How does Islamic finance work?
There are a number of Islamic finance products and services available in the UK.
A Shari’ah-compliant current account doesn’t pay interest. Instead, in return for having ready access to your money, the deposit you give the bank is used as an interest free loan. This loan is known as a ‘qard’.
If you open a savings account, the bank will invest the money you deposit. But they won’t invest it in anything the Shari’ah says is harmful.
The bank will pay you part of any profit they earn. Depending on what is invested in and how the profit is worked out, this might be called a ‘wakalah’ (where the bank acts as your agent) or a ‘murabahah’ (where a bank buys and trades in commodities to earn a profit).
When it comes to buying a home, there are a couple of alternatives to a traditional mortgage.
In one type of agreement, the bank can directly buy the property you want. Then they sell it to you at a profit and let you pay it back in instalments. This is also called a ‘murabaha’ contract (because they are buying the property and selling it to you at a profit).
Or you can buy the property jointly with a bank, in what is called a ‘musharakah’ (partnership) contract. Then over time you gradually pay the bank for its share of the property.
In both cases, the bank charges you extra to cover their costs and to reflect the fact you’re living in a property they partly own.