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A moral approach to finance

28 September 2018

Islamic finance is one of the fastest growing sectors of the ethical-banking industry. Rebecca Paveley finds out more


Money is neutral; choosing to do good with whatever we have is recognised by the Church as good stewardship

Money is neutral; choosing to do good with whatever we have is recognised by the Church as good stewardship

THE Islamic Bank of Britain (IBB) first opened its doors in the UK 14 years ago, three years before the economic crash that would rock the world, and whose effects are still being felt today.

While other banks collapsed and had to be rescued, in 2009, the IBB had £5 million of assets. Today, it is worth almost £2 billion. Its CEO has been awarded an OBE for services to Islamic finance, and it has 85,000 customers in the UK, one quarter of whom are from non-Muslim communities.

All its products, it says, are sharia-compliant: each new product has to be passed by a sharia supervisory committee, which looks at every offering by the bank to ensure that it complies with Islamic teaching.

It is now renamed Al Rayan Bank, and its senior head of retail banking, Simon Walker, attributes the bank’s growth beyond its traditional customer base to its ethical foundations.

“The difference between a bank like us, which is on the ethical side of banking, and a high-street bank, which talks about responsible banking, is that we were born to be ethical: that is where we come from. A quarter of our customers come from the non-Muslim community, and they come to us, often online, because they want an ethical place to put their wealth.

“There is a growing desire among millennials for ethical finance and transparency. They want to know what a bank stands for, and where a bank invests. We are clear: we do not pay interest or charge interest. Interest promotes unfairness in transactions and leads to unfairness in society. And we will not invest in gambling, alcohol, pornography, arms, or derivatives.”

Instead of interest on savings, the bank pays each saver a share of its profits.

Though he says Al Rayan is a “UK bank, not a religious bank”, the bank allows its branches to close briefly on Friday afternoons to allow staff to attend prayers.

The 2007/08 global financial crash undoubtedly boosted the appeal of ethical banking in general, a sector in which Islamic banks are keen to be placed. The growth over the past decade could be seen as a response to the problems in the finance sector that the crash exposed, says Graham Burnside, who is on the advisory board of the Islamic Finance Council.

“In the UK, Islamic banking is growing beyond the Muslim community, and, for some of those, there is genuinely an element of appeal in the ethical intention of Islamic banking, which isn’t just about interest, but also considers how all financial transactions affect society as a whole. That is why there is a prohibition on gambling and alcohol, for example.

“It’s a long way ahead of the ethics of conventional banking. Islamic finance institutions have been far-sighted in bringing a consideration of fairness between parties and the impact on wider society.”

Al RayanAl Rayan headquarters, in Birmingham

THE distinctiveness of Islamic banking is largely — although not solely — due to its policy of banning the charging or earning of interest. This ban on usury was shared by the Abrahamic faiths for centuries, and also appears in the earliest Vedic texts of Hinduism, and in Buddhism.

But, during the Reformation, John Calvin signalled a shift in the interpretation of usury, suggesting a distinction between lending money at high interest rates and lending at low interest rates, which was seen as acceptable for Christians.

Dr Natan Mladin, from the think tank Theos, is leading a project on debt with the St Paul’s Institute, looking at the moral and ethical underpinning of debt. He argues that the original prohibition on usury was part and parcel of the economic context of its day.

“The usury laws in the Old Testament related to the subsistence agrarian economy of the time, when to practise usury would be to throw someone into poverty which they couldn’t escape from. . . That is where the usury law came from. There was then no distinction between usury and interest, but, over time, that has changed: it has been influenced by urbanisation and commerce, and is now used to mean excessive interest. In some ways, the cap on the interest rates of pay-day lenders is the modern application of the law on usury.”

He believes that interest is not intrinsically “bad”, but that there is a need to question what relationship an interest rate establishes between the debtor and the creditor, and whether it leads to exploitation, or contributes to the wider good of society.

Dr Simon Mouatt, associate professor of economics at the University of Chichester, says that without Calvin’s reinterpretation of usury “capitalism would not have happened” — yet he points out that many of those who argue against the excesses of capitalism do not mention interest.

“A lot of people from Christian communities rail against the exploitation of banks, but don’t rail against interest. The Christian response is that Wonga and the like are wrong to charge massive interest, but not that interest is wrong. No one in the church hierarchy is prepared to say that interest is wrong.”

Not all Muslims think that the Islamic finance sector is perfect, however, and some critics express scepticism about the fact that the profits Islamic banks offer on savings accounts, and the rates that they charge on mortgage loans, are broadly equal, or close, to the interest rates charged by a high street bank. (This scepticism is dismissed by Mr Walker, who says that rates are intentionally comparable: although it is not always the best rate, the bank aims to be “highly competitive”).

Some Muslims and some Christians believe that the Islamic finance sector could still be trying harder, Dr Mouatt says. “A lot of Muslims think Islamic banking is not there yet, in terms of being fully sharia-compliant in terms of interest. But each individual using an Islamic bank is sending a message that we want a non-exploitative system, that isn’t just about interest, but about a different approach to lending, where Islamic banks will share risks with the borrower as well as share profits. . . There are some great innovative ideas in the sector, which appeal beyond the Muslim community.”

Also enshrined in Islamic finance is zakat: the obligation that requires Muslims who own wealth at, or over, a certain threshold to donate a portion of their wealth (typically 2.5 per cent) to those in need.

Dr Mouatt believes that such principles are radical: “Islamic finance is doing more to challenge the financial sector than anything else at the moment. Islamic banking is probably one of their [the Islamic world’s] strongest cards.”

THE growing reputation of Islamic banking in the ethical finance world has led to a unique project, the Edinburgh Declaration, between the Church of Scotland and the UK Islamic Finance Council. The project has resulted in the publication, next month, of a set of shared values on finance and economics, which it is hoped will then lead to new financial products to help those suffering from financial exclusion.

The Edinburgh Declaration will set out six core values on finance which are shared by the two faiths: sustainability, love of neighbour, stewardship, justice, human flourishing, and the common good.

The interfaith officer for the Church of Scotland, Mirella Yandoli, says: “By looking together at what our shared values are, in terms of ethical finance, Christians can gain fresh insight into what Muslims care about — not investing in alcohol, ensuring that banks do not profit from interest — which is very similar to our own concerns.

“Formally establishing these shared values, and applying aspects of both our scriptures to encourage both communities to think more carefully about where we put our money, is a really helpful way to get people to see one another in a new light.

“We are both facing similar challenges of an increasingly unequal world, and climate change is wreaking havoc in communities of all faiths; and we are much stronger if we work together to change the status quo. Simply put, the benefits include equipping Christians with a new understanding of their Muslim neighbour, and an opportunity to collaborate in a different way with each other.”

Al Rayan Simon Walker, senior head of retail banking at Al Rayan

THE Islamic finance sector in Britain has managed to separate itself from some of the negative tabloid headlines associated with the word “sharia” in other contexts, such as the legal sector. Mr Burnside, who is also a member of the Church of Scotland and is involved in the joint project, says that the UK IFC is very aware of the context in which discussion on sharia finance is operating. “We are conscious that the very word ‘sharia’ can produce nervousness in people, and we want to reassure people.

“I’d encourage anyone to look at it, to see that it comes from a whole approach to finance that Islamic philosophy takes, and that, in response to the problems that have emerged in the last decade, there is a lot to be said for it.”

Dr Mladin sees the appeal of Islamic finance for those with strong opinions on usury, but says that the Christian response is usually not to create a “parallel system”, but to “infuse current structures and institutions” — a policy also argued by the Church Commissioners, most recently about their share holdings in Amazon (News, 21 September).

“The financial crash drove home the point that the world of finance and economics is not independent of the rest of society. We need to ask what is good banking practice, and ask questions about the ethics of banks. By and large, the Christian approach is to be more involved, to influence from within,” Dr Mladin says.

Chris Sheldon is chief executive of Kingdom Bank, one of the UK’s “Christian” banks, which are tiny compared with Al Rayan. Besides providing savings accounts, Kingdom Bank lends money to churches to build new church buildings, as well as to individuals in ministry, such as church workers and missionaries, who might struggle to get a mortgage from a high-street bank.

His bank’s marketing drive encourages people to think about where they place their money, and to think about what kind of society their wealth might be helping to build.

“We can change society and influence it through how we use our money,” Mr Sheldon says. “Individuals may not be able to tie their own money in, long term, to a church building, but they can place their savings in a bank that is investing in those churches and organisations.

“Think of what we could achieve in the UK if every Christian placed even some of their savings in a Christian bank. . . We would like people to think more widely about the responsibilities they have to what they have, and what they look after.






At a glance: how do sharia-compliant financial products compare?


Unlike a conventional mortgage, where the purchaser borrows money from a lender which is then repaid with interest, sharia-compliant Islamic mortgage alternatives are based upon the Islamic finance principles of co-ownership: diminishing Musharaka, and leasing (Ijara). The monthly payment to the bank is made up of two elements: an acquisition payment, which increases the borrower’s share of the property, and a rental payment for use of the portion that the bank still owns. Depending on the term of the loan and the value, variable rental rates start at about 3.6 per cent. They also offer Buy to Lets.

Personal/business finance

There are no personal or business loans. But they do offer finance for commercial properties, and other services for business and personal customers, including international money transfer, investment services, and guidance on Islamic tax matters and wills.


Sharia-compliant savings accounts do not offer interest on savings, but depositors get a share of the bank’s profits. There is a higher element of risk involved in this, as the profit is “expected profit” rather than “guaranteed interest”; so the profit share can be lower than the expected rate — but it can also be higher. Products include children’s savings accounts, direct-access savings, and cash ISAs.

Current accounts

Depositors deposit their money and are not paid interest on it. Islamic banks use the Islamic principle of qard for current accounts. Qard is an ethical loan, free of any benefit. Current accounts are a loan to the bank, which are used by the bank for investment purposes, in line with Islamic principles.

‘I don’t want to fudge the question of usury’

Ian Yearsley has had an Islamic bank account for 11 years, and now keeps the majority of his savings there

A FORMER journalist and a Reader Emeritus in the Church of England, Ian Yearsley was prompted to explore Islamic bank accounts after reading a well-known book, Religion and the Rise of Capitalism, by R. H. Tawney (reprinted by Hesperides Press), whose premise is that the Church has never really come to terms with usury.

“I then went to a lecture about Islamic banking, and was invited to a mosque to find out more. I eventually took out a savings account. Now, around 75 per cent of my savings are in an Islamic bank [Al Rayan].

“I use an Islamic bank because I don’t want to fudge the question of usury. Some say it is only excessive interest, but what is excessive interest? I do worry, though, that the same things might now happen in the Islamic world as in the Christian world, and that people will find ways round the prohibition on usury.”

He also admires the Islamic bank’s approach to lending, which is based on sharing risk and profit. “Islamic banks do lend money, but they don’t go mad on it, in my opinion. And I have benefited — and others like me — from this during times of financial crashes, as, although the returns go down, they do not disappear completely.”

He keeps an eye on offers from other ethical banks, but says that he has no current plans to move his money from the Islamic finance system.

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