Can Sharia savings accounts provide you an extra return on your cash?

Published by Edmund Greaves on 16 August 2018.
Last updated on 16 August 2018

Sharia bank

Sharia banks often offer better rates of returns on cash savings than their non-Sharia-compliant counterparts.

Plus, many – such as the providers below – have Financial Services Compensation Scheme (FSCS) protection. But how do these products work, and should you consider them?

Better returns

While most savings and Cash Isa accounts on the market offer an Annual Equivalent Rate (AER), which is a guaranteed rate of interest, Sharia accounts can’t do this. In order to comply with religious rules, these accounts instead offer an Expected Profit Rate (EPR). This is because under Islamic law, money is banned from generating money (ie, interest), and instead, the EPR is generated from profits made investing in ethical companies.

Tom Adams, head of research at independent savings advice site Savings Champion, explains: “Despite Sharia accounts being very much a fixture in the UK savings market, there is still some confusion among savers about how they work and how they differ from standard savings accounts. This confusion can sometimes lead to savers signing up without fully understanding the accounts or avoiding them altogether – neither of which is ideal.”

The EPR in particular may put off savers, given the rate is ‘expected’ rather than guaranteed. However, Sharia provider Gatehouse Bank says in its 10-year history it has never failed to meet the stated EPR of a product. It adds that if it were to revise the EPR mid-term, it would contact customers and offer them the opportunity to keep the account or close it immediately.

Keith Leach, chief commercial officer at Al Rayan, adds: “Al Rayan has been in operation since 2004 and has always achieved the expected profit rate it has quoted to its customers. On occasion it has even paid more.”

Mr Adams says: “While the accounts are aimed at savers who want a return on their savings without compromising their faith, they can be suitable for all savers. However, because of the different way that the return is calculated, compared with standard savings accounts, you should ensure that you are comfortable with this before proceeding.”

Another factor that may affect savers’ willingness to use these products is worrying about how safe their money is. However, Sharia-compliant banks, such as Gatehouse Bank and Al Rayan, are FSCS protected.

Many Sharia-compliant banks are FSCS protected

Best buys

At the time of writing, there are several EPR products on the market that beat their AER equivalents.

On easy-access Cash Isas, Al Rayan Bank offers 1.36% EPR, while the next best rate is Virgin Money, offering 1.35% AER.

Al Rayan also offers a 12-month Fixed Term Deposit Cash Isa at 1.61% EPR. The next best is Bank of Cyprus, offering 1.55% AER. Al Rayan also has the best two-year fixed Cash Isa at 1.81% EPR. The next best comes from Paragon, offering 1.7%.

Mr Adams concludes: “With competitive rates available, Sharia accounts are worth considering, provided you are happy with how the EPR is generated and paid, and with the provider’s track record in achieving profit rates in the past. Always ensure that providers are covered by the FSCS or equivalent and if you have any concerns, keep within the protection limits.”

FEATURED PRODUCT

Al Rayan Instant Access Cash Isa, 1.36% EPR

Open this Expected Profit Rate (EPR) account from Al Rayan Bank online, by post, in-branch or by phone. The account requires a low initial deposit of £50 and transfers in from other providers are allowed. You can make additional deposits with no minimum amount, up to the annual Cash Isa limit. Instead of interest, the account pays ‘profit’, which is credited to the account on the last working day of each month.

 

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