Student loans and Sharia Law

Most UK banks offer home undergraduates a student bank account with an overdraft facility which is interest-free up to a specified limit. The same bank may at the same time charge non-students interest on an overdraft.

The UK government offers eligible undergraduate students a Tuition Fee Loan and Maintenance Loan as part of the Student Finance funding system in the UK. These student loans incur interest on the repayments. Before 2012 this interest was set at the rate of inflation, not at a commercial rate. Therefore, the value of the amount repaid was the same as the value of the amount borrowed.

However, since 2012, interest is charged at the rate of inflation plus 3 percent during the period of study. The interest rate then varies after studies, between the rate of inflation only and inflation plus 3 percent, according to earnings.

It is important to understand that if you decide for faith reasons not to take a loan for your studies, this may have an effect on your eligibility for other sources of funding. You would need to find alternative funding such as family, friends, savings, etc, to cover the cost of your education. Some factors you may wish to consider are:

• Banks often want to see evidence of a Maintenance Loan before opening a student account with the interest-free overdraft facility.
• Some trusts and charities specifically exclude students who are entitled to a Maintenance Loan, whether they have taken it or not.
• If you are entitled to claim welfare benefits as a student, the office assessing your benefit claim will assume you have taken your loan entitlement and will reduce your benefit entitlement accordingly.

However, it is worth noting that some elements of government Student Finance are not repayable. These include supplementary grants for dependants or disability related course costs. 

If you started your course before 2016, you might qualify for a Maintenance Grant, depending on your household income.

The UK government has been exploring the possibility of an Alternative Finance system available alongside traditional student loans that will avoid the payment of interest but results in identical repayments to the conventional system. This funding would be Sharia (Shariah, Shari’ ah) compliant and overseen by a Sharia advisory committee. The UK government undertook a public consultation ending in September 2014 which has resulted in an agreement to offer an Alternative Finance product. This 'Takaful' product has received preliminary approval from Al Rayan Bank's Sharia supervisory committee and chapter 4, paragraphs 27-36 of the November 2015 government green paper 'Fulfilling our potential Teaching Excellence, Social Mobility and Student Choice [PDF 2,197KB] sets out the details of this (paras 27-36).

The latest available information is set out on pages 59 and 60 of the government's White Paper 'Success as a knowledge economy' [PDF 13,948KB] published in May 2016, which explains that the government is committed to introducing the new product, however there are currently no timescales for this.

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.

If you are a Muslim student and have secured your main source of funding for your studies, you may be eligible for some additional financial help from the National Zakat Foundation. Detailed advice about eligibility and the different areas they may be able to offer help with are set out on their website.

Interest free loans from Islamic banks

Rayan Bank (formerly Islamic Bank of Britain) currently provides bank accounts that comply with Sharia Law. For more information on the services offered and how to apply, please visit the Rayan Bank website. The bank provides additional financial services such as home financing, savings and investment services.