For many Muslim charities, decisions surrounding finance and banking do not end with the question of whether a bank offers the services it needs or the terms and conditions it wants.

Islamic, or Sharia, law includes strict guidelines surrounding the matter of money, how it is managed and how it is invested. The principles are drawn from the Qu’ran and from the teachings of the prophet Muhammed.

One key element of this is that earning or paying interest is not allowed, as it is considered usury, so standard current and deposit accounts and loans, including mortgages, are not acceptable to many Muslims. Money should also not be invested in anything related to businesses dealing in products and services banned under Sharia law, such as alcohol or pornography.

In the past, Muslim charities wanting to bank and invest in a Sharia-compliant way would have struggled to find any UK bank that fit the bill. But with close to two million Muslims now living in Britain, there are a now a variety of mainstream and specialist banks offering the kinds of services all those potential clients might want, both to individuals and to businesses and charities.

Sharia law does not say that Muslims should only bank with organisations run by Muslims, but it does specify that whoever is looking after the money should do so in a way that is acceptable to the faith. Every bank, whether high street or specialist faith-led banks, offering Islamic financial services operate under the watchful eyes of panels of Muslim scholars, who are there to ensure that all practices are appropriate under Islamic law. The accounts are not reserved only for Muslims; indeed anyone can apply, regardless of faith.

Lloyds TSB launched Sharia compliant business and corporate bank accounts in April 2007. The accounts, which are suitable for charities, are available through the entire branch network, and form part of a suite of other Sharia products and services on offer through Lloyds, including student accounts, mortgages and an investment fund.

The accounts do not pay any interest and do not include an overdraft service, neither of which would be allowed under Sharia law, and Lloyds says the funds will be ring-fenced. But aside from this, the accounts are pretty similar to Lloyds’ standard business offerings.

HSBC’s Islamic Amanah arm of the business is a global service, and offers a range of financial services to Muslim clients, including a Sharia-compliant equivalent to a mortgage and current account. HSBC says it keeps the funds in Amanah accounts separate from other funds, and that they are not invested in anything that is not permitted under Islamic law.

Charity Bank, too, has been planning to launch an Islamic offering. Last year it announced it would begin work on developing a Sharia compliant, non-interest bearing account, which has yet to come to fruition. Brian Sweetland, chairman of the Friends Provident Foundation, which supported the development programme, said at its launch: “Ensuring that those who find it most difficult to find appropriate financial products have choice and control are central to our approach to financial inclusion.”

Meanwhile, the Islamic Bank of Britain, which has been stepping up its operations in recent years, offers a dedicated account for charities and mosques, or Masjids. The bank also encourages charities that are not Muslim to sign up, with the assurance that funds will be invested in “an ethical and responsible manner”.

Again, the bank does not pay interest, but instead generates income from Sharia-compliant activities, which is shared with charity customers. “Charities can invest with us for a profit,” explains spokesman Samir Alamad of the Islamic Bank of Britain.

The Islamic Bank also offers Sharia finance for the purchase of commercial property, which allows organisations to buy buildings without the need for a conventional mortgage.

What’s more, banks should not profit when customers default on repayments or go into unauthorised overdraft, explains Alamad. The bank levies charges when customers break the rules, but these funds are given to charities rather than being kept by the bank.

Not all Muslim charities choose to use Islamic or Sharia-compliant banks, and indeed some have reserves about the way Sharia finance is approached in the mainstream. As one representative of a Muslim charity says, “not many Muslims would be prepared to buy Halal meat in a shop where pork is also sold”. By the same principal, for some it is strange to think of Sharia finance being offered where non-Sharia activities also take place.

And, looking at the wider picture, it could be argued that any bank that is part of the international banking system has no choice but to be involved at some level in activities which would not be permissible under Sharia law.

Another charity explains that its priority is to be able to transfer funds to beneficiaries overseas in the most transparent and straightforward way possible, which has prompted it to stick with an international organisation with branches all over the world, albeit not a Sharia-compliant bank.

Nonetheless, the scope for banking in accordance with faith is growing for Britain’s Muslim charities, making it easier for them to make the choices that best suit their practical and spiritual requirements.

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Islamic investments

There are a number of Sharia compliant investment funds on the market, such as HSBC’s Amanah Global Equity Index fund, the UBS Islamic fund and the Scottish Widows Islamic Global Equity fund.

The funds all follow the same ethical structure and avoid investment in gambling, anything to do with alcohol, the production and sale of pork, tobacco and pornography.

Scottish Widows also says its fund will not invest in other financial institutions which are not Sharia-compliant.

The charity offering Sharia finance to its beneficiaries

The charity Islamic Aid has turned the idea of Sharia finance around and offers a Halal version of microfinance to people living in poverty, helping them to buy livestock which is vital to allowing them to earn a living. “Instead of lending money we enter into joint activities,” explains Mahmood Hassan, chairman of Islamic Aid.

“We give a person the capital to buy the livestock, and then when it is sold in the marketplace, that person keeps two thirds of the proceeds and Islamic Aid takes one third.”
Interestingly, Islamic Aid has not chosen an Islamic bank to look after the organisation’s funds, but instead has chosen to use a high street bank. “We have been with the bank for around ten years and we have been very happy with the service,” says Hassan.

Key Islamic financial terms

Riba

The term Riba refers to interest, whether earned or paid. This is considered usury and is not permitted under Sharia law.

Musharaka

This means partnership – the placing of capital with another person, and the sharing of the risk and reward. This is one of the central points in Islamic finance.

Ijara

Ijara is a form of leasing. Essentially, the bank buys an item and then leases it back to the customer at a set rate and over a set period. The customer never actually owns the item. A variation on this is Ijara-wa-iktana, where the customer undertakes to buy the item at the end of a set term at a set price, and rent payments are part of the purchase price.

And another variation is often used for property purchase. Ijara with diminishing Musharaka is where the bank buys the building and which each payment above the value of the rental payment, the bank reduces its equity in the asset. Gradually, the customer’s equity increases and the bank’s decreases until the ownership is finally taken over by the customer.

Murabaha

This is effectively a form of credit without interest. Essentially, the bank buys an item which it agrees to resell to the customer on a deferred basis. The customer pays the bank in instalments, and a profit margin is included in the sale price.

Mudaraba

This is where someone hands over money to someone more skilled to invest it. In exchange for the expertise on offer, the skilled investor gets a share in the returns.

Qard

This is a loan where no interest is paid. The Islamic Bank of Britain uses this principal for its current accounts – a customer lends its money to the bank and the bank in turn invests that money for other purposes, but promises to give it back on request.

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