition costs.

Of course, opinions on this issue continue to remain divided.

Students are encouraged to undertake their own research and due diligence.

Want Versus Need

Some scholars are of the opinion that there will never be a clear cut answer on whether student loans are considered to be halal or haram.

However, students should always consider whether their desire to pursue further education is a want or a need. If university is seen as a want - that is, it is not essential - then taking out extensive student loans might not be a good idea.

However, for those people who have no choice but to go to university such as doctors, lawyers, and dentists, perhaps there is an argument to say that there is a real need.

Not everyone who attends university is entitled to a bursary or scholarship and it would be a shame for these students to miss out on learning or advancement.

What is clear is that many Muslim students (and parents of students) have felt unable to access Sharia compliant and appropriate student finance. This has affected their employment prospects and their career progression.

Whatever your view of student loans, the UK does need to identify and create solutions that are accessible for Muslim students.

Conclusion

Ultimately, when deciding if student loans are halal or haram. students should be doing their own research on whether they feel comfortable taking out student loans.

Always seek out the knowledge of experienced and knowledgeable scholars. Use a website that you trust to find out more information, and read the opinions and advice of scholars who have researched the topic extensively.

Whilst not all Islamic scholars agree on whether student loans are halal or haram, what is clear is that the subject is still open to debate. Perhaps this is the reason that more and more universities are directing their Muslim students towards Sharia compliant loans and finance options.

In addition, the Federation of Student Islamic Societies, and the National Union of Students have been working collaboratively with the government to find alternative finance solutions for Muslim students who do not want to go down the traditional student loans route.

In the meantime, it is worth having a look at the various scholarships and bursaries available. These could be an alternative form if financing but it is rare to find one that will cover a full university course plus living costs.

In addition to this, many UK banks offer interest free current accounts up to a certain limit so it is also worth checking these out.

The UK government has been looking into having an alternative financing option for Muslim students to ensure that they have access to higher education.

In 2014, the government approved a non-interest based student loan model, and this is still under review.

However, in June 2022, the Federation of Student Islamic Societies reported that a date has been finalised for the non-interest based student loan and it would be available in 2025.

Until then, of course, the most beneficial course of action would be to seek out halal funding options. There are service providers available who provide Sharia compliant loans and products. In addition, there are some Muslim charities who will fund higher education.