For example, Al Rayan Bank's three-year fix currently has the second highest rate available – an impressive 4.6%.
The rates are certainly attractive, but what else should you consider before putting your money in a Sharia-compliant account? Read on to find out more about what Islamic banks offer and how their accounts differ from UK high street providers.
What are Sharia-compliant accounts?
Islamic banks will only invest your money into Sharia-compliant ventures. This means they won't invest in businesses that provide goods or services such as alcohol, tobacco or gambling, as these are against Islamic principles.
Anyone can open a Sharia-compliant account, regardless of their religious beliefs. The requirements for opening are the same as other savings accounts – for instance, you must be able to provide proof of identity and address, and make the required minimum initial deposit.
Find out more:Why are their rates so high?
While instant-access deals are available, the best Sharia-compliant accounts are usually fixed-term.
We used Moneyfacts data to analyse Sharia-compliant accounts over a three-month period. We found 95% of accounts offered above-average rates, and 57% in the top 20 deals. Of these, 92% were fixed-term accounts.
Islamic banks have to abide by Sharia law, so instead of paying an annual equivalent rate (AER) of interest on savings, they pay an 'Expected Profit Rate' (EPR). This means what savers earn depends on the profit the bank makes.
The high rates offered are down to the way EPRs are funded. Islamic banks can’t borrow money from the markets in the same way a high street bank can, so they need to use deposits to raise money for their Sharia-compliant mortgages, known as ‘home purchase plans’. This means they have to offer better EPRs to customers to get the cash they need.
Is EPR the same as interest?
The EPR describes the profit that the bank expects to make. It's advertised as a percentage so that you can gauge what the account offers in comparison to rates from non-Islamic banks.
However, the rate is only a target and is therefore not guaranteed. In theory, it could be adjusted at any time, but at the time of writing, we're not aware of any instances where an EPR has been reduced.
If a provider does reduce its EPR, you should be notified beforehand.
The best Sharia-compliant rates
The table below shows the best Sharia-compliant rates for instant-access and fixed-term savings accounts.
However, Islamic providers QIB and Habib Bank Zurich also currently offer above-average rates on fixed-term bonds.
Find out more:Can they beat high street banks?
Sharia-compliant savings accounts usually come with rates considerably above those offered by high street brands.
For example, the top high street rate on an instant-access saver, without opening restrictions or withdrawal limits, comes from HSBC and NatWest, both offering 1.5% AER. That's less than half the 3.6% Al Rayan offers in EPR on its equivalent Everyday Saver.
The rate gap is much tighter with fixed-term accounts, however. A one-year fix from the Bank of London and The Middle East is only slightly higher than HSBC's deal – 4.5% EPR compared to 4.15% AER.
Find out more:How your money is protected
Islamic banks offer the same financial safety nets as UK high street banks.
Under this scheme, savings of up to £85,000 are protected. This means that if a bank goes bust and you lose your savings, you can make a claim to the FSCS and you'll be entitled to get your money back.
Some other Islamic banks aren't based in the UK, but many countries have similar compensation schemes in place. Be sure to check the protections offered before you deposit your money into a foreign bank.
Find out more: undefinedsource https://www.which.co.uk/news/article/should-you-open-a-sharia-compliant-savings-account-aiQ7j7X3leUV