Islamic finance - the lowdown on sharia-compliant money

Islamic products are available to regular savers, investors and homebuyers, but unlike standard deals they don't charge interest.

Why aren't regular accounts sharia-compliant?

How do sharia-complaint banking products work?

There are several ways that banks can structure accounts so that they are sharia-compliant.

Ijara works as a leasing arrangement: the bank buys something for a customer and then leases it back to them. Different forms of leasing are permissible, including those where part of the instalment payment goes toward the final purchase. This might be used to help you buy a car or other item, or to help a business buy equipment.

Murabaha works by the bank supplying goods for resale to the customer at a price that includes a margin above the costs, and allows them to repay in installments. This might be used to provide a mortgage on a property. The property is registered to the buyer from the start. Musharaka is a joint venture in which the customer and bank contribute funding to an investment or purchase and agree to share the returns (as well as the risks) in proportions agreed in advance.

Wakala is an agreement that the bank will work as the individual's agent. If a saver enters into this type of agreement, the bank can use their cash to invest in sharia-compliant trading activities to generate a target profit for them.

How do the banks make money?

Banks can profit from the buying and selling of approved goods and services. The principal means of Islamic finance are based on trading, and it is essential that risk be involved in any trading activity, so banks and financial institutions will trade in sharia-compliant investments with the money deposited by customers, sharing the risks and the profits between them.

Islamic banks are structured so that they retain a clearly differentiated status between shareholders' capital and clients' deposits in order to make sure profits are shared correctly.

Although they cannot charge interest, the banks can profit from helping customers to purchase a property using a ijara or murabaha scheme. With an ijara scheme the bank makes money by charging the customer rent; with a murabaha scheme, a price is agreed at the outset which is more than the market value. This profit is deemed to be a reward for the risk that is assumed by the bank.

There are firm laws governing the types of businesses with which the banks can trade. There should be absolutely no investment in unsuitable businesses, including those involved with armaments, pork, tobacco, drugs, alcohol or pornography.

It's similar to ethical banking, then?

There is some common ground. Some of the tenets of Islamic banking will appeal to anyone, Muslim or otherwise, who agrees with the underlying principles of equitable distribution for everyone, the ideals of fair trading, spending of wealth judiciously, and the well-being of the community as a whole. In the wake of the banking crisis, savers may also be drawn by Islamic banking's approach to investment: they can only invest in real assets, not financial instruments that are based on speculation.

The Move Your Money campaign rates one bank, the Islamic Bank of Britain, highly for ethics and customer service, but its overall score is diminished by a lack of women on its board and high directors' pay, among other things.

How does it work if I take out a mortgage?

How does it work if I open a savings account?

Is my money safe?