The Islamic finance sector is growing rapidly, with increasing demand for Shari’ah-compliant financial products. However, the current Consumer Credit Act 1974 (the "Act") presents challenges for Islamic financial institutions (IFIs), as its provisions do not fully accommodate the principles of Islamic finance.

Example terminology issues in the Act

The Act frequently references "interest" in provisions such as APR (Annual Percentage Rate), default sums, and early settlement rebates. For Islamic finance products, which replace interest with profit-sharing or other Shari’ah-compliant mechanisms, this terminology is problematic both from a compliance and consumer clarity perspective. For example:

1.    APR and Profit Rate: While APR is a standard benchmark for comparing costs in conventional finance, it does not align with the profit-based structures of Islamic finance. A more inclusive definition that accommodates a "profit rate" would allow consumers to compare conventional and Shari’ah-compliant products more effectively.

2.    Right of Withdrawal: Under section 66A of the Act, borrowers withdrawing from a credit agreement must repay the credit plus interest. For IFIs, this could be reframed as repayment plus a "profit rate" to ensure compliance with Shari’ah principles while maintaining parity with conventional lenders.

3.    Default Sums: Section 86F of the Act permits lenders to charge "simple interest" on default sums. Islamic finance typically requires alternative remedies, such as charitable donations or penalties not benefiting the lender. Adjustments to the Act could allow IFIs to recover costs through a "profit rate" or equivalent mechanism.

4.    Early Settlement Rebates: The Act provides borrowers with a rebate of interest for early repayment. However, under Shari’ah principles, this is not strictly permitted, and any such rebate has historically been discretionary, as Islamic finance prohibits altering the agreed repayment price once the terms are set. The Act could be amended to explicitly recognise "profit rate" rebates, ensuring that IFIs can offer early settlement benefits while adhering to Shari’ah principles.

Next steps

To support the growth of Islamic finance in the UK, HM Treasury should:

• Conduct a focused review of the Act’s language and definitions.
• Engage with the Islamic finance industry, including scholars and IFIs, to identify additional challenges.

By addressing these issues, the UK can foster financial inclusion while maintaining robust consumer protections.