Islamic Banks in the UK

Tommy Buckley

31.05.23

5 minute read

The United Kingdom is a wealthy island nation whose consumer market has always remained desirable to individuals and organisations alike. A large population with high disposable incomes, a stable political system, and a highly-skilled labour pool has meant that the UK has been able to maintain its position as a preferred global destination to conduct business in. Even though the cost of living in the UK is in the top 20 countries worldwide¹, a growing number of individuals are looking to base themselves in the UK due to increasing opportunities within the digital nomad economy².

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What is an Islamic Bank

Islamic Banking, or Sharia (Islamic law) Compliant banking is a type of ethical banking where saving, investing, and acquiring loans are strictly compliant with Islamic standards of finance. While Islamic banks tend to offer the same financial products as their traditional counterparts, they are different in the way they structure and execute their products and services.
The Islamic finance sector is also growing at a considerable rate of 15-25% per annum, with 526 Islamic Banks and close to 1,500 Islamic finance institutions operating globally³.

It is also important to note that while an Islamic bank may seem like a completely different type of financial institution to a traditional bank, Islamic banks in the UK tend to offer very similar products and services to a traditional bank. The difference remains with the way these banks choose to structure and finance these products and services, and also with where Islamic banks in the UK choose to invest their capital.

What are the differences between Islamic and traditional banks?

Let’s break it down; there are two foundational principles that set Islamic banking products apart from traditional banking; 1. The sharing of profits and losses. This serves as a function for the banks to create an income for themselves without charging interest. For example, if the bank were to grant a loan to an entrepreneur to launch a new business, instead of asking for interest payments back on the loan amount, the bank would expect to partake in any profits, or losses, the company would make.

Prohibition on the payment or collection of interest. This is perhaps the most important, and biggest difference. Sharia (Islamic law) dictates that when an individual or bank is to loan money or even accept a loan, ethically there shall be no interest collected or paid.

Another factor that sets Islamic banking apart from traditional banking is the strict ethical requirements in relation to investments. To be Sharia (Islamic law) compliant, investments can not be made in industries considered to encourage vices. This includes investments in alcohol, gambling, or other forbidden substances. Furthermore, Islamic investments can not be speculative or engaged in usury and for this purpose, Islamic investments are traditionally very risk-averse⁴.

Islamic/Sharia Compliant banks in the UK

Islamic banking services in the UK have been growing their offerings for some time now which has resulted in some well-established Islamic financial institutions in the UK.

Abu Dhabi Islamic Bank (ADIB).

ADIB is an Islamic bank that originates from Abu Dhabi, UAE. In the UK, ADIB currently only offers one type of financing service, financing for commercial real estate in the UK;

ADIB UK can offer between £5-50 million in commercial real estate financing
5 or 10-year term
Not floating, but rather fixed rates
ADIB UK also offers real estate investment advisory services⁵

Ahli United Bank

Ahli United Bank is another Sharia-compliant bank that is originally from Kuwait. Some of the services Ahli United Bank offers in the UK include;

Private banking, wealth, and asset management
Real estate fund management
Residential mortgages
Islamic home purchase plans⁶

Al Rayan Bank

Al Rayan Bank is an Islamic bank in the UK that offers commercial property finance, but also Sharia-compliant savings plans for individuals. Al Rayan Bank offers multiple different savings accounts for different requirements. Minimum deposits range from £50-250,000 and the profits (as opposed to interest) earned on these savings accounts range from 1%-4.9%, or in the case of a Wakala Treasury Deposit, the profit rate can be negotiated with the bank. Depending on what type of account an individual requires, some of these savings accounts are fixed-term, and others are instant access or access with notice⁷.

Gatehouse Bank

Gatehouse Bank is another great example of an ethical, Sharia-compliant bank that operates in the UK. They offer many different services including personal and business finance. Gatehouse’s Easy Access Account requires a minimum deposit of £1 and offers unlimited withdrawals. The Easy Access Account can be opened online. To comply with Sharia, Gatehouse does not pay out interest on deposits in the Easy Access Account, or even their other savings schemes, instead Gatehouse operates on a variable profit basis. The profit rate, or Annual Equivalent Rate (AER), currently sits at 3.35% for deposits into the Easy Access Account⁸. \

Bank of London & The Middle East

Bank of London & The Middle East (BLME) is another independant and Sharia-compliant bank in the UK. BLME also offers savings accounts based around an Annual Equivalent Rate. Deposits into these savings accounts range from £1,000 to £1 Million and the AER rates range from 3.55% to 4.50% with fixed terms of 3 months, up to 7 years⁹.

QIB UK

QIB UK is also an Islamic bank based in the UK. QIB UK offers private banking in many different shapes and forms, including but not limited to;

Current Accounts
Notice Accounts
Property financing

QIB UK’s current account offers deposits in GBP, while their Instant Access Savings Account is offered in GBP, USD and EUR¹⁰.

Benefits of Islamic banking

It’s evident that businesses and customers alike can see the advantages of Islamic banking, demonstrated through its increasing popularity, and the strong and consistent annual growth of the industry. Immunity from rising global interest rates is one of the benefits. While mortgages, loans, and lines of credit become more challenging to establish and repay due to rising interest rates and austerity, Islamic banks don’t charge interest. This generally means that any previously agreed repayment amounts remain fairly consistent and aren’t subject to as much volatility as a traditional, interest-based loan.

Another benefit of Islamic finance is the risk-averse investment approach and the required transparency on investments. Islamic banking products are not allowed to make speculative investments. Since speculative investments are considered high-risk and unstable, Islamic investment products are regarded as more informed, stable, and risk-averse.

Islamic banking also requires full transparency for the investor. Islamic banks in the UK and elsewhere have to ensure investors fully and completely understand the potential risks associated with their investment, where their money is being invested, and how the payments will work¹¹.

In the past few years we’ve seen traditional banks around the world are seeing a decline in their popularity¹². This is because of the significant barriers to attaining credit, usury, and even the lack of transparency that exists in these institutions. It is important to remember that traditional banking isn’t the only method of moving your money around out there.

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It’s evident to see that while traditional banks are on a global decline, Islamic finance is picking up steam. While it may come as a surprise to some in the UK that traditional banks are waning on their legitimacy, sharia-compliant banking seems to be the solution for a growing number of people due to their transparency, ethical-investing and risk-averse approach to finance. Islamic banking is a viable alternative for those who want to align their finances with their beliefs.

Sources:

Sources last checked: 20.05.2023

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