Islamic finance

First published on 16 of October 2017 • Updated 27 of March 2019

Islamic or Sharia bank accounts work in their own particular way. Since Islamic law does not permit the earning of interest, a Sharia-compliant bank must operate in a different way from a regular bank. Maintaining your finances according to this law can have many other implications too. There are a number of specialist financial advisers who are expert in Sharia finance.

How does Sharia finance work?

There are four main types of banking arrangement under Sharia law, governing everything from saving and investing money to taking out loans.

  • Wakala – Your bank uses your cash to invest in Sharia-compliant ventures to generate a return for you.
     
  • Musharaka – A form of investment, this allows you to contribute funding to a venture (for instance) alongside your bank, and then you and the bank share both the risks and the returns.
     
  • Ijara – Your bank buys an asset (e.g. a car) for you and then leases it back to you. Your payments may include instalments towards fully purchasing the item.
     
  • Murabaha – This is the Sharia version of a mortgage. Your bank buys the property and allows you to buy it from them instalments (plus a small margin) while registering you as the buyer from the start.

In all these arrangements, a board of advisers will ensure compliance with Islamic law, and avoid any investments in tobacco, alcohol or other prohibited substances or activities such as gambling.

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About the author
Nick Green
Nick Green
Nick Green is communications manager at Unbiased, the UK's favourite place to find advice you can trust. He has been writing professionally on finance, business and many other topics for over 15 years.