Many Muslims stay away from traditional savings accounts due to interest or riba. The overarching concept of riba is probably the most known of the Islamic finance principles but with the universal message for millennials being to save more; Muslims are often left in a quandary of what should they do with their money.
Islamic finance can go very deep and there are even degrees that focus on Islamic finance but for our purposes we’ll be covering the main areas of how you can grow your money (in the UK for now) and helpful tips to manage money. For a glimpse of what a MSc in Islamic Finance consists of have a read of our interview with Amir Tyebally who completed his Msc from Durham University.
Principles and Definitions
Before beginning any articles in this section, a few terminologies and principles of Islamic finance need clarifying:
The overarching theme is that apart from only doing Halal activities with your money there is a need for ethical considerations. Whilst this has always been a pillar of Islamic finance there is certainly a buzz these days around ethical investing.
Shareholders and consumers now demand management to consider ethical investing as part of their plans. They expect companies to have a positive footprint in their social, environmental and human engagements. Future financial leaders also learn about ethical investing (as well as specifically Islamic finance) with it being a key component in all financial qualifications from the CFA to the ACA. So strong is this interest in ethical investing that some companies even blacklist anyone who does not fit in with this idea – most notably the Norwegian sovereign wealth fund, the largest government owned fund in the world.
In addition to the above diagram, Islamic finance transactions specifically exclude the below items:
- Interest: Riba (Arabic for multiply into more than what is due) is not allowed due to it seen as the bedrock of an unequal society.
- Uncertainty: Gharar (Arabic word for cheating) is where you do not allow the other parties involved in the transaction to be privy or understand all that’s needed to make informed decisions.
- Gambling: Maysir and Qimar both are referring to the illegitimate gains acquired through chance as opposed to earning through effort.
- Industries: Industries are prohibited if they are detrimental to society. Examples include pornography, tobacco and alcohol.
How Can Consumers Grow Their Savings with Islamic Finance?
The TML finance section will not deal with topics such as how large construction projects are financed or how commodities are dealt with in a halal manner as this will not be beneficial to the majority of readers. The aim is to help the everyday saver, primarily what Islamic bank accounts are available to UK consumers.
The term you’ll often hear when it comes to savings is profit and loss – this is the concept of mudarabah. Mudarabah is where the consumer deposits funds to the bank i.e. your savings. The bank then uses these to invest in economic activity using the aforementioned principles. The resultant profit or losses are shared with the consumer.
Banks will tell you the expected profit/loss rate beforehand e.g. 1.3% per annum, if you want to compare like for like then this is the equivalent of savings rates you will find in conventional western banks. The clever amongst you might’ve noticed it says profit and loss. Investments can make a loss but no UK Islamic bank has ever made a loss to date when it comes to these savings accounts. Nevertheless, one should still note that there is the possibility.
Summary
Finance is boring, I get it! However, finance is part of our daily life and so we should have at least a basic understanding of what Islamic finance means.
Islamic finance isn’t just for Muslims, there is a growing consciousness amongst wider society for ethical investing which hopefully you can now see is the basis of Islamic finance. Investing in a manner that supports society rather than support damaging industries of society is seen as an ethical option for all.
Keep reading TML to find out what banks are providing Islamic finance and what their profit and loss rates are.
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