Student finance compliant with Islamic law

As reported in UK Islamic Finance Law Blog  on 6 June 2014, the Department for Business, Innovation and Skills undertook a public consultation on student finance compliant with Islamic law. It should certainly be applauded for doing so and for proposing the provision of such loans.

As education is devolved, the consultation only concerned Muslim students in England.

Out of a little under 20,000 responses 94% stated that the respondent believed there would be demand for such a student finance facility. [1] The principal conclusion the government drew from the consultation is that there is (an as yet unquantified) demand and that pending legislative changes student loans could be offered as early as the 2016-2017 academic year.[2]

It is worth examining the proposed financing structure in some detail.[3] In accordance with the ban on interest no interest would be charged or payable. The proposed structure has not undergone official approval by a Shari’a Board and the government conclusion to the consultation stated that a well-known reputable Board’s approval would need to be sought.

1) A mutual insurance fund (takaful) will be established using donated funds or funds borrowed from (presumably institutional) private sources on an interest free basis (qard hasan). This fund is called ‘the Alternative Finance Fund.’

2) A fund manager (the Student Loans Company) which will be paid a fee will manage the fund (under the ‘agency agreement’)

3) A student seeking financial support for education will apply.

4) Should the application be successful, the student would make (in writing) a unilateral promise to repay the funds.[4]

5) Funds will be released to the student during the course of their educational programme.

6) Repayment terms are as follows: a) payable when the student has graduated and is in work; and b) the student’s salary  exceeds a specified threshold (which is the same as that of conventional student loans); and c) repayment will be into HMRC.

7) HMRC returns the funds to the Alternative Finance Fund.

8) Return to stage (3).

Questions to be raised which the consultation leaves unanswered:

a) regarding the Alternative Finance Fund: i) what precisely will be the source of the Alternative Finance Fund from inception until the first student repayment (3-4 years later)? and  ii) what assurance can there be that the initial funding will also be consistent with the prohibition on interest (or other structures imposed by Islamic legal compliance)?

b) the terms of the agency agreement and how compliance with Islamic law can be assured, monitored etc.

c) who will screen the applicants and what will be the criteria applicable at stage 3?  In particular will there be a religious test and means testing?

d) how will the management fees at stage 2 and the administration of the loans from stages 3-7 (screening of applicants, paying out to the students, keeping records etc) be paid for? Is it presumed that returns from the management of the fund are sufficient for this purpose? Is there a government subsidy?

e) what accounting method would be employed to ring fence or quarantine the funds once remitted to HMRC and before being returned to the Alternative Finance Fund?

f) what are the legislative changes that are required in order to implement the proposed student loans programme?

 

 

 

[1] the consultation, 8

[2] op cit, 22

[3] the description summarises and analyses the structure as set out at op cit, 6-7

[4] The consultation observes that this would be considered a charitable donation in Islamic law. It is not strictly speaking a contract. Therefore there is no issue of a gratuitous promise  — in either Islamic or English law.

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