Islamic finance is based on the teachings of the Kuran.  These teachings provide the basis coinsof 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.  Investment in alcohol, pork, weapons and pornography is also forbidden.

 

Lending and Borrowing

 

During the time of the Prophet Muhammad many people made money through Usury (lending money at exorbitant rates of interest).   As a reaction to this, Shariah law prohibits the charging or receiving of interest, or ‘Riba’.  This means that a fixed return on an investment is not allowed, neither a fixed amount of interest as a charge for lending money. 

 

There are four main financial arrangements that have evolved to comply with these principles:

 

Musharaka – or ‘partnership’.   Capital is placed with another party or parties and the losses or profits from the venture are shared.  The ratio by which profits are shared is agreed by all parties at the outset, but losses should always be proportionate to the amount invested.

 

Murabaha – A contract is made between someone who wants to buy something, and someone who will buy it for them, typically a bank.  The two parties agree on the amount that the goods cost plus an agreed profit margin for the bank.  The bank then sells the item to the client at an agreed mark up, and repayments are usually made in instalments.

 

Ijara – A bank buys a property or piece of equipment and leases it to a customer for an agreed rental price, which includes an amount of profit for the bank.

 

Muduraba – One party provides capital for the another to invest.  Any profits are shared on a pre-determined basis, but the losses are borne by the one who provides the capital.

 

Student Loans

Opinion among Islamic scholars is divided as to whether or not the interest charged on a Student Loan constitutes Riba.   The interest charged on the student loan is linked to the rate of inflation, so the amount paid back is the same value as the amount borrowed.  Some scholars argue that this means that a student loan is not Riba.  Others, such as Muhammad ibn Adam al-Kawthari of Darul Iftaa, Leicester maintain 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."(http://www.central-mosque.com/).  Dr. Monzer Kahf, a prominent Muslim Economist believes that the interest charged on student loans does constitute Riba, “although it less severe than normal increments that are not tied to inflation." (http://www.islamonline.net/)

 

It has been argued that taking a Riba-based loan to finance education is permissible in certain circumstances.  Dr. Muzammil Siddiqi, former president of the Islamic Society of North America (ISNA), says: "Like all other loans, Student loans are also permissible as long as they don't involve interest. However, if a student is in dire need to pursue his/her studies and no loans are available without interest, then in that case, under the rule of necessity, it will be permissible for the student to take the minimum loan and he/she should pay it back as soon as possible”.(http://www.islamonline.net/)

 

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 such a product, but it is not available as yet.

 

Students who choose not to take out loans should be aware that this decision has a knock on effect in terms of other funding as the Access To Learning Fund regulations require students to have applied for their maximum student loan entitlement before they can apply.  Any full-time students who have an entitlement to claim benefits will have the student loan taken into account as income whether they take one or not.

 

Other Options

Students who do not wish to take out any student loans for their tuition fees or maintenance should consider the following possibilities:

 

In reality, it will be difficult for many students to find the money to pay tuition fees without taking out a loan.

 

coinsSharia Compliant Banking

 

As well as the Islamic Bank of Britain (http://www.islamic-bank.com/), both Lloyds TSB and HSBC offer Shariah compliant bank accounts.  Lloyds TSB offers a specific Islamic Student Bank Account.

 

1st Ethical Charitable Trust recently wrote an article (dated 12 November 2010) about the impact of raising university tuition fees in England for 2012/13 and what this might mean for Muslim students. You can read it here

 

With thanks to the Federation of Student Islamic Societies for their help in providing this information.

 

"The Smart Money initiative at the University of Westminster is part of a national project aiming to improve students' financial capability, led by the the Consumer Financial Education Body (CFEB)"