Six UK universities have begun advertising “interest-free” student loans designed to comply with Islamic law. The government-backed scheme is drawing sharp criticism over fears it could create a “two-tier” system, the Telegraph has reported.
The planned scheme, known as Alternative Student Finance, is set to comply with sharia law, which prohibits the payment or receipt of interest. Based on the Islamic finance principle of Takaful, it would require students to pay an equivalent “contribution” instead of interest on top of their principal, with the funds ring-fenced to finance future participants.
Takaful, an Islamic system of mutual financial assistance and risk-sharing, is widely used in Muslim-majority countries, primarily in insurance rather than higher education financing.
The Telegraph noted on Tuesday that the British authorities paid Islamic Finance Council UK more than £365,000 ($486,000) of public money to devise the new loan scheme.
The loans are expected to be introduced as part of wider changes to student finance due to begin this year, although the Department for Education (DfE) has yet to announce a launch date.
According to the newspaper, the institutions include the University of Bristol, the University of Leeds, University College London (UCL), City St. George’s, Newcastle University, and De Montfort University.
Muslims number just under four million people in the UK, accounting for around 6% of the population, according to census analysis by the Muslim Council of Britain.
Critics have questioned whether the government should create a separate student finance system to accommodate the religious beliefs of one group, arguing that this could undermine equal treatment within higher education.
Suella Braverman, Reform UK’s education spokeswoman, called the scheme “outrageous,” “anti-British” and “exclusionary,” and told The Telegraph that it would create a “two-tier education system.” She also argued that taxpayers would have to cover any shortfall if borrowers failed to repay their loans in full.
A DfE spokesperson was cited by the newspaper as calling it “completely false to assert that Alternative Student Finance arrangements would give favorable treatment to Muslim students.” He stressed all graduates would repay their loans in full regardless of which system they used, including an equivalent alternative to interest, adding that student loans differ from commercial lending, with the repayment burden managed and the system already heavily subsidized by the government.
Official forecasts show that 45% of undergraduates in England taking out their first loans in the 2025–26 academic year are expected not to repay them in full, a risk that also applies to the conventional student loan system.
A report by research center Equi, cited by Times Higher Education last month, argued that introducing the alternative financing scheme could generate an additional £450 million for the UK economy by enabling around 6,000 students who annually turn down university places because of the existing loan system to pursue higher education. The report also said the alternative funding mechanism should be available to all students, regardless of their faith.
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