Islamic finance

Islamic banking is consistent with the principles of Sharia. A key factor is that it operates without interest, which is not permitted in Islam, as money by itself is not considered to be a commodity from which you can profit. 

The Islamic banking system uses real trading activities backed with real assets. This means that Islamic banks, such as Al Rayan Bank, do not conduct business unless they have an asset to allow the transaction to be carried out.

Islamic banks are also not permitted to use financial instruments that are based on speculation, which introduce a high element of risk to a bank, and the assets and deposits of its customers. By following this asset-backed approach, Al Rayan Bank, and Islamic banking as a whole, is not exposed to the same risks as conventional banks. This is why the Islamic finance industry proved to be an ethical and resilient alternative to conventional banking after the recent financial crisis.

Al Rayan Bank also offers security and stability to its customers because it is part of a larger Islamic bank called Masraf Al Rayan (MAR). This gives Al Rayan Bank financial stability as well as access to expertise and knowledge to continue developing its range of Sharia compliant retail financial products.

Furthermore, as a UK bank, Al Rayan Bank is authorised by the Prudential Regulated Authority (PRA) and regulated by the Financial Conduct Authority and the PRA, which means it must meet all UK banking regulations. As a result, Al Rayan Bank’s products offer customers the standard regulatory consumer protection. For example, Al Rayan Bank savers who place their deposits with the Bank are covered by the Financial Services Compensation Scheme.

The absence of interest in Islamic finance is one of the key factors that differentiate Islamic banks from conventional banks. However, there are other important differences:

• Islamic banking is asset-backed which means that an Islamic bank does not carry out business unless an asset is purchased to allow the transaction to be conducted according to Sharia.
• The business investments and the profits Islamic banks generate cannot be in/from businesses that are considered unlawful under Sharia, i.e. companies that deal in interest, gambling, pornography, speculation, tobacco and other commodities contrary to Islamic values.
• The whole premise of Islamic banking is to provide a way for society to conduct its finances in a way that is ethical and socially responsible. Trade, entrepreneurship and risk-sharing are encouraged and these are the financial principles that underpin Islamic finance and the products offered by Al Rayan Bank.
• Islamic banks have a Sharia Supervisory Committee to ensure all the transactions and operations are based on Sharia and ethical principles.

The Qur'an makes it clear that interest, or riba, is forbidden. Conventional banking, which is interest based, is therefore not suitable for Muslims. The Qur’an does permit trade as a method of generating wealth and this is the basis for Islamic banking. It operates without interest to offer approved Sharia compliant financial products. These are based on Islamic finance principles involving trade, such as leasing, investments and partnership.

With Islamic banks Muslims can save their money, buy their homes and carry out their day to day banking in a Sharia compliant way. Some Muslim customers stay with conventional banks and simply do not keep the interest they earn. However, what they may not know is that, indirectly, this can provide funding to other customers for activities that are not permitted in Islam, including interest-based lending. For example, a Muslim customer’s deposits may be partly, or fully, used to provide an interest-based loan to fund a casino or brewery. This is not permitted according to Sharia.

Islamic banking, therefore, provides the certainty to Muslim customers that their money, which is with the bank in a savings, current or business banking account, is not being used in a way that is against Sharia principles.

Islamic finance is now widely and competitively available in the UK and consumers have a real choice about how they manage their finances. By choosing an Islamic bank, Muslims have the peace of mind that their money is working for them and still in line with their faith.

Islamic banks are based on an asset-backed system of finance and develop partnerships with their customers where risk and reward are shared. Unlike many conventional banks, Islamic banks only invest customers’ deposits in ethical activities which are consistent with the principles of Sharia.

Islamic banks are founded on faith-based ethical principles that are derived from trade, entrepreneurship and risk-sharing. As money by itself is not considered to be a commodity from which you can profit, no interest is paid or received by Islamic banks. The ethics and values which underpin Islamic banking include inclusivity, transparency, integrity, respect and fairness.

Unlike the conventional bank-customer relationship, Islamic banks work with their customers in partnership, sharing risk and reward.

Islamic banks only use their customers’ deposits for investments which are permitted in Sharia. So, customers’ money will never be invested in gambling, alcohol, arms, tobacco, pornography or any interest-bearing activities. The activities of Al Rayan Bank are constantly monitored by an independent Sharia Supervisory Committee and an internal Sharia Compliance Department.

The business investments the profits Islamic banks generate cannot be in/from businesses that are considered unlawful under Sharia, such as gambling, alcohol, arms, tobacco, pornography or any interest-bearing activities.

Some Muslims do this. However, as conventional banks are not transparent as to where customer deposits are invested, Muslim customers can find that their money is indirectly being invested in activities which are not Sharia compliant.

The Islamic banking system uses real trading activities backed with real assets, a relatively low-risk approach. Al Rayan Bank depositors are covered by the Financial Services Compensation Scheme (FSCS).

Sharia Scholars are appointed by the shareholders of an Islamic bank as an independent committee. Their role is to ensure that the bank carries out all of its transactions in compliance with Sharia requirements.

They are required to audit the bank’s work from a Sharia point of view and review the bank’s products. In return for the Scholars’ time and effort they are entitled to remuneration. This is no different than for any other trained professional, such as a solicitor or an accountant, who carries out work for an organisation.

This is permissible according to Sharia and the fee paid to the scholars does not cloud their work or negate the impartiality of their advice. It merely recognises the level of expertise the organisation is receiving, which is fundamental to it carrying out its business.

The basis for all Islamic finance lies in the principles of the Sharia, or Islamic Law, which is taken from the Qur'an (the Holy Book for Muslims) and Sunnah (sayings and acts of  Prophet Muhammad peace be upon him).

Islamic banking operates without interest which is not permitted in Islam, as money in itself is not considered to have intrinsic value. As interest is income generated from money, it is seen as effortless return. Instead money must be used in a productive way and wealth can only be generated through legitimate trade and investment, which involves an element of risk.

Islamic banking therefore uses various principles recognised as Sharia compliant such as Ijara (leasing), Musharaka (partnership) and Wakala (agency agreement). Islamic banks use these principles to develop Sharia compliant financial products, such as savings accounts and home finance, which allow Muslims to conduct their finances in an Islamic way.

Under the principles of Sharia, the presence of interest creates an inequitable relationship between two parties favouring one over the other; this imbalance can ultimately lead to wider negative social and economic implications, as has been seen in recent years with several major global banks failing.

This is why it is forbidden in the Qur’an as generating money from money is effortless and useless approach of making money, it instead encourages trade and investment.