Islamic finance may be a relatively new banking sector for many economies around the world, but it is worth $1 trillion globally. So, what are the benefits of opening an Islamic bank account?
This is one of a series of six guides to Islamic products: Islamic Banking – how does it work? | Islamic bank accounts explained | Islamic credit cards explained | Islamic personal finance explained | Islamic car finance explained | Islamic home finance explained. We also have a guide to Islamic finance for SMEs.
What is an Islamic bank account?
Islamic banking is guided by the principle that Islam prohibits investors from earning money simply because they are lending it. This is something that affects all bank accounts as current account holders are not paid interest, or riba, on their deposits and savings account holders do not earn interest on their savings.
The reason for this is that money is not considered to have intrinsic value; instead, it is simply considered a medium of exchange.
So what are the differentiating features of an Islamic bank account?
Current accounts become sharia-compliant by offering no credit or debit-interest. Generally, Islamic accounts don’t charge for everyday transactions as long as the account stays in credit and above the standard minimum balance of AED 3,000.
Are there any other differences?
Well, unlike conventional accounts, Islamic bank accounts do not offer overdrafts so customers must ensure they always have enough money to meet their monthly requirements.
But how do Islamic banks make money?
The principle means of Islamic banking is based on trading, therefore banks can trade in sharia-compliant investments with the money deposited by customers. They then share the risks and profits between themselves and the customer. In order to ensure profits are shared appropriately, Islamic banks are structured carefully with shareholders’ capital and customer deposits kept very separate. This is to ensure profits are shared correctly – a concept that adheres to the Islamic banking belief in fair play.
And what about Islamic savings accounts?
This works on the same principle that the money stashed in the account cannot earn any interest because that is forbidden under Islamic law. Instead, savers are offered a targeted profit instead of interest; this is why you will see profit rates quoted on sharia-compliant accounts rather than interest rates.
Banks will then use the money deposited to invest in trading activities in order to generate that target profit. Like savings accounts in conventional banks, customers can choose either a fixed target profit typically found in a fixed-deposit account or an easy access savings account that they can dip into whenever they need to.
Can anyone open a sharia-compliant current or savings account?
Absolutely. Islamic banking is open to all whatever their religious denomination. In fact, some non-Muslims prefer the ethos of Islamic banking and choose it over conventional banking. This is because banks cannot use money invested to support any businesses that fund any activities considered haram, or harmful. These include businesses associated with alcohol, tobacco, firearms or pornography. The premise of Islamic banking is to support society’s financial needs in a way that is ethically and socially responsible.
How do I find the best Islamic bank account?
Your first step should be to compare all the Islamic accounts available in the UAE or compare all the Islamic accounts available in Saudi Arabia. Factors to consider for current accounts include the profit rate, whether the account offers any rewards, what currencies you can open the account in and any hidden fees. There may be charges for transferring money or for withdrawing money at an ATM not associated with your bank.
For Islamic savings accounts, decide whether you want easy access to your money or want to earn a higher profit on the cash deposited by leaving it for a fixed period of time. Other factors include the minimum balance demanded for an account and, of course, the profit rate.