Sharia-compliant savings bonds adhere to Islamic principles which forbid the payment of interest, and don’t invest your savings in unethical activities. But these products aren’t just for Muslims, they are open to anyone interested in ethical savings.
How does a Sharia fixed-term account work?
Under Sharia, or Islamic law, Muslims are prevented from paying or earning interest, as making money from money is considered exploitative and unethical. Instead, money must be used in a productive way, and wealth can only be generated from legitimate trade and investment in assets. So, instead of offering interest payments, with a Sharia-compliant account the bank uses your money to earn profits from approved activities, and gives you an expected profit rate.
Pros of Sharia fixed term accounts
The biggest pro is that Sharia savings accounts pay some of the top rates on the market.
When you save into a Sharia account with a regulated provider, your cash savings of up to £85,000 are protected under Financial Services Compensation Scheme, just as with any other standard account.
Your money won’t be invested in industries such as alcohol, tobacco, gambling, pornography and arms.
Cons of a Sharia fixed term account
On the downside, technically there is a chance your savings won’t achieve the anticipated profit rate. Providers, however, say this never happens and point out that you might even earn more than the stated rate. If your account will fail to achieve its expected profit rate, you may be given the option to close it early and withdraw your money along with your profits earned so far, but do check the small print for your preferred account. Or, if you want your account to be fully Sharia-compliant, you can choose to accept a loss.
You still have to pay tax on profits from your Sharia-compliant savings just as you would on interest from a standard account.
You may not be able to make early withdrawals from your savings account.
Where are the best Sharia fixed term account deals?
- Gatehouse Bank pays an expected profit rate of 1.85% on its Sharia-compliant 5-Year Fixed Term Deposit account. No withdrawals are allowed before the account reaches maturity. The bank recently cut the rate from 2%, but it is still a good deal in the current climate, says Eleanor Williams, finance expert at Moneyfacts. “Despite this rate cut, this account retains a position within the top 10 when compared against other bonds with similar terms,” she says. “Paying 1.85% on its anniversary, this deal may entice savers searching for a competitive return on their cash over the longer term.”
- Al Rayan Bank offers a 36 Month Fixed Term Deposit account paying an expected profit rate of 1.51%. You can choose to have profits paid quarterly and earn an expected return of 1.5%. The minimum deposit is £1,000.
- For a shorter-term bond, private bank QIB (UK) pays 1.4% on its 9 Month Fixed Term Deposit account if you go via Raisin. No withdrawals are allowed.