The lesser-known bank accounts with bumper savings rates

Islamic banks technically cannot pay their customers interest – and yet for years they have been topping lists of the UK’s top-rate savings accounts.

Today, Gatehouse Bank, the Bank of London and The Middle East (BLME) and Al Rayan Bank all offer some of the highest rates in the fixed-rate bond market. These Sharia-compliant banks each offer savings rates in excess of the Bank Rate, which is currently 5.25pc. 

So why do Islamic banks provide such generous rates – and are they available to anyone in the UK, even non-Muslims?

Here, Telegraph Money explains everything you need to know about Sharia-compliant banks.

What are Islamic banks? 

Islamic banks adhere to the principles of Sharia law. The main difference between them and conventional banks is around interest. 

Ravi Kumar, a senior manager at Gatehouse Bank, said: “Islamic banks operate in accordance with Sharia principles, which state that money should be put to work to produce a return by generating wealth for the whole community, rather than producing profit in and of itself. As such, payment or receipt of interest is not permitted.”

The returns offered by Sharia-compliant savings accounts are therefore known as the “expected profit rate” (EPR), rather than the “annual equivalent rate” (AER) interest paid by other banks.

To generate this profit, the bank invests in Sharia-compliant funds and then shares this with the customer. 

These are funds that do not invest in sectors perceived to cause harm to society, such as alcohol, tobacco, gambling, adult entertainment and the arms industry. 

It is this investment portfolio that some Islamic banks, such as Gatehouse Bank, use as a selling point to attract savers who are not necessarily looking to save based on their religious beliefs. Its website describes it as “Socially responsible. Ethical. Fair. Transparent”, it advertises “Green home finance” products, and its “Woodland Saver” savings range plants a tree for every new or renewed account.

The investments should also not involve excessive uncertainty or speculation in order to comply with Sharia principles. 

What savings rates do Islamic banks offer?

There are a number of Islamic bank savings providers currently operating in Britain, many of which frequently feature in best-rate tables. According to data from Moneyfacts there are five Islamic bank providers offering savings accounts at the time of writing.

Al Rayan Bank has been in Britain since 2004, and provides savings, current accounts and commercial property finance to around 90,000 customers. Its 12-month fixed-term deposit account offers 5.85pc, just a fraction behind the current top rate of 5.91pc offered by Metro Bank. Its instant-access cash Isa is not so competitive, however, at just 1pc versus a top-rate of 5.5pc from Mansfield Building Society.

BLME is based in London, with an office in Dubai. It was founded in 2006. It currently offers a range of fixed-term savings accounts, and a 90-day notice account. Offering 5.35pc, its notice account falls a little short of the top rate of 5.51pc, while its other fixed accounts are competitive: its one-year fix offers 5.7pc, and the two-year account is advertised at 5.6pc.

Gatehouse Bank began in 2007, and offers savings accounts, and residential and buy-to-let mortgages. While not market-leading, its one-year fixed-term account offers 5.8pc, which is not far off the top rate. Unlike most of the other Islamic banks, it also offers a range of tax-free cash Isas.

Habib Bank Zurich plc has eight branches in London, Manchester, Leicester and Birmingham. It offers both Sharia compliant and non-Sharia-compliant six-month and 12-month fixed-term savings accounts in the UK – both options offer the same returns for customers. Fix for six months and you will get 5.3pc, whereas the one-year fix offers 5.8pc.

QIB (UK) is a subsidiary of Qatar Islamic Bank, with a range of savings accounts that are currently only available via Raisin UK, a savings platform. Its fixed-term rates are not as high as the other Islamic banks listed here, however. For a one-year fixed-term account, it offers 4.9pc – compared to a top rate of 5.91pc. 

Why can Islamic banks offer higher rates? 

Despite not investing in industries that tend to make high returns (such as tobacco), Islamic banks are relatively small players in the British savings market – unlike bigger high street banks they have to work harder to attract customers’ money. This can be done by offering high savings rates (albeit sometimes for a short time, depending on demand). Unlike the bigger lenders, they may be more inclined to monitor the Bank Rate in order to remain competitive.

This follows the same pattern as many other smaller savings providers and challenger banks, who have fewer overheads and can therefore offer higher rates to their smaller number of customers.

Can anyone open an Islamic bank account? 

The process of opening an account with an Islamic bank is much the same as with any other provider; they are not restricted to any particular religion, and you will not be asked any extra eligibility questions. 

Mr Kumar said that some UK customers may be put off opening a Sharia-compliant account because they assume you have to be Muslim to apply. 

“There is a common misconception that Islamic finance products are exclusively for those of the Islamic faith,” he said, “but the reality is that they are open to everyone, including those of all or no religions.”

Any UK resident over the age of 18 can open an account at a Sharia-compliant bank.

If the rate is ‘expected’, is there a risk it will not be paid? 

It is in the bank’s interest to ensure they pay the “expected profit rate”. The bank closely monitors its investments to make sure this will happen, and Al Rayan Bank and Gatehouse Bank have always paid the EPR. 

However, there is a rare chance the bank could fail to generate its expected profit. If that happens, it will contact you and give you the option of closing your account. If you decide to do this, they will return the original deposit amount in full plus the profit at the original Expected Profit Rate.

As with all other UK-registered banks, deposits of up to £85,000 are protected under the Financial Services Compensation Scheme, so your money is covered should any providers go bust.