Changes to higher education funding which came into effect in September 2012, have presented Muslim and non-Muslim students alike, with the difficulty of paying up to £9,000 in tuition fees each year. Consequently, an even greater majority of students will be setting their sights on a student loan to fund their studies, including some of those who might have been funded by family before the policy change. The student loan however, now carries a real rate of interest above inflation and many Muslims believe this would be incompatible with their beliefs. Prospective Muslim students are now faced with the dilemma of forsaking higher education, or paying interest on a student loan in the future.
The UK Government, having acknowledged this difficulty, has since worked with experts in Islamic finance to develop an alternative finance model which would be Shari’a compliant. The proposed model had received preliminary approval from the Al Rayan (at the time Islamic Bank of Britain’s) Shari’a supervisory committee. The Government then lead a consultation with the general public to ascertain the demand for Shari’a compliant student finance and the acceptability of the proposed product in the eyes of those adverse to traditional student loans. A key concern in developing the alternative finance model was that it should be equitable with the traditional student loan, so that consumers of either would not be better or worse off than the other.
The Alternative Finance Model
The model is based on a Takaful contract which is similar in nature to a mutual fund. The basic idea is that students opting for this product would join a fund from which they receive the finances for their education. Upon graduation, repayments are made back into the fund and are used to provide finance to future students who join the fund. The initial amount within the fund would either be donated to it or loaned to it interest-free. To ensure that students under both financing schemes are treated equally, application and repayment of the alternative finance product are made in the same way as the traditional loan. The product then functions as follows:
- Prospective student applies to the Student Loans Company (SLC) for alternative finance in the same manner as would be for a traditional loan.
- A Shari’a compliant contract is signed with the student fully aware of all the terms.
- The fund managed by the SLC and overseen by a Shari’a supervisory board to ensure Shari’a compliance provides the finance.
- Once graduated, just like traditional loans, repayments are made once earnings are above the threshold (of £21,000 p.a.) and are collected in the same way too – through the UK tax system.
The total contribution would be equal to that received from a traditional student loan. The distinguishing factor is that although repayments under both products are equal in size, the repayments from the alternative finance model are treated in a different way. They are returned to the fund which is ring-fenced, to ensure there is Shari’a compliance at every point in the cycle, and are only used to provide finance to new fund members.
The consultation with the public ran for 10 weeks from the beginning of April 2014. It sought to determine mainly if the proposed model was acceptable and understandable. Nearly 20,000 responses were gathered with the main conclusions being that there is definitely a demand for Shari’a compliant student finance, and that the vast majority of respondents were in favour of the Takaful model. Throughout the consultation however, one concern which was continually flagged up, was the desire to ensure the product is Shari’a compliant by having it certified and supervised by a credible Shari’a supervisory committee.
The Government have therefore expressed their support for the introduction of the Takaful product, and have resolved to work on developing it with Islamic finance specialists, whilst exploring how it can be made available through the SLC. In addition, new primary legislation is required to enact this product so the Government do not expect it to be available before the 2016-17 academic year.
There has not been jubilation in Muslim communities since the Government’s proposals have been announced. The universal student grievance of debt/repayment still remains and disparate voices in the consultation have highlighted a controversy surrounding the alternative model. A small number thought the product was not Shari’a compliant as it simply replaced interest with a Takaful contribution. The reality is however, that as long as the Government is determined to ensure that students under both schemes are treated in the same way, the repayment structure of both will have to remain similar. The educational charity 1st Ethical, who together with organisations such as NUS and FOSIS, were part of the awareness – raising campaign ‘Bright and Halal’, have stated that they support the conclusion to develop the model ‘as per their (the Government’s) stated conditions that there is a clear and transparent explanation of its workings and endorsement from a suitably drafted sharia scholar panel’. They believe the next steps are to create a political lobbying campaign in time for the 2015 general election, to have the legislation passed early in the new parliament. We await further developments