With current low interest rates, Islamic banks could be the answer for savings
The Head of Which? Money explains how savings accounts with Islamic banks work
QI’m currently looking for a savings account and even though most of the rates are awful, I keep seeing Islamic banks at the top of the best rate tables. But instead of paying interest, they say they pay an ‘ expected profit rate’. What is this? Is it the same as interest? And what happens if profits don’t meet expectations?
ALegacy high street banks simply don’t compete when it comes to savings rates, and you’re right that the best savings rates tables are dominated by providers that don’t have widespread name recognition. Islamic banks are table toppers largely in the fixed- rate savings market, and have been for quite some time.
There are five Shariah- compliant banks licensed in the UK, and it is thought that this country is leading the charge for Islamic finance in the west. There are five banks with UK authorisations – Al Rayan, Bank of London & The Middle East, Gatehouse Bank, Qatar Islamic Bank UK, and Abu Dhabi Islamic Bank.
You don’t have to be a follower of Islam to apply for these top rates. The only restrictions on opening a Sharia- compliant account are those present for all other savings accounts – meeting minimum funding requirements and providing proof of identity.
All of these banks are regulated by the Financial Conduct Authority, which means that being Shariah- compliant has
an impact on the safety of your money. If you save with one of these banks, your money will be protected through the Financial Services Compensation Scheme. This means that if your bank were to go bust, you would be able to claim back up to £ 85,000 through the scheme.
But what does Shariah- compliant actually mean? It’s not all that different from a stand
ard bank – the savings you deposit with the bank are lent out to businesses that want to borrow. But in line with Islamic principles, you’re not paid interest on your deposit; and your savings aren’t lent to any firms who provide goods and services that contravene these principles, such as alcohol, gambling or tobacco.
This brings us to the “expected profit rate” or EPR. This
reflects the return on the investments that the bank has made with your deposits. It is often advertised as a percentage, not to confuse you, but to make it easy to compare with standard savings accounts.
The EPR is not guaranteed – it is more of a target, and can be changed at any time. My team has spent a lot of time analysing these accounts and have not heard of any instances where the EPR has been reduced because the expected target was not met. Despite not paying interest, profits from these accounts are treated as savings income by the tax authorities. This means that your returns potentially fall under the personal savings allowance, and you may not have to pay any income tax on them.
One thing to note on tax – the best Shariah accounts tend to be fixed- rate. Interest becomes taxable in the year it becomes available. However, some fixed- rate, fixedterm accounts do allow you to access your funds before the end of the term ( usually with a penalty), meaning that the interest becomes ‘ available’ and potentially liable to tax. Gareth Shaw is the Head of Money at which. co. uk.