Competitive savings rates are attracting non-believers.
The halal restaurants established by Muslim migrants in Britain quickly inspired an almost religious following among non-believers. Now a similar conversion may be under way in banking. Al Rayan Bank, Britain’s biggest sharia-compliant retail bank by assets, says around one in three of its customers is non-Muslim, up from one in eight in 2010. The Bank of London and the Middle East (blme), another halal outfit, also has a following outside the faithful: the “vast majority” of customers are not Muslims.
A bank prohibited from paying interest might seem an unlikely choice for savers. The practice is banned under sharia. Instead, Islamic banks invest deposits and return a cut of the profits, which amounts to much the same thing as far as many savers are concerned.
Some non-Muslims may be drawn to pious banks for ethical reasons. Sharia forbids investments in sin stocks like arms, alcohol and tobacco. Simon Walker, head of retail sales at Al Rayan, compares his firm to Charity Bank and Ecology Building Society, which market themselves as ethical alternatives.
But more are probably persuaded by competitive rates. Funds deposited for two years at Al Rayan return 2.32%, the best deal on the market according to Moneyfacts, a data firm. Price-comparison websites bring in clients who might not otherwise have considered Islamic banking. Some 90% of savers who opened fixed-term deposit accounts with Al Rayan last year were non-Muslims.
How do sharia upstarts beat the market? Returns on ordinary savings accounts are steered by the Bank of England’s base interest rate, which has been at rock bottom since 2009. Sharia accounts do not follow the base rate so closely. Nor do Islamic banks benefit directly from quantitative easing (in which the Bank of England creates money to buy assets from financial institutions), since no sharia-compliant facility exists. Sharia banks seem to pay for their generous savings accounts by offering much worse deals on lending. Al Rayan’s home purchase plan (its sharia-compliant version of a mortgage) charges 4.24% in the first two years, almost double the market average. Even so, 12% of Al Rayan’s home-purchase customers are non-Muslims.
Some purists dislike the way modern sharia finance is run. Tarek El Diwany, a consultant, says banks are devising loopholes to sell nominally sharia-compliant products that are essentially the same as any other. For 1,400 years Islamic finance has been based on mutual ownership and profit-sharing, he says. But most sharia deposits return a specified rate similar to interest, not a share of actual profits earned. He describes it as “blank-faced copy-catting”.
If that is true, it seems not to trouble most savers. In 2013-17 Al Rayan’s assets almost quintupled. If it continues to convert non-believers to sharia banking, it may grow bigger yet.