A funny thing has happened in one corner of the banking world - Sharia-compliant fixed deposits, known as mudaraba, are outclassing their competition at western banks, despite the latter being allowed to pay interest. In some cases, that means deposits posted at Islamic banks are paying 4 per cent or more per annum in profit, while many interest-bearing deposits struggle to pay 2 per cent.
At Noor Islamic Bank in Dubai, for instance, a 12-month investment in its mudaraba pool recently paid 4.25 per cent on a minimum Dh10,000 deposit. You can read the list of the most recent profit rates in our Rates Report on the right of this page. To summarise the way mudaraba works, the bank acts as an intermediary between a group of investors - which includes your fixed deposit - and a group of entrepreneurs working on a project.
Each group takes an appropriate share of the profits, or in some cases the losses. An Islamic fixed deposit, then, adds your investment to this pool. Total returns have been higher recently because traditional banking depends on spreading interest around and in today's slow economic climate, there are few opportunities to collect significant interest. "The Islamic banks invest in industries with higher capital return, such as oil, gas and physical infrastructure," says Dr Jamaldeen, an Islamic finance expert based in London.
"Account holders are like shareholders in the group, sharing profits, and more investments influence the Islamic banks to pay out more in profits." Of course, Muslims will have no problem buying into mudaraba, as no interest is paid or charged at any time. However, these investments have a few caveats to consider. First, obviously you need to be able to let go of your deposit for the whole term, and longer terms pay out better profit rates. Also, expect to have profit paid out at the maturity of the deposit instead of monthly or quarterly, although there are exceptions.
Also, as with normal fixed deposits, you will need a minimum of Dh10,000 to invest in mudaraba, although this can vary slightly by bank. Many Islamic banks sweeten the deal by giving you a free savings account on the side, or the ability to take out a personal loan against your investment. The most important point to remember is that the rates are based on physical profits, so your return is not 100 per cent guaranteed. However, rates have remained relatively stable so far this year.
mryan@thenational.ae