Sharia Law and Student Loans

  • Introduction

    Some Muslims and members of other faiths may be deterred from taking out the UK government's student loans, due to the interest payment system.

    We have prepared this page of information for undergraduate and postgraduate students who need to finance their education, and who also have questions or concerns about Sharia compliance.

  • 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.

    A new system of Postgraduate Loans for Masters' degrees in the UK has been in operation since the 2016-17 academic year. Students aged under 60 on the first day of their programme can borrow a maximum of £10,000 (2018-19: £10,609.00) to help pay tuition fees and/or living costs for both taught and research based Masters' programmes. More information on Postgraduate Loans can be read on our pages here.

    Interest is charged at current RPI (Retail Prices Index) plus 3% with repayments normally due from the April following course completion. 

    In addition to the Postgraduate Loans Scheme, the government has also announced a separate PhD Loans Scheme for student starting from 2018-2019 onwards, aimed at students without Research Council funding, as a means of expanding access to PhD study for postgraduates. There is more information on our webpages here.

    Some other loans for study do attract a commercial rate of interest. For example, some students may choose to take a Professional and Career Development Loan (PCDL) or other form of bank loan to fund their studies (especially for postgraduate study). Some people believe that this is not Sharia-compliant while others believe that if such a loan is crucial to a student accessing education, then it can be.

    The PCDL scheme will end on January 2019.  The Government announced in June 2018 that they will close to new borrowers on 24 March 2019. The final date to apply for inclusion on the PCDL training provider list or register a new course will be 30 November 2018. The final date for learners to submit applications to The Co-operative Bank will be 25 January 2019.

    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:

    • Oxford Brookes has University Financial Support to help students facing financial difficulties. To become eligible to apply for funds under this scheme, you need (a) as an undergraduate student, to have applied for your full maintenance loan; or (b) if a postgraduate student you need to have made provision to pay your tuition fees and basic living costs
    • 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)

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