Islamic finance: what is it and how does it work?

Islamic finance is a way of managing your money in accordance with the principles of Islam and Sharia law.

Discover more about what it is, how it works and how to find a financial adviser who specialises in Islamic finance below.

Islamic or Sharia bank accounts work in their own particular way.

Since Islamic law does not permit the earning of interest, a Sharia-compliant bank must operate differently than a regular bank, and Islamic finance products must follow similar rules.

Maintaining your finances according to this law can have many other implications.

There are a number of specialist financial advisers who are experts in Sharia finance.

How does Sharia finance work?

There are several types of banking and finance arrangements under Islamic law, governing everything from saving and investing money to taking out loans.

• Wakala: Your bank uses your cash to invest in Sharia-compliant ventures to generate a return for you.
• Musharakah: This is a form of investment, which allows you to contribute funding to a venture (for example) alongside your bank, and you and the bank share both the risks and the returns.
• Ijara: Your bank buys an asset (for example, a car) for you and leases it back to you. Your payments may include instalments towards fully purchasing the item.
• Murabaha: This is the Sharia version of a mortgage. Your bank buys the property and allows you to buy it from them in instalments (plus a small margin) while registering you as the buyer from the start.
• Mudaraba: An equity financing partnership, in which one party provides the capital and the other provides the labour.
• Salam: A contract for advance payment on goods to be delivered later.
• Sukuk: A type of bond for investing in assets
• Takaful: A mutual insurance contract that allows the sharing of risk between business partners.

In all these arrangements, a board of advisers will ensure compliance with Islamic law and avoid any investments in tobacco, alcohol or other prohibited substances or activities such as gambling.

For additional information on buying property, read our helpful guide on Islamic mortgages here.

What qualifications will an Islamic financial adviser have?

Ideally, you will want to look for an adviser who holds the Islamic Finance Qualification (IFQ).

The IFQ is an international qualification covering the technical and Sharia aspects of financial planning, accounting, insurance and business.

However, the IFQ is a relatively recent qualification, so not all financial advisers who can advise on Islamic finance will necessarily have it.

This does not mean they will be any less competent, but when you first speak to the adviser, you should ask them to explain how and why they are qualified to offer you Sharia financial advice.

Furthermore, an experienced Islamic IFA working in the UK should be suitably qualified in Western financial advice.

There is a wide variety of IFA qualifications in the UK, covering many specialist areas. Most of these will overlap at least partly with key areas of Sharia finance and demonstrate your adviser’s understanding in these disciplines.

Look for an adviser with qualifications that cover the areas of expertise that you need. See a list of standard IFA qualifications.

How to find the right Islamic financial adviser for you

When you search for a financial adviser using Unbiased, you can ask specifically to find advisers who can offer guidance on Islamic finance.

There are two ways to do this.

The simplest and quickest way is to click the Financial adviser button on the homepage. Click 'Continue' and then 'Show more options' which should reveal ‘Sharia finance.’

Click that, and proceed with your enquiry as normal.

Another way is to browse a list of financial advisers who can provide Sharia advice.

On the financial adviser page, click Browse adviser directory, select 'Sharia finance' and your estimated assets and postcode. The list will show only those who can offer this service.