Sharia-compliant alternative student finance

Joe Lewis

The UK Government first proposed a student finance product consistent with Muslim beliefs about interest-bearing loans in 2013. The Higher Education Research Act 2017 allows the Government to introduce such a product, but it has yet to do so. The issue has been raised in Parliament a number of times, with the delay described as “shameful” by Lord Sharkey.

In March 2023, in its response to the consultation on the Lifelong Loan Entitlement (LLE; now the Lifelong Learning Entitlement), the Government said a Sharia-compliant alternative student finance product would not be available as part of the launch of the LLE in England in 2025. The Government has said it remains committed to delivering alternative student finance “as soon as possible” after 2025.

Student loans and interest

When student loans were first introduced in England, any interest added reflected the rate of inflation only, as measured by the Retail Prices Index (RPI). This was to ensure the value of the loan was maintained in real terms.

In 2012, the Government changed the way interest was added to student loans to include a ‘real’ above inflation rate of interest. Depending on the student’s circumstances and income, loans taken out after 2012 (plan 2 loans) generally carry an interest rate of RPI plus up to 3%. For students with postgraduate loans, the interest rate charged is generally RPI plus 3%.

For new borrowers taking out student loans from 2023, the maximum interest rate will once again be set at RPI inflation.

Islamic finance

Central to Islamic finance is the belief money has no intrinsic value, but instead is simply a medium of exchange. Benefiting from lending money by charging interest or repaying more than the initial amount borrowed (‘Riba’) is consequently forbidden.

The investments made by loan companies, which might be in industries such as gambling or alcohol, are also considered problematic.

For these reasons, Muslim students may be deterred from taking out student loans from the Student Loans Company to cover the tuition fees and living costs associated with higher education. Research has shown this can act as a barrier to higher education for Muslims or cause financial hardship for those who do choose to study at university.

Findings from the Muslim Census study suggest over 12,000 students per year are affected in this way.

Consultation on an alternative student finance product

In April 2014, the Government launched a consultation on introducing a Sharia-compliant alternative finance product for students. Several criteria were established (p10):

Repayments and debt levels after graduation must be identical to current student loans.
Making repayments should be as easy as it is for current student loans.
The product must be applied for in the same way as current loans, through theStudent Loans Company.
The product should be transparent in its workings and easy for students to understand.

The Government’s response to the consultation (PDF) revealed 94% of the nearly 20,000 respondents agreed there would be demand for a Sharia-compliant alternative student finance product (p9).

The ‘Takaful’ system

The Government concluded a ‘Takaful’ system would be most suitable (PDF, p6). This is a structure used in Islamic finance and based on mutual lending and borrowing within a group.

A Takaful fund would be established and managed by the Student Loans Company away from other student loans to ensure full Sharia-compliance. Students would receive payments from the fund to attend higher education. Following their graduation, they would repay a contribution to the Takaful fund, through the tax system, to ensure future students could also benefit.

This contribution would be considered charitable from a Sharia perspective, and the mutual basis of this structure would make it acceptable under Islamic principles.

2015/16 policy papers

In November 2015, the Government published a green paper setting out proposals to reform England’s higher education system (PDF). These included introducing a new Sharia-compliant alternative student finance product based on the Takaful system (pp40-41).

In May 2016, these proposals were included in a white paper, which said the alternative student finance product “will be open to everyone and will not result in any advantage or disadvantage relative to a student loan, but will avoid the payment of interest” (pp59-60).

Higher Education and Research Act 2017

In 2017, the alternative student finance proposals were enacted in sections 86 and 87 of the Higher Education and Research Act 2017. These allow the Government to introduce an additional model of student finance called “alternative payments”, which would not carry any interest.

The Impact Assessment (PDF) published alongside the initial Bill highlighted the benefits of introducing an alternative student finance product for Muslim students and the UK economy (pp203-19). These included:

Removing a barrier to higher education for those unwilling to take out a loan for religious reasons.
Higher income tax and National Insurance payments because of a greater number of graduates.
Benefits to employers facing skill shortages.
A better higher education experience for students able to access financial support consistent with their religious beliefs.

In July 2019, the House of Lords debated why, despite the passage of the Higher Education Research Act, a Sharia-compliant student finance product was yet to be launched.

Review of Post-18 Education and Funding

In 2018, the then-Prime Minister, Theresa May, announced a government-led review of post-18 education and funding in England. In May 2019, an independent panel report (the Augar report) was published as part of the review.

The report proposed a number of changes to the student finance system but did not address the issue of a Sharia-compliant product in detail, only saying (p177):

It is important that students should be able to access finance support that is compatible with their religious beliefs. The government will need to consider carefully how the changes we are proposing to the student finance system affect plans to introduce a system of alternative student finance for students who feel unable to access interest-bearing student loans for reasons of faith.

In January 2021, the Government published a short interim conclusion to the review that made no mention of introducing a Sharia-compliant alternative student finance product. In response to a petition on the subject that same month, the Government said it was working through the “complex range of policy, legal and system issues” that still needed to be resolved.

A further update was promised as part of the review’s full conclusion.

Government conclusion

On 24 February 2022, the Government concluded its review and published a policy statement setting out reforms to the student finance system.

It also launched a consultation on the Lifelong Loan Entitlement (LLE), which will replace the current student loans systems in England and provide individuals with student finance to use throughout their lives from 2025. The entitlement has since been rebranded as the Lifelong Learning Entitlement.

The only mention of Sharia-compliant student loans as part of the conclusion was a short paragraph in the policy statement. It said the Government will consider “if and how” alternative student finance could be delivered as part of the LLE (p23).

Lifelong Learning Entitlement

On 7 March 2023, the Government published the outcome of the LLE consultation.

The Government confirmed the LLE will provide all new learners in England with a tuition fee loan entitlement to the equivalent of four years of post-18 education to use up to the age of 60 from 2025. This would be £37,000 in current fees to use on full courses and modules. People who have already received some publicly funded student finance may be eligible for a “residual entitlement”. Maintenance loans for living costs will also be available.

A Sharia-compliant alternative student finance product will not be available as part of the launch of the LLE in the 2025/26 academic year. The LLE consultation outcome said the Government remained committed to delivering such a product and hoped it could be accessible “as soon as possible after 2025” (PDF, p25).

Alternative student finance policy paper

In July 2023, the Government published a policy paper and blog post on its plans for alternative student finance in England. They confirmed the new product would be:

based on the Islamic finance principles of Takaful;
available to any undergraduate students eligible for student finance;
managed by the Student Loans Company and identical in terms of available funding and repayment amounts and timings;
available “as soon as possible” after 2025.

The Government said it is working with the Islamic Finance Council UK to ensure alternative student finance would be compliant with Sharia law. It also said it will need to create secondary legislation to set out how the new system will work.

In September 2023, the Education Minister Baroness Barran said she meets on a quarterly basis with the Student Loans Company, the Islamic Finance Council UK, parliamentarians, and representatives from the Islamic community “to discuss the steps the Government are taking to deliver alternative student finance as swiftly as possible.”

December 2023 progress update

On 14 December 2023, Baroness Barran wrote to the House of Lords with a progress update on Alternative Student Finance. She said the Government remained “strongly committed” to delivering a form of alternative student finance compatible with Islamic finance principles.

Baroness Barran said work with the Student Loans Company (SLC) “to understand the cost, timeframes, and possible delivery solutions” of alternative student finance was on track to finish by the end of March 2024. She said the next phase of work would be “planning delivery activities and identifying where changes need to be made across SLC systems and products” in order to introduce a Sharia-compliant alternative student finance product.