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Can anyone explain to me the apparent nonsense of "prohibiting" of interest in Islamic finance?

They just find a different way of rewarding the risk taker

It is interest in all but name only

So what is the big deal???

sk1, the simplified reason is that Muslims are forbidden from earning money from idleness or unproductivity. So a bank account which pays guaranteed interest is forbidden - the interest is earned whilst some of the money sits on the bank's balance sheet doing nothing but filling capital adequacy requirements or being lent to other people who spend it on unproductive activities. Finding a way to reward the risk taker within the confines of Sharia law is one of the key problems for Islamic banks, because money must always be invested productively, which implies some risk.

So if a bank takes deposits from Islamic customers, it has to invest them in productive activities, such as lending to businesses, and pay the depositor a percentage of the profits. The bank cannot guarantee any minimum or maximum return on the money, it can only provide a profit sharing agreement, target profit and risk profile for the money. So there is no such thing as a risk free return under Sharia law, whereas traditional bank accounts are risk free as long as the bank is solvent. Many banks have tried to create Sharia compliant products which pay "interest in all but name", but often fall foul of Islamic scholars, who have to make the ultimate decision on whether or not their products are prohibited. These scholars are very apt at picking out when a bank is actually providing a Sharia compliant product, and when it is just trying to raise more deposit finance from Muslims using Sharia imitation products. Unsurprisingly, many banks find their products vetoed by Islamic scholars for attempting to bend the rules. If only the FSA were as efficient at spotting such rule bending, eh?

Does this mean that Islamic Banks are outside the FSA guarantee scheme?  Surely if there is a guarantee involved,  such as the FSA, then it would be illegal?

Nemo666, I don't think it has anything to do with what's fair. A standard fixed rate mortgage can never be Sharia compliant, even if the interest rate is 5% - it completely violates the principle of riba. Most Muslims want to receive a return that is as close to standard interest as possible, i.e. guaranteed return with no risk, but without it actually being usury, i.e. actual interest. Of course the definition of what is riba, or acceptable, is very dependent on the interpretation of the scholar. So scholars in moderate countries such as Malaysia will allow a more liberal interpretation of the principles, and what is accepted, than scholars in more fundamentalist countries such as Saudi Arabia and the UAE. That's another headache for international banks - what they can get away with in one country they can't in another!

AdAstra100, I think Islamic bank accounts can be covered by the FSCS. This is because the scheme guarantees the ability of the bank to cover its debt to you, it doesn't guarantee the performance of the account itself. If a bank goes bust, the FSCS means you get your money back, but you obviously don't get any profit on it, and you will only be compensated to the value of your account at the time, so any losses that your account may have made from its investments will still stand. The Islamic Bank of Britain is covered by the FSCS.

RedundantHippie, the bank operates the same way, but the account itself doesn't. A standard bank account pays you a fixed amount of interest and your capital is guaranteed as long as the bank is solvent. An Islamic bank account will be invested for a variable profit, and there is no guarantee over your capital even if the bank is still solvent and hasn't gone belly up. In this context, Sharia compliance refers to the account itself, not the bank. Lloyds offers Sharia compliant bank accounts, and is most definitely not a Sharia compliant bank.

Broley, I assume your comment about Rachel's 'incorrect' use of the terms 'lend', 'lender' etc. refer to the section about Zopa.  As Rachel clearly explains that Zopa is a 'peer to peer lending business' - where lenders lend their money to borrowers for a return - her use of the terms 'lend' and 'lender' throughout the Zopa piece is actually correct! 

Oh, and by the way, your own usage of the word 'it's' in the phrase 'in it's correct context' is incorrect.  When used as the possessive of 'it', the correct spelling is 'its' and not 'it's'.  The term 'it's' is an abbreviation of the phrase 'it is', the apostrophe standing in for the missing letter 'i' in the word 'is'. 

Just a gentle poke in the ribs from a fellow pedant!

Rachel

You started off bemoaning the paucity of Instant Access and then switched to long-term accounts such as Zopa and Sharia.

Why not spend a little time in the middle ground.  There is an excellent Postal 30-day account with Chelsea BS and it is an ISA.  The top rate is 3.50% over £25,000 and that is equivalent to 4.375% for a basic taxpayer or 5.83% for a Higher Rate payer.

30 days is not far off instant and they allow instant access with 30 days interest loss.

Mike

I'm a ZOPA lender.  

8% might well be an average return over the past year (although I was surprised to read it), however to quote that figure before taking bad-debt into account is highly misleading. It's all about risk. Zopa's A** borrowers are more likely to pay you back but they are not going to take up your offer if you charge a high rate of interest because they have other opportunities to borrow. They frequently often only borrowing via Zopa because they are dealing with real people and it's a nice alternative to banks. You might be able to lend at 15% or even 20% on the Zopa 'markets', but there is a much higher risk of the borrower defaulting. There are ways of spreading that risk and a few people have done very well, but many lenders, myself included, have withdrawn from lending on those markets altogether because the probability of being default is too high; it's a risky punt. 

You also will have to fill in a relatively complicated tax return and, as Rachel says, your money is tied up and buried for at least 3 years.

However, cutting out the banks (who seem to have withdrawn from the borrowing and lending process), is a very satisfying way to invest. You are helping real people, and your returns will probably at least match what the banks are offering. 

I can't say I'm convinced by the explanations given regarding interest in Sharia finance. Seems very hypocritical

There is no such thing as money earned for nothing  -  with interest you are being rewarded for taking the risk of depositing/lending your money, and any instituition can go bust as we have seen

Importantly, interest is taxed under UK law.

Do these "Sharia- compliant" products thus avoid the payment of UK income tax?

Obviously the products may attract capital gains tax, but as there is a generous ceiling, most people would end up not paying it

I think these products ought to be examined by the FSA and HMRC to check if they are actually tax avoidance schemes

Hi Broley, you're welcome, thank you for taking my comments in the humorous way in which they were intended! ;-)

When I worked in Saudi Arabia, I was informed that the bank could not pay me interest, as that was usury, but would pay me 'commission'.   By great coincidence, this was about the going rate for British banks at the time!

Now, can anyone tell me how to repatriate my remaining capital from of the Saudi-British Bank?

Why just list instant access accounts?

Most of these are 'Common Knowledge'.

What we need is more Information on [None Zopa] rates for the more MEDIUM Term. [Two, Three & Five Years.]

Also a way through the 'Minefield' of trick bonus accounts thathat 'Disappear' with the morning mist.

Kids Accounts ALSO [Outside of CTFs for older ineligible kids] are a 'Rip Off' [Small wonder few kids save.]