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    Why an Islamic bank might be the answer to your poor savings rates

    Islamic banks technically cannot pay their customers interest – and yet for years they’ve been topping lists of the UK’s top-rate savings accounts.

    Today, Gatehouse Bank, the Bank of London and The Middle East (BLME) and Al Rayan Bank all offer among the highest rates within the fixed-rate bond market. These Sharia-compliant banks each offer savings rates in excess of the Bank Rate, which is currently 5.25pc. 

    So why do Islamic banks provide such generous rates – and are they available to anyone within the UK, even non-Muslims?

    Here, Telegraph Money explains all the things you could learn about Sharia-compliant banks.

    What are Islamic banks? 

    Islamic banks adhere to the principles of Sharia law. The most important difference between them and traditional banks is around interest. 

    Ravi Kumar, a senior manager at Gatehouse Bank, said: “Islamic banks operate in accordance with Sharia principles, which state that cash needs to be put to work to supply a return by generating wealth for the entire community, relatively than producing profit in and of itself. As such, payment or receipt of interest isn’t permitted.”

    The returns offered by Sharia-compliant savings accounts are subsequently generally known as the “expected profit rate” (EPR), relatively than the “annual equivalent rate” (AER) interest paid by other banks.

    To generate this profit, the bank invests in Sharia-compliant funds after which shares this with the shopper. 

    These are funds that don’t put money into sectors perceived to cause harm to society, reminiscent of alcohol, tobacco, gambling, adult entertainment and the arms industry. 

    It is that this investment portfolio that some Islamic banks, reminiscent of Gatehouse Bank, use as a selling point to draw savers who aren’t necessarily looking to save lots of based on their religious beliefs. Its website describes it as “Socially responsible. Ethical. Fair. Transparent”, it advertises “Green home finance” products, and its “Woodland Saver” savings range plants a tree for each latest or renewed account.

    The investments also needs to not involve excessive uncertainty or speculation with a purpose to comply with Sharia principles. 

    What savings rates do Islamic banks offer?

    There are various Islamic bank savings providers currently operating in Britain, lots of which steadily feature in best-rate tables. In line with data from Moneyfacts there are five Islamic bank providers offering savings accounts on the time of writing.

    Al Rayan Bank has been in Britain since 2004, and provides savings, current accounts and business property finance to around 90,000 customers. Its 12-month fixed-term deposit account offers 5.85pc, only a fraction behind the present top rate of 5.91pc offered by Metro Bank. Its instant-access money Isa isn’t so competitive, nevertheless, at just 1pc versus a top-rate of 5.5pc from Mansfield Constructing Society.

    BLME relies in London, with an office in Dubai. It was founded in 2006. It currently offers a spread of fixed-term savings accounts, and a 90-day notice account. Offering 5.35pc, its notice account falls slightly in need of the highest rate of 5.51pc, while its other fixed accounts are competitive: its one-year fix offers 5.7pc, and the two-year account is advertised at 5.6pc.

    Gatehouse Bank began in 2007, and offers savings accounts, and residential and buy-to-let mortgages. While not market-leading, its one-year fixed-term account offers 5.8pc, which isn’t far off the highest rate. Unlike many of the other Islamic banks, it also offers a spread of tax-free money Isas.

    Habib Bank Zurich plc has eight branches in London, Manchester, Leicester and Birmingham. It offers each Sharia compliant and non-Sharia-compliant six-month and 12-month fixed-term savings accounts within the UK – each options offer the identical returns for purchasers. Fix for six months and you’re going to get 5.3pc, whereas the one-year fix offers 5.8pc.

    QIB (UK) is a subsidiary of Qatar Islamic Bank, with a spread of savings accounts which can be currently only available via Raisin UK, a savings platform. Its fixed-term rates aren’t as high as the opposite Islamic banks listed here, nevertheless. For a one-year fixed-term account, it offers 4.9pc – in comparison with a top rate of 5.91pc. 

    Why can Islamic banks offer higher rates? 

    Despite not investing in industries that are likely to make high returns (reminiscent of tobacco), Islamic banks are relatively small players within the British savings market – unlike larger high street banks they need to work harder to draw customers’ money. This may be done by offering high savings rates (albeit sometimes for a short while, depending on demand). Unlike the larger lenders, they could be more inclined to watch the Bank Rate with a purpose to remain competitive.

    This follows the identical pattern as many other smaller savings providers and challenger banks, who’ve fewer overheads and may subsequently offer higher rates to their smaller number of consumers.

    Can anyone open an Islamic checking account? 

    The strategy of opening an account with an Islamic bank is way the identical as with every other provider; they aren’t restricted to any particular religion, and you may not be asked any extra eligibility questions. 

    Mr Kumar said that some UK customers could also be postpone opening a Sharia-compliant account because they assume you may have to be Muslim to use. 

    “There’s a typical misconception that Islamic finance products are exclusively for those of the Islamic faith,” he said, “but the fact is that they’re open to everyone, including those of all or no religions.”

    Any UK resident over the age of 18 can open an account at a Sharia-compliant bank.

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