Each Thursday we look at a different savings option, explain the pros and cons and reveal the best deals on the market (see table below for that). This week we’re talking about Sharia fixed-term accounts – which Savings Champion founder Anna Bowes explains here…
Part of the UK savings landscape for many years now, Sharia-compliant savings accounts are often very competitive, if not market leading, writes Anna.
The key difference between Sharia and non-Sharia savings accounts is simply that Islamic banks pay profit to their savers rather than interest. This is because interest is strictly forbidden in Islam, as Muslims believe it promotes unfairness in financial transactions, which leads to social inequality and injustice.
Islamic banks are founded on faith-based ethical principles that are derived from trade, entrepreneurship and risk-sharing.
Therefore, instead of paying a guaranteed interest rate to their savers, Islamic Banks invest customers’ deposits in ethical, Sharia-compliant trading activities in order to generate a profit, which is then shared.
Islamic banks only use their customers’ deposits for investments which are permitted in Sharia.
Although Sharia-compliant savings accounts comply with Islamic law, they are available to any saver, regardless of religion or culture.
As Sharia fixed-term accounts pay an expected profit rate (EPR) rather than a fixed interest rate, in order to comply with the strict ethical code of Sharia banking principles, this means that the rate is not guaranteed, although it’s worth noting that to date, the offered EPRs have always been paid on the fixed term accounts, as they are provided with that objective in mind.
And, even if the provider felt that they would be unable to pay the EPR, the providers will offer their customers the option to break the bond, having earned the EPR up to that point.
The providers are fully authorised and regulated in the same way as other banks and building societies and are part of the UK Financial Services Compensation Scheme.
So, funds of up to £85,000 per person, per bank, are fully protected in the same way as funds deposited with your high street bank.
Click here to look at the best Sharia fixed-term bonds on Savings Champion