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UK Government consultation on Shariah compliant student finance


4 April 2014 Addendum added 5 February 2017

On 3 April 2014, the Daily Telegraph had a story "Plan for 'Sharia-compliant' student loans to get more Muslims into university." It explained that Universities Minister David Willetts MP was launching a consultation on Shariah compliant student loans. The issue arises because the conventional student loan scheme involves the payment of interest, and some Muslims refuse to use interest paying contracts for religious reasons.

This consultation is a natural follow on from the commitment that Prime Minister David Cameron gave when speaking at his Eid al-Adha Reception on 21 October 2013:

"I want Britain to be one of the world centres of Islamic finance. And that should go from the highest and most mightiest financial institution all the way to things like start-up loans that we have introduced and are fantastically successful – we've got tens of thousands of young people taking them on and starting up their own businesses.

And tonight I can announce that we will make sure that there is a type of start-up loan that is totally consistent with all the principles of Islamic finance. We must do that for start-up loans, we must do it for student loans, we must do it for enterprise allowances and for all of those things. That's what a welcoming, tolerant, multi-racial country does."

The full consultation document can be downloaded from the UK Government website. While it is 23 pages long, there are only a few key pages and it is quite quick to read.

How the proposed scheme works

The consultation document sets out on page 10 the fundamental principles underlying the design of any alternative student finance scheme:

"Repayments after graduation and debt levels must be identical to that of a traditional loan, so that students who chose the alternative finance product would be in no worse or better position than those who took out a traditional loan.

Making repayments should be as easy for students who chose the alternative finance product as it is for those students with traditional loans, therefore it should be possible for repayments to be made directly through the UK tax system.

The alternative finance product must be applied for in the same way as a traditional loan, through the Student Loans Company, to ensure that no extra burden be imposed upon the student.

The finance product should be transparent in its workings and easy for potential students to understand."

The document goes on to explain how the alternative scheme was devised:

"Using these objectives, the Government has worked with experts in Islamic Finance to select one potential finance product which could meet all of these key criteria. The finance product the Government has identified is based on the ‘Takaful’ structure used in Islamic finance to allow groups of people to cooperate to provide mutual finance assistance to members of the group. This type of mutual fund model is familiar to Sharia scholars and many UK Muslim families, who use a similar concept to raise funds between cooperating relatives.

This model of student finance product was proposed and developed by experts in Islamic finance and has been approved by the Sharia Supervisory Committee [link added by me] of the Islamic Bank of Britain."

Other pages give more details about how the alternative scheme is structured. I will not attempt to summarise them.

Consultation questions

The consultation asks six question which I have reproduced below:

  1. "To what extent, if any, are you aware that students with religious objections to the charging of interest have been affected by the changes in to tuition fees and student loans? Please illustrate your answer with any specific examples you may have.
  2. Do you believe that there would be demand among students and potential students for an alternative finance product which was Sharia-compliant?
  3. Do you believe that students will be satisfied with the opinion of a Sharia advisory committee as to the Sharia-compliance of an alternative finance product?
  4. Do you believe that students whose faith has resulted in concerns about the interest rate on traditional loans would find this alternative finance product acceptable? If not please provide an explanation.
  5. Do you believe that the working of the proposed alternative finance product would be understandable to students?
  6. Do you believe it will be clear to students why this alternative finance product is Sharia-compliant? If not please provide an explanation."

The consultation page sets out the many ways to respond. I encourage everyone who is interested to respond. The easiest way is probably to use the online form which uses the familiar Survey Monkey tool. The response deadline is 12 June 2014.

I have already responded and am happy to make my response publicly available.

The conventional student loan scheme

In 2011 and 2012 along with others I had a number of meetings, pro bono, with the Department of Business Innovation and Skills, which is the relevant department, about the issues involved in devising a Shariah compliant student finance scheme. However I was not involved in designing the scheme which is now the subject of consultation.

These meetings gave me a detailed understanding of the conventional student loan scheme, which is still not very well understood by parts of the media and many prospective students. As part of my involvement I prepared an Excel workbook which I used to model the conventional loan scheme and a Shariah compliant alternative. That workbook allows one to input varying assumptions about student fees, future rates of inflation, future salary levels, to see what happens. I am happy to share my model of the conventional scheme, subject of course to the disclaimer which is at the foot of every page of this website.

Concluding comments

I commend the Government for recognising that the conventional student loan scheme prevents some Muslims from attending university and for the efforts it has put in to devise a Shariah compliant alternative.

I would expect Muslim students' reactions to an alternative student finance scheme to be similar to Muslims' attitudes to banking discussed on my page Are Islamic banks Islamic enough? Accordingly I expect three behavioural responses:

  1. Some Muslims will be happy to use the conventional student loan scheme, as many do now.
  2. Other Muslims will use the Shariah compliant alternative.
  3. Some Muslims will conclude that they do not consider the alternative scheme to be Shariah compliant. They will either finance their university education by other means, or will not attend university.

Each person has to reach his own conclusions regarding such religious issues, since each of us is individually responsible to God for our actions.

Addendum - Government response to consultation

In September 2014, the Government published its formal response to the consultation.

The response concludes as follows:


The Government has analysed all of the responses to the consultation. It is clear there is a demand for an Alternative Finance product, although the extent is unquantifiable. The Takaful option would be largely accepted as long as it is verified with a combination of a clear and transparent explanation of how the Alternative Finance product works (there is no consensus amongst Muslims as the UK has a very diverse Muslim population from all the mains schools of thought).

Additionally an endorsement by a widely acceptable Sharia advisory committee stating what makes it Sharia compliant would also be required. The awareness raising campaign and on-going communications through Student Loans Company’s student loan tours and links with community groups should also reassure those whose faith has resulted in concerns over interest charged on traditional student loans.

Currently the Secretary of State has the powers to offer loans and grants. The Government would require new primary legislation to enable to Secretary of State to offer the Alternative Finance product, and this will take time as an appropriate legislative window would need to be identified. The Government will also need to conduct a full feasibility study as to whether the Student Loans Company could provide the Takaful and the role of Her Majesty’s Revenue and Customs in collections would also need to be verified.

However, in light of the positive 20 Sharia-compliant student finance response to the proposals in the consultation, the Government supports the introduction of a Sharia-compliant Takaful Alternative Finance product available to everyone and will work on its development.


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