Guide to 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 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.

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 choose to 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).

Youcan find out more information in our Help & Support section