Islamic finance is based on the teachings of the Quran. These teachings provide the basis of Islamic, or Shariah, law. One of the fundamental principles of Shariah finance is that money has no intrinsic value but is purely a medium of exchange. Money should not be made from money itself, but through legitimate trade in goods and services. The Institute of Islamic Banking and Insurance states that 'as a matter of faith, a Muslim cannot lend money to, or receive money from someone and expect to benefit – interest (known as riba) is not allowed. Riba also applies when borrowing money, as the lender profits from the applied interest. To comply with Shariah, any loan must be Qard (free of profit)'.
Are student loans Qard?
Student loans do accrue interest but at a very low rate, equivalent to the rate of inflation. On a loan of £22,000, this could mean repaying £27,000 in total (based on 2.5% inflation and repaying the loan within 6 years of graduation). The difference ensures that the value of the loan that is repaid remains the same in real terms as the amount borrowed.
Islamic scholars are divided on whether student loans are compliant with Islamic (Shariah) law, with the argument hinging on whether the loans are in essence interest-free. Muhammad ibn Adam al-Kawthari of Darul Iftaa, Leicester states that "when a loan is paid back, then the rate of inflation is not considered according to Shariah. One can only claim back exactly the amount which was given as loan." Dr. Monzer Kahf, a prominent Muslim Economist also believes that the interest charged on student loans does constitute Riba, “although it is less severe than normal increments that are not tied to inflation."
There are clearly issues for some Muslims about taking out a student loan, but at present there is no Shariah compliant alternative. The Islamic Bank of Britain is investigating the possibility of introducing a student loan, but it is not available as yet. Some financial institutions have Sharia-compliant financial services. They guarantee that money held in these accounts is not invested in industries such as gambling, alcohol or weapons manufacturing.
Alternatives to Student Loans
Charitable trusts often require evidence that applicants have taken their full entitlement of statutory funding before applying for further support. If applying for help, it’s therefore advisable to contact the trust first to check whether they are able to consider an application based on you not taking the loan for faith reasons.
A number of banks offer Shariah compliant facilities. The Islamic Bank of Britain was one of the first to do so in Britain and offers deposit bank accounts as well as a Halal Personal Finance Facility, a form of borrowing with repayments beginning immediately.
As a rule current accounts which offer an overdraft facility are not Shariah approved. However Lloyds TSB: Islamic Student Account offers an interest-free overdraft of up to £1500 and is Shariah compliant, although exceeding the overdraft limit would incur interest. You can find out more here: Lloyds TSB: Islamic Financial Services.
Al Rayan Bank offers Shariah compliant banking in the UK.
Most banks offer interest-free overdrafts on student accounts. However the account itself will not be Shariah compliant unless specifically stated.