Should you consider saving in a Sharia-compliant account?

You can often get a better rate of return on your cash savings with a Sharia account

Savings rates have plummeted in the past year, so hunting out the best paying accounts is more important than ever.

Sharia-compliant accounts are consistently at the top of the best buy tables.

Anyone can open a Sharia-compliant account with an Islamic bank – it does not matter what your religious beliefs are.

Anna Bowes, co-founder of Savings Champion, says: “Part of the savings landscape for many years now, Sharia-compliant savings accounts have been pretty competitive and therefore far more visible in the past few years.

“And as long as you understand the slight difference, there is no reason not to use one of these accounts if they are offering the best rates.”

Most savings and Cash Isa accounts offer an Annual Equivalent Rate (AER), which gives you a guaranteed rate of interest.

However, Sharia accounts are not allowed to charge or pay interest. In order to comply with religious beliefs, they offer an Expected Profit Rate (EPR). This is because under Islamic law, it is forbidden to generate money from money – like interest.

Instead, the EPR is generated from profits made from investing in ethically selected companies.

The main difference for customers is that EPR is not guaranteed, although in practice they rarely pay below the advertised rate.

As Sharia accounts have an EPR, this might put some savers off. However, Al Rayan and Gatehouse Bank both say they have always achieved the rates quoted to their customers.

Maisam Fazal, chief commercial officer at Al Rayan Bank, says: “As the return is expected profit rather than guaranteed interest, there is a small element of risk, which is shared between the customer and the bank. However, since Al Rayan Bank was founded in 2004 we have always paid the profit rate quoted to our customers and in some instances the bank has even paid more.”

Is your money safe?

Another worry for consumers can be the safety of their money. However, both Al Rayan and Gatehouse Bank are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority.

The banks are also members of the Financial Services Compensation Scheme, so your money is safe up to £85,000.

Best buys

Al Rayan is the top-rated easy-access Cash Isa at 1.36%, followed by Virgin Bank at 1.31% and Leeds Building Society at 1.3%. It is also the highest paying two-year fixed Cash Isa at 1.5%.

When it comes to fixed-term savings bonds, Gatehouse Bank comes for the three-year account at 1.82% and the five-year account at 2.1%.

Bowes says: “While Sharia-compliant accounts are primarily designed for those people who would like to get a return on their savings without compromising their faith, they are available to any saver.

“Because of the different way that the return is calculated, this makes them a little different – but that’s not a reason to ignore them.”

FEATURED PRODUCT

Gatehouse Bank three-year fixed term deposit, 1.82% EPR

You can open this account from Gatehouse Bank online with an initial deposit of £1,000. The account has an EPR of 1.82% and you cannot withdraw funds from your account before the maturity date.