Interest-Free “Sharia-Compliant” Student Loans: How the New Scheme Works and Why It Has Sparked a Row

Updated 10 Nov 2026, 15:27 · First published 10 Nov 2026

Universities across the UK are telling students about a new government-backed student loan that does not charge interest, designed to be compatible with Islamic finance rules. The scheme has prompted a political row.

The “Alternative Student Finance” product is being developed by the Department for Education. No launch date has been set, but some universities say it could be available for the 2026-27 academic year.

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How does the interest-free student loan work?

Instead of interest, borrowers pay an equivalent “contribution”. That money goes into a ring-fenced fund used to support future students on the scheme, rather than going back to the Treasury. The government says graduates will repay the same amounts, on the same timetable, as those on standard loans.

The scheme was announced in principle years ago and the government confirmed in June 2025 that it “doesn’t include interest”. Islamic Finance Council UK was paid more than £365,000 to help design it.

Why was it created?

Many Muslim students say standard loans, which charge interest, conflict with their faith. A 2021 Muslim Census survey of nearly 39,000 British Muslims found 80% of students felt conflicted by regular loans. Universities including Bristol, Leeds, UCL, City St George’s, Newcastle and De Montfort now mention the new option on their websites.

What are the arguments for and against?

Supporters say the scheme simply makes sure no one is shut out of university because of their faith, with everyone repaying on the same terms. Critics argue it creates a “two-tier” system and point out that taxpayers still cover any loans that are never repaid – official forecasts expect almost half of student debt to go unpaid across the whole system.

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