Market-leading Sharia savings accounts: should you consider them?
Under Islamic principles, savers are forbidden from earning interest or profit. Sharia-compliant products and accounts pay an expected or anticipated profit rate.
While this removes the element of certainty that an advertised rate will be paid on deposits, it allows the UK’s millions of Muslims to save without breaking Sharia law.
However, the Sharia-compliant savings accounts aren’t just for Muslims – they’re available to the UK’s beleaguered savers who have had to put up with 100 months of record low savings rate.
With a number of new entrants this century – BLME (2006), Milestone Savings (Gatehouse Bank 2008), and Al Rayan Bank (2004), Sharia-compliant savings are also playing their part in kick-starting small rate increases.
Currently in the fixed bond market, Sharia savings accounts top every single category according to data from Moneyfacts:
- One-year fixed bond: Al Rayan Bank, expected profit 2.02%. Best non-Sharia compliant rate is 1.86% from OakNorth Bank
- Two-year fixed bond: Al Rayan Bank, expected profit 2.11%, closely followed by BLME with 2.10%. Best non-Sharia compliant rate is 2.05% from Paragon Bank.
- Three-year fixed bond: BLME gets in by a whisker with an expected profit of 2.25%, though the minimum investment is a hefty £25,000. Non-Sharia challenger Atom Bank’s rate is 2.2% with a much more affordable £50 starting deposit or NS&I’s offering is 2.2% with a minimum £100 investment.
- Five-year fixed bond: Again BLME pips competitors to the top spot with an expected profit of 2.50% (remember the minimum £25,000 starting investment). Otherwise just below it is the offering from Paragon Bank at 2.45% with a minimum investment of £1,000.
As well as top returns, they also appeal to the more ethical saver or investor. The money is invested, not lent out and it’s not used to fund businesses that engage in ‘unethical activities’ such as alcohol, tobacco, gambling or pornography.
Rachel Springall, finance expert at Moneyfacts, says: “Savers looking for an ethical way to boost their deposit could turn to Sharia-compliant savings accounts which are an attractive alternative. Savers can be confident in knowing that their cash is not being used to fund unethical practices and avoid unnecessary risk.”
Expected rate, not guaranteed: will they pay?
In the UK, savings accounts should not carry investment risk while Sharia savings carry an element of risk in order to grow the money. As such, the rate is not guaranteed but James Blower, managing director of Savings Guru says that none of the providers have ever failed to pay out on the expected profit rate.
He says: “Critics would say it’s a question of semantics in terms of the difference between the expected profit and fixed interest. For consumers, the fact that it’s classified as expected profit rather than guaranteed, they’re naturally cynical and fear an occasion where the rate won’t be met.
“I think the lack of guarantee is a reason why they’re not as popular as consumers are sceptical but this is slowly changing.”
Al Rayan Bank’s results for 2016 reveal a 67% growth in deposits to 1.2bn, having added £500m in the past year.
“They are starting to move more into the main stream, but if we compare Al Rayan with say Charter Savings Bank which also consistently features highly in the best buy tables, it’s taking in something in the region of £1.5bn to £2bn a year.
“Sharia-compliant savings have developed their niche very well and will grow in popularity as long as they continue to offer these rates and are accessible, savers will be tempted to try them out.”
He adds that Islamic Banks are driving competition in the market, competing with each other as well as the challengers. However, Blower doesn’t think they’ll ever be main stream, in line with the top four familiar banks: “They’re fueling rate rises and are dragging up the rest of the market. Sharia savings can offer 0.1-0.2% above the mainstream bank’s offering. But what’s not helping them from a diversification perspective is the high investment amounts.”
High minimum investment levels but longer availability
As above, BLME’s minimum investment level is £25,000 while Milestone starts at £10,000. Al Rayan is at the more affordable end of the scale with minimum deposits of £1,000.
“The high minimum investment won’t help them break outside of the Islamic market and it won’t encourage people to try the service,” Blower says.
He says there are three reasons why Al Rayan is one of the most successful Islamic banks in the UK: It has a low minimum entry level, wide range of options for customers to deal with it, such as telephone banking and a mobile app which makes things easier, and it rebranded from Islamic Bank of Britain to Al Rayan Bank. An interesting point to note is that 86% of Al Rayan customers are non-Muslim.
Another plus point of the Islamic banks’ savings accounts is that they don’t offer highly attractive but short-lived deals. A number of market-leading savings rates have been offered by Atom Bank (2% on its one-year fix), Ford Money (4% ISA and regular saver) and Tesco Bank (3% on £3,000 as part of its current account offering) but they were pulled or amended with stricter eligibility criteria within days or weeks as consumers’ demand overwhelmed their expectations.
Given the higher minimum investment levels, Sharia accounts seem to be able to maintain they’re offering in the market for some time, without being trampled by demand.
Blower says: “The deals tend to stay around longer because they appeal to a more limited audience and can therefore hold their position as they’re not seeing the in-flows that traditional providers achieve with that pricing.
“That’s not to say that they don’t dip in and out of the market but they’re more consistent with their presence. Last month Al Rayan and BLME sat at the top of the table and I wouldn’t be surprised if they stay there for most of July.”
A final point for savers is to note that Al Rayan, BLME and Milestone are all regulated by the Financial Conduct Authority (FCA) and are members of the Financial Services Compensation Scheme (FSCS) which protects deposits of up to £85,000 should anything go wrong.