Understand Riba in Islam - Interest Guide

ISLAMIC SAVINGS ACCOUNTS - WHAT ARE THEY?

An Islamic savings account, also known as a Sharia compliant savings account, is a type of savings account that is designed to be compliant with Islamic law. Islamic finance rules prohibit the payment and collection of interest, also known as riba.

Instead of interest, Islamic savings accounts typically pay profit or loss sharing. This means that the bank and the customer or account holder share in the losses or profits of the bank's investments.

HOW DO ISLAMIC SAVINGS ACCOUNTS WORK?

Instead of offering interest on deposited funds, an Islamic savings account operates on the principle of profit and loss sharing, where the profits made by the bank are shared between the bank and the account holder.

An Islamic savings must adheres to the principles of Islamic finance. These principles, derived from the teachings of the Quran, prohibit the payment or receipt of interest on financial transactions. The bank offering Islamic savings accounts ensures that the account is not charged or paid any interest.

Islamic savings accounts are also known as interest-free savings accounts or sharia-compliant savings accounts offer a number of benefits to those who choose to use them.

Conventional Savings Accounts

To compare, conventional ISAs are a type of savings account offered by banks and financial institutions in the United Kingdom. ISAs are regulated by the Financial Conduct Authority (FCA).

Conventional ISAs are essentially offer the customer to save money and earn interest on their savings without having to pay taxes on the interest earned. The main difference between a conventional ISA and an Islamic savings account is they way in which they earn money for the account holder.

Islamic Savings Accounts And Sharia Rules

An Islamic savings account, also known as an Islamic finance account or a Shariah-compliant savings account, is a type of financial account that is designed to be compliant with the principles of Islamic law (Shariah). In contrast, a conventional ISA, or Individual Savings Account, is a type of savings account that is offered by traditional banks and financial institutions in the UK.

One of the key differences between these two types of savings accounts is the interest rate. Islamic law prohibits the charging of interest, known as riba, on loans and financial transactions. Therefore, an Islamic savings account does not offer interest on to customers on the deposited funds.

Instead, an Islamic savings account operates on the principle of profit and loss sharing, where the profits made by the bank are shared between the bank and the customer or account holder. This means that the returns on an Islamic savings account may vary depending on the performance of the bank.

Ethical And Socially Responsible Investments

Another key difference between Islamic and conventional savings accounts is the use of investments that are considered to be ethically and socially responsible.

Islamic finance is based on the principle of avoiding investments in businesses that are considered to be harmful to society, such as those involved in the production of alcohol, tobacco, gambling, and other activities that are prohibited by Islamic law. Conventional ISAs, on the other hand, do not have any restrictions on the types of investments that can be made with the deposited funds.

Taxation Of Islamic And Conventional Savings Accounts

In addition to the differences in interest rates and investments, there are also some differences in the way that Islamic and conventional savings accounts are taxed.

In the UK, ISAs are tax-free savings vehicles, meaning that the interest earned on the deposited funds is not subject to income tax. However, the profits earned on an Islamic savings account may be subject to income tax, depending on the specific details of the account and the tax laws in the country where it is based.

It is always best to find out as much information about the savings account you are opening. The bank or provider of the service should be able to help you identify the exact tax implications for you. A comparison of the accounts can also be done via the website of the bank.

Overall, the main difference between an Islamic savings account and a conventional ISA is the way they are structures and the principles each account is based upon.

Structuring Of Conventional Savings Accounts Vs Islamic Savings Accounts

Islamic savings accounts are designed to be compliant with the principles of Islamic finance, this includes the prohibition of interest and the promotion of socially responsible investments. Islamic savings accounts need to ensure they are structured in a way that does not contravene any Islamic finance principles. The structure and the way they progress are important components as the obligation to be Sharia compliant applies to the lifetime of the savings account.

What this means is that the bank offering Sharia compliant savings accounts must ensure it meets all the Islamic finance requirements of operating such an account.

Conventional ISAs tend to be more flexible and do not have the same restrictions as an Islamic savings account would have. However, for Muslims and other customers who do want an ethical form of saving, Islamic savings accounts are useful tools for saving in a Sharia compliant way.

It is therefore important to understand the differences between the two types of savings accounts.

The Benefits Of An Islamic Savings Account

There are over a billion Muslims worldwide. As a result, the principles of Islamic finance and banking have gained increasing recognition and popularity in recent years.

One of the key products offered by Islamic finance institutions is the Islamic savings account.

An Islamic savings account must operate in a way that is consistent with the values and beliefs of Islam, including the prohibition of interest (riba) on loans and financial transactions.

There are several benefits to using an Islamic savings account. Here are just a few:

1. Alignment with religious beliefs: For Muslims, the prohibition on interest is an important religious principle. By choosing an Islamic savings account, individuals can align their financial practices with their religious beliefs.
2. Higher potential returns: Because Islamic savings accounts do not pay interest, banks and other financial institutions that offer these accounts often provide higher potential returns in other ways. For example, some Islamic savings accounts offer profit-sharing arrangements, where the bank shares a portion of its profits with account holders.
3. Increased transparency: Islamic finance is based on the principles of transparency and fairness. As a result, Islamic savings accounts often provide greater transparency than traditional savings accounts, with clear and straightforward fee structures and a lack of hidden charges.
4. Support for ethical investing: Islamic finance prohibits investment in certain industries, such as gambling and alcohol, that are considered sinful in Islam. By choosing an Islamic savings account, individuals can ensure that their money is not being invested in ways that conflict with their religious beliefs.
5. Contribution to the Islamic finance industry: Islamic finance is a growing industry, with an increasing number of people around the world choosing to use sharia-compliant financial products. By choosing an Islamic savings account, individuals can support the continued growth and development of this industry.
6. Higher Returns: Because Islamic savings accounts operate on the principle of profit and loss sharing, they may offer higher returns than conventional savings accounts that offer interest. This is because the returns on an Islamic savings account are linked to the performance of the bank, and the profits made by the bank are shared with the account holder. This means that the returns on an Islamic savings account can vary depending on the bank's performance, but they may be higher than the fixed interest rates offered by conventional savings accounts.
7. Ethical and Socially Responsible Investing: Islamic finance is based on the principles of ethical and socially responsible investing. This means that Islamic finance institutions avoid investing in businesses that are considered to be harmful to society, such as those involved in the production of alcohol, tobacco, gambling, and other activities that are prohibited by Islamic law. By choosing an Islamic savings account, you can ensure that your money is invested in businesses that align with your values and beliefs.

Choosing The Right Savings Account For Your Needs And Values

An Islamic savings account offers a wide range of benefits for savers. Some of these benefits are financial and others are beneficial for those with religious beliefs who want to adhere to Sharia compliant savings.

There has been a significant growth in lenders who are now offering Islamic savings accounts, so it is always worth doing your due diligence to find the right account for you.

Islamic car finance is available for Muslims wanting Sharia compliant options. What halal finance options do Muslims have and how do they work?

There is a huge array of car financing and leasing options on the market for those who do not want to buy a car outright. For Muslims, the car finance options available can be difficult to navigate, especially if they want finance and leasing options that are not in contravention of Islamic finance options.

Islamic car finance operates to enable people to use their money wisely, spread the actual cost of financing the car whilst ensuring that they do not pay interest on the finance option they have chosen. Drivers can take advantage of car finance deals whilst also adhering to Islamic Sharia rules relating to interest (the payment and receipt of which is prohibited) and speculation.

The halal car finance market is aimed at those people who want Sharia compliant finance options. Essentially, for those people who do not have the cash to buy a car outright, or those who do not want to buy a car paying cash, Islamic finance ensures that people can spread the cost of the car without breaching Sharia rules.

Islamic Finance Principles Applied To Car Finance

The main Islamic finance principles relating to car finance are:

1. Riba (Interest) - Islam prohibits the receipt or payment of interest. It is deemed to be haram. In car finance terms, this means that Muslims who want to remain Sharia compliant cannot borrow funds with an Annual Percentage Rate (APR) attached. An APR is an interest rate and is prohibited in Islam.
2. Simplicity of Contracts: Islamic Sharia principles dictate that transactions should always be honest, transparent and open. This means that if you enter into a contract for leasing a car you should make sure that there is no undue risk, speculation, or gambling involved. The contract should be fair for both parties and be simple to interpret.

Buying A Car Outright Without Car Finance

It goes without saying that buying a car outright with a cash payment is probably the best option for those wanting to remain strictly Sharia compliant. If you have savings that would cover the purchase of the car you can avoid interest payments and APR. However, not all Muslims have the option of paying cash outright for a car and this is where the market has developed to cater to the needs of those wanting Sharia compliant car finance options.

Car Finance Options - Leasing

Islam does not prohibit leasing (ijara). In fact, leasing is permissible and is compatible with Islamic finance principles. Payments for vehicles can be done via leasing contracts with car companies. Sharia does not prohibit car leasing agreements because the heart of the transaction relates to a tangible asset - the car. As long as the leasing contract sets out the terms of the lease, the details of the parties, and the payments it can be structured to be compliant with Islamic finance rules.HOW DOES HALAL CAR FINANCE WORK?

Halal car finance is actually straightforward, working on the basis of a loan being agreed between the parties. The buyer and seller in the transaction agree on the value of the car the seller is selling. The seller does not charge an interest rate for payment of the car as they would normally to make money on the finance arrangement. Instead, the seller increases the purchase price of the car to cover the interest payments they would have received. No interest is actually charged by a bank or the seller.

What this means for the buyer is that the deposit will be higher than a deposit they would pay on a non-halal car finance option, but for Muslims this is a halal way of obtaining car finance.

Halal Car Finance Options

Generally speaking, the traditional car finance options such as hire purchase agreement and personal contracts are always attached to an APR and this makes them non compliant with Sharia rules.

However, below is an example of how Islamic finance options can adapt the traditional car finance options to make them halal.

Hire Purchase Agreement (Hp)

HP financing means the buyer can spread the cost of the car over fixed monthly payments and the use of a deposit. Below is an example of an Islamic finance HP deal:

Example:

Price: £20,000

Contract Term: 12 months

APR: 6%

Total Cost to buyer: £21,200

Using an Islamic finance agreement, the seller/dealer would add the additional £1,200 to the price of the car. The buyer of the car would then pay £21,200 as fixed payments monthly for the contract term. When all the payments have been made, the buyer owns the car outright.

Personal Contract Purchase (Pcp)

PCP's are a common form of car financing option and act as a loan, with the buyer only paying off the full value of the car at the end of the contract term if they decide to keep the car. If the buyer does not pay off the full value of the car then they do not own the car at the end of the contract. PCP's usually always come with interest payments and are therefore not Sharia compliant.

However, there are sometimes some PCP finance deals available for new cars but these can be expensive and the requirements are often stringent.

Personal Contact Hire (Pch)

As PCH agreements are actually long-term hiring agreements they are normally deemed to be Sharia compliant. As you are simply renting the car from the owner or dealer you are simply paying for the use of the car for a specific duration.

Conclusion

Each contract and hire purchase agreement is different. The onus is on the customer to ensure that they have inspected the terms, and service fees of the agreement before they decide whether the option is Sharia compliant. There are various Islamic car finance options on the market these days, so it is always best to explore these options rather than using the traditional bank or dealer car finance options.

In recent decades the landscape and number of small and medium-sized (SMEs) businesses has seen a huge transformation. Many of these businesses are formed and led by Muslim entrepreneurs such as Shahzad Younas (Muzmatch), and Ufuk Secgin (Halalbooking.com). With the growth of Muslim entrepreneurs comes an increase in demand for Islamic finance based lending solutions and strategies.

SMEs dominate the world business landscape. They account for approximately 60% of private sector employment. It therefore makes sense that SMEs will require funding options in order to sustain and succeed as a business. With close to 60% of SMEs failing in the first few years, ensuring they have access to adequate funding is critical.

SME lending has historically been centred on the traditional models of funding that are interest based. However, there has recently been a move towards SME lending based on Islamic finance principles.

In the UK, SMEs are considered to be firms that employ less than 250 employees. UK SMEs play a significant role in the UK economy, and the government is keen to ensure that they are sustainable and successful.

SURGE OF SMEs

SMEs account for a significant portion of the world economy. They not only contribute to employment and job creation, they also play a leading role in sustainability and community impact. In the UK a staggering 99.2% of the business population comprises of SMEs.

SMEs are considered to be major employers and they drive local economy growth.

Recent statistics found that the total value of loans to SMEs in the UK reached a whopping £65.1 billion in 2022. This was an increase of over 10% on the previous year and was the official highest on record.

New business lending in the UK totals in the region of £259 million. Demand from SMEs for inclusive and diverse lending options continues to grow.

SMEs AND SOCIAL IMPACT

SMEs play a critical role in society and our economy. Not only do they facilitate and generate employment, they also increase the flow of money from individuals to industries and through society.

At the beginning of 2023 there were estimated to be 5.5 million SMEs in the UK, an increase of 0.8% over the previous year. The professional, scientific, and technical industries accounted for 14% of all SMEs while another 10% are in the retail, trade, and wholesale industry.

Beyond contributing to the economy, SMEs can impact different areas of society. They encompass social development, community wellbeing, alleviating local poverty, job creation, innovation, and reducing income inequality.

SMEs also tend to be more forthcoming in embracing sustainable and ethical practices. They foster financial inclusion by providing local opportunities for local people.

WHY SMEs ARE THRIVING

There are 1 million SMEs in London and over 852,000 in the South East. These SMEs account for 34% of the UK business population. SMEs account for 60% of the employment in the private sector within the UK. They also account for over 50% of the employment in the UK.

As SMEs have grown, so has the need to provide lending that meets their particular demands. Many SMEs do not have the stellar trading history and records of large business.

SMEs therefore need an innovative approach when it comes to lending and funding.

SMEs can come with limited credit history and collateral but bags of entrepreneurial dynamism and innovation.

Distinct from larger businesses, SMEs have unique considerations relating to scale, financials, structure and characteristics. They may have limited access to capital markets, and therefore need tailored and bespoke financial solutions. A one size approach to lending does not meet the needs of SMEs that provide a range of services in the economy.

This is where Islamic finance really comes forth as a viable option for SMEs.

Sme Lending

SME's often demonstrate adaptability and resilience when faced with economic fluctuations, challenges and issues. SMEs are well placed to weather economic downturns and maintaining local communities through change. Lending to SMEs in the UK amounted to £4.8 billion in the second quarter of 2023.

In 2022 36% of SMEs used external funding and finance options. Over 69% of SMEs have stated that they turned to lending options due to cash flow related issued.

For SMEs, obtaining favourable funding options is not as easy as it is for big companies. Perhaps this is the reason more and more SMEs are turning to Islamic finance services.

Islamic finance is a great option of raising funds for SMEs for many different reasons.

For Muslim SMEs that want to avoid interest and want to be Sharia compliant, Islamic finance provides funding options not available in the wider banking sector. Islamic finance is able to adapt to the requirements of Muslim SMEs ensuring compliance and inclusion.

It is also worth mentioning that Islamic finance is based on a risk and profit sharing arrangement. This means that the funder and the SME share the profits AND the risks.

For SMEs, this is a huge benefit as it creates a sense of partnership with support for the new SMEs on the market. SME borrowing has a huge impact on their operations and customer base growth, so it is essential that the SME lending market continues to diversify and educate itself on the needs of SMEs.

Islamic finance is asset backed finance. What this means for the SME is that the financing is linked to tangible assets. In the long term, this is a more sustainable and stable form of financing for them.

Diversity In Business

The great thing about SMEs that often goes unnoticed is how impactful they are when it comes to inclusion and diversity.

In 2020, 16% of SMEs were led by women. Almost 24% of SMEs were equally led by men and women.

Workplace diversity is essential for SMEs as they often operate within diverse local environments. With Millennials currently making up 50% of the UK's workforce (and Gen Z accounting for 27% by 2025), businesses lacking diversity are missing out.

When it comes to investment for the future and the business operations of the SME, they need to ensure they recruit and retrain properly.

Empowerment Through Enterprise

SMEs are known to encourage empowerment through enterprise. This should be done at every stage of the SME process from project initiations, implementations, cost analysis, research, and education.

The result is that SMEs can ensure that they can recognise and eliminate barriers to growth. Enterprise enables SMEs to plan and prepare, ensuring they have the right insight into how to fund their operations and continue to succeed.

For Muslim entrepreneurs there are additional considerations relating to compliance with Islamic finance rules when partaking in financial services and considering lending options.

Why should Muslim SMEs focus on Islamic finance lending:

• Adherence to Islamic rules relating to financial transactions
• Interest free finance options
• Asset backed financing
• Profit and risk sharing
• Flexible finance structures and services
• Financial inclusion without compromising ethics and religious principles
• Community impact
• Flexible payment options
• Lending is not connected to an industry, product or service deemed impermissible by Islam (ie alcohol, gambling, porn)

Faith In Business

Those SMEs that are looking for ethical and sustainable models of finance and lending can find answers in Islamic finance.

Risk sharing, loss sharing, ethical considerations and non-exploitative practices all underpin Islamic finance and support SMEs in a way that traditional financial service cannot.