Savings Focus – Sharia Compliant Savings

30th June 2017

What is it? How does it work? Are the accounts worth considering?

Whilst Sharia compliant savings accounts are very much a fixture in the UK savings market, there is still some confusion about how they work and the difference between them and standard savings accounts.

This confusion can lead to people signing up without fully understanding the accounts or avoiding them all together – neither of which is ideal. Savings Champion is here, as always, to cut through any confusion and give you clear and helpful information, so that you can make your own, fully informed, decision.

Sharia compliant savings accounts comply with Islamic law but are available to any saver, regardless of religion or culture. As Sharia law states that money itself had no intrinsic value, neither party can profit from an exchange of money, therefore the payment and receipt of interest is forbidden. Instead, Sharia compliant accounts pay an 'Expected Profit Rate' as an alternative to interest, which is the level of profit paid by the provider to the saver.

So why, you may ask, should we be interested in Sharia compliant savings accounts? Well, the simple answer is that some of the very best rates on the market can be found amongst Sharia accounts and whilst there are key differences to be aware of, to dismiss them out of hand could mean that you miss out on precious returns, at a time where savers continue to struggle with low interest rates.

Two of the key players in the Sharia account market at the moment, Bank of London & The Middle East (BLME) and Al Rayan Bank have been actively improving rates over the last few weeks, so now is an ideal time to look at these accounts in more detail.

To give you an idea of some of the top rates on offer, here are how some of the key accounts stack up against the rest of the market;

Sharia compliant accounts v the rest of the market

5 year fixed term account – BLME 2.50% gross/AER v Paragon Bank 2.45% gross/AER

3 year fixed term account – BLME 2.25% gross/AERv Atom Bank 2.20% gross/AER

2 year fixed term account – Al Rayan Bank 2.09% gross/AER v Paragon Bank 2.05% gross/AER

1 year fixed term account – Al Rayan Bank 2.00% gross/AER v Paragon Bank 1.85% gross/AER

As you can see, higher rates across the board, but before you jump straight in, we will take some time to make sure you are aware of the key points to consider.

Whilst the accounts are primarily designed for those people who would like to get a return on their savings, without compromising their faith, they can be suitable for all savers. However, because of the different way that the return is calculated and the element of risk that sets these accounts apart from standard savings accounts, you should ensure that you are comfortable with this before proceeding.

The provider invests the money deposited by savers to generate a profit, so there is an inherent risk involved, as the return received depends on the performance of the investments made. Having said that, providers are keen to state that Expected Profit Rates are usually achieved and most providers allow you to take funds away early if the Expected Profit Rate is not likely to be met.

Because of this key difference, we have a best buy table on our website dedicated solely to Sharia accounts, ensuring that savers are fully informed and can make a decision on that basis. Click here for the table.

It is also worth noting that the risk involved is to the level of return only; the capital is no more at risk than in a standard savings account, provided of course you keep within the Financial Services Compensation Scheme (FSCS) limit of £85,000 per person, per provider. For more information on the FSCS, click here for our handy guide.

Whilst Fixed Term Deposits are the most common type of Sharia Compliant Account, there are also Easy Access Accounts, Notice Accounts and both Variable Rate and Fixed Term Cash ISAs available. These accounts work broadly in the same way as the standard equivalents, although of course each pays an expected profit rate rather than interest.

Sharia compliant accounts have been part of the savings landscape for some time now, though it’s only in the last few years that their popularity appears to have grown amongst savers. There are a number of providers that offer this type of account, with Al Rayan Bank (formerly the Islamic Bank of Britain), Bank of London & the Middle East (BLME) and Milestone Savings perhaps the most prominent names at the present time.

Sharia compliant accounts could form part of a balanced savings portfolio, although it is important to make sure you are happy with how the Expected Profit Rate is generated and paid and it is also worth looking at the provider's track record in achieving profit rates in the past. Always ensure that providers are covered by the Financial Services Compensation Scheme (FSCS) or equivalent and if you have any concerns, keep within the protection limits.

If you would like to discuss Sharia compliant accounts in more detail or have any savings related query that you would like to run past us, call us free on 0800 321 3581, we’d love to hear from you.

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