Busting the Myth: What is Islamic Finance?
Consumers are becoming increasingly concerned about the future of the environment, with ONS statistics revealing that three quarters (75%) of adults in Great Britain are worried about climate change.
The same study also revealed that those worried about the impact of climate change were more likely to make lifestyle changes to help tackle the problem. Within this context, it is vital to raise awareness of ethical products on the market, including banking and finance solutions which are well-suited to those looking to make more environmentally conscious choices. This includes Shariah-compliant finance, which follows a socially responsible framework aligned with the Shariah principles of promoting, protecting and preserving the human race.
Demand for Islamic finance is continuing to grow at a rapid rate. Currently, the UK ranks 27th globally for its development of Islamic finance and has been deemed a vital provider by Refinitiv. However, Shariah-compliant finance remains widely misunderstood.
Open to everyone
A common myth is that Islamic finance tends to only be present in Muslim majority countries or is exclusively tailored to those of the Muslim faith. However, Shariah-compliant products and services are open to everyone of all religions and none and are guided by socially conscious principles.
Islamic finance follows the Shariah principles of transparency, fairness and ethical venture. These values naturally encompass wider social morality and personal preferences to support ethical and sustainable enterprise. Shariah-compliant banks, like Gatehouse Bank, aim to promote wealth for the benefit of the whole community, sharing both risk and reward in an equitable way. This is achieved by not investing in industries that can cause harm to society, including gambling, alcohol, adult entertainment, and the arms industry.
These principles have a wide appeal, bolstered by their natural alignment to sustainable development frameworks. At Gatehouse Bank, we have formalised our commitment to do good for society and the environment by becoming a founding signatory to the UN Principles for Responsible Banking, where we have committed to strategically aligning our business to the UN’s Sustainable Development Goals and the Paris Climate Agreement. We have also been independently certified as an operationally carbon neutral business for two consecutive years.
Shariah-compliant vs. conventional banking
The main difference between Shariah-compliant and conventional banking is around interest, as Shariah principles state that money should be used to produce a return for the benefit of the whole community, rather than generating profit in and of itself.
Home purchase plans are often referred to as an Islamic alternative to conventional mortgages. They are based on a partnership between the customer and the bank, who purchase the property together with the customer paying the bank rent on the proportion of the home they do not yet own. The bank is the registered owner of the property but holds the customer as the beneficiary until all payments are made, after which full ownership of the property is transferred to the customer.
Shariah-compliant savings products offer returns known as an Expected Profit Rate. The bank invests the customer’s deposit in Shariah-compliant funds and the profit is subsequently shared. At Gatehouse Bank, our savings range is underpinned by our Woodland Saver accounts, which have been designed to help our customers align their financial goals with their ethical values. For every account opened or renewed, we plant a tree on behalf of the customer in a certified UK woodland project, planting over 30,000 trees to date.
Islamic finance is simple and secure
People are rightfully protective of their finances and often want to stick to what they know. Yet, Islamic finance is a valuable option that ensures good returns and honest transaction. Essentially, most misconceptions of Islamic finance come from a lack of understanding of the concept.
In reality, Shariah-compliant finance is often a more ethical choice than conventional banking and most importantly, is welcome to all. For example, Gatehouse Bank does not engage in highly speculative investments, as Shariah principles state that the risk should be shared and mitigated instead.
As the sector expands in the UK, it is vital that advisors, financial services companies, and customers take the time to learn about and consider the financial venture. As a leading centre of Islamic finance and education, UK institutions must continue to provide spaces to discuss financial options and spread awareness of the concept. This will certainly improve consumer confidence in Islamic finance and allow it to flourish.
This editorial was featured in Your Money.