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Islamic Loans 

Saarrah Mussa
Written by  Saarrah Mussa
Jonathan Leggett
Reviewed by  Jonathan Leggett
5 min read
Updated: 12 Mar 2024

Islamic finance in the UK has experienced significant growth over the years, making it one of the leading hubs for Sharia-compliant financial services in the Western world. Islamic finance, also known as Sharia-compliant finance, is a system of finance that operates in accordance with Islamic principles and law, known as Sharia.  

The development of Islamic finance in the UK can be traced back to the 1980s, when the first Western Islamic banks and financial institutions were established. Since then, the industry has expanded significantly and now offers a wide range of products as well as services that cater to the needs of both Muslims and non-Muslims alike.  

What is an Islamic loan?  

An Islamic loan is one that is compliant with Sharia law. It usually means that you don’t have to pay interest on that loan, as it is forbidden in Sharia law.  

Islamic loans adhere to Sharia guidelines and principles which promote ethical and socially responsible financing. This means that they avoid and often do not permit any funding to industries like alcohol, gambling, and tobacco, which are seen as harmful to society.

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How do Islamic loans differ from conventional loans?  

Islamic banking recognises loans as non-commercial and excludes them from the domain of commercial transactions. Any loan given by Islamic banks must be interest-free.

With conventional banks and loans, money is treated as a commodity and is lent against interest as its compensation.

Conversely, Islamic banking products are usually asset-backed and usually involve trading assets, renting of assets and participation on a profit and loss basis.  

What are the principles of Islamic finance?  

An important principle of Islamic finance is that the loaned capital should not be used to cause harm.

For this reason, Islamic finance should not invest in things like gambling, arms, tobacco, and alcohol.  

Islamic finance is guided by Islamic law, also known as Sharia. This law focuses on ethical financial practices. The most common features and principles that govern Islamic finance are:  

  • The investment must not be in any businesses that are deemed not Sharia-compliant or unethical, such as pork products, alcohol, gambling, pornography, or weapons.  

  • The loan cannot involve the payment of any interest. 

  • The risk must be shared between at least two parties. 

  • A ban on contracts with excessive risk or uncertainty. 

What are the eligibility criteria for Islamic loans? 

The eligibility criteria for an Islamic loan in the UK will vary depending on your chosen lender. However, there are common factors that most lenders adhere to when they pick a legible candidate, these include:  

  • Credit history: Similar to other loan processes, you’ll need a good credit history to demonstrate a strong ability to pay back the loan. This will involve showing a steady income and the ability to manage existing debts. 

  • Religious requirement: While Islamic loans are based on Islamic principles, most lenders do not require you to be Muslim to qualify for the loan, while other do have it as a requirement.  

  • Purpose of the loan: The purpose of the loan should be compliant with Sharia law. This means it should not be used for any activities that are prohibited in Islam. 

  • Minimum income: Some lenders have an income requirement  

  • Loan amount: Some lenders may have a minimum loan amount you need to borrow  

What are the benefits of Islamic loans?  

Islamic loans allow you to take out a loan that can be entrusted to be in line with Sharia law. They are also seen as ethical, as Islamic loans typically avoid any financial activities that are deemed unethical or harmful.  

Islamic loans offer a unique financial solution for those seeking sharia-compliant options, with transparent structures and potential for shared risk as well as ethical considerations.  

It is crucial to be aware of the specific terms and conditions of your loan. Although you won’t need to pay interest on your Islamic loan, your loan may be subject to additional fees to cover additional costs and checks.

As the Islamic finance sector in the UK is still developing, the variety of products and lenders available may be smaller compared to other conventional options. However, it is always worth comparing different lenders to find out the best product option for you. Click here for more information on Islamic mortgages.

Is Islamic Finance regulated?  

Yes, the Islamic finance sector in the UK operates under legislation that applies to all sectors.

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