For years, when someone has asked me if Islamic Student Finance has been coming, I’ve replied by saying “I wouldn’t hold your breath”.
But maybe, this time, it might actually happen.
The Department for Education has published a preliminary market engagement notice on Find a Tender, asking banks whether they can provide an Islamic-finance-compliant account to hold the Alternative Student Finance (ASF) Takaful fund.
The notice isn’t yet a tender – it’s DfE at the preliminary stage of asking the market whether it’s feasible, whether compliant accounts exist, what it would cost, and how long setup would take. The actual tender notice isn’t expected until January 2027, and the contract dates on the notice run from 31 August 2027 to 31 August 2034.
It’s been a looooooooooooooooong time coming, this. In 2013, David Cameron promised a solution in a speech at the World Islamic Economic Forum:
Never again should a Muslim in Britain feel unable to go to university because they cannot get a student loan – simply because of their religion.
Sections 86 and 87 of the Higher Education and Research Act – the primary legislation that gives ministers power to introduce the product – were passed in April 2017. All these years on, the product still doesn’t exist.
And there’s a reason. ASF is being asked to pass three tests at the same time – Shariah compliance, strict parity with Plan 5, and fund coherence as a genuine Takaful mutual. DfE’s public material explains the first two. It doesn’t really engage with the third. And without the third, the argument for the product being different in kind from a conventional loan starts to wobble.
Irony of ironies? The shape of what’s emerging looks eerily like the thing everyone has spent a decade insisting couldn’t be done – a graduate tax.
The Alternative
UK student loans charge interest – which you also have to repay. Islam forbids paying or receiving interest, which is called riba in Arabic.
So some Muslim students feel unable to take these loans without breaking their faith. Research by the Muslim Census in 2021 estimated that over 12,000 students a year are affected – either not going to university at all, or paying out of pocket rather than borrow.
ASF is built around an Islamic finance structure called Takaful. Takaful is a form of mutual cooperation – a group of people all put money into a shared pot, and anyone in the group who needs help can draw from the pot.
It’s meant to be self-supporting. Members put in, members take out, it balances over time through contributions. That mutual structure is the whole theological reason Takaful is considered permissible under Islamic law when conventional interest-bearing loans are not.
The Department for Education (DfE) has engaged the Islamic Finance Council UK (UKIFC) – an advisory body that specialises in Islamic and ethical finance – to advise on the product.
UKIFC has appointed a three-person Islamic Finance Supervisory Board of scholars to certify it as Shariah-compliant before launch. The Student Loans Company (SLC) – which administers student loans on behalf of government – started operational work on delivery in August 2023, and is still going.
It’s all about the numbers
Under Plan 5 – the student loan for anyone who started university in England from 2023 – the government expects about half of graduates to repay in full. The other half don’t. They either never earn enough to trigger repayments, or the 40-year clock runs out before they finish paying.
The government absorbs the gap. Recent HEPI and London Economics modelling puts that gap at around 17p for every £1 lent – the “RAB charge” (Resource Accounting and Budgeting charge, Treasury terminology for the portion of lending the government doesn’t expect to get back).
In the early scheme documentation, ASF contributions were described as “equivalent” to Plan 5 repayments. That left a sliver of ambiguity – which could in principle have allowed a calibration buffer, with ASF contributions set slightly higher than Plan 5 repayments to make the fund balance.
But the language has since hardened. The June 2025 DfE blog post states that “the amounts and timings of contributions back to the Takaful fund will also be identical to repayments made for mainstream loans” – identical, not equivalent – and that ASF users “will pay the same amount towards their studies as those who use the standard student loan system”. The guidance repeats the point – contributions of “the same amount and at the same time” as conventional loan repayments.
ASF users pay exactly what Plan 5 users pay, drawn down against exactly the same triggers. Which means ASF inherits exactly the same cashflow profile as Plan 5 – and by inheriting the cashflow, it inherits the expected public subsidy that sits behind it.
Because if contributions match repayments pound for pound, then for every £1 the ASF fund pays out, only about 83p is expected to come back in. That subsidy has to sit somewhere.
A Takaful fund is supposed to be self-supporting. That is literally the whole theological argument for why Takaful is structurally different from a conventional interest-bearing loan. Members fund each other through mutual contribution – not through an outside party making up the shortfall. If ASF mirrors Plan 5 cashflows exactly, by design it cannot be self-supporting from contributions alone. So what is to be done?
Mind the gap
There are three ways to close the gap and all three create problems.
- Treasury underwrites the fund on an ongoing basis. In which case the “ringfenced” fund – meaning a separate pot kept apart from general government money, which is how it’s described in every public document – is operating on implicit public subsidy. The theological argument for why the structure is different from a conventional loan gets harder to sustain, because part of the economics is being carried by the state rather than by the mutual.
- ASF contributions are set higher than Plan 5 repayments so the fund balances. This breaks the parity promise that DfE has now explicitly made – identical amounts, identical timings, no detriment, no advantage. The whole public basis of the scheme collapses. Take-up likely collapses too, because nobody would rationally choose the more expensive product.
- The fund runs out, which isn’t a real option either.
So there’s a structural tension in the design. The product can’t be all three of genuinely self-supporting, financially identical to Plan 5, and free of ongoing public underwriting. You can have any two. You can’t have all three.
Some participants in the 2019 DfE-commissioned research raised exactly this concern in their own words. One asked: “what if more people are taking out of the fund than are paying back into it?” Another worried that “the fund might be limited and could run out.”
And all of that connects directly to our old friend – variation.
The risk that government changes the terms of the loan after students have signed up for it is very real. Martin Lewis’s public row with the Chancellor over the Plan 2 threshold freeze is the current live example of how government actually behaves.
Unless contributions exceed the mainstream system, some part of the ASF economics has to be underwritten by government – and any mechanism for topping up or smoothing the fund requires regulatory change. Every regulatory change potentially reopens the Shariah analysis – the Islamic legal assessment of whether the product is still compliant. The variation problem is structurally guaranteed by the design.
Can the agreement even bind?
Classical Islamic contract law requires certainty about material terms at the point a contract is formed. Gharar – excessive uncertainty about what you’re agreeing to – invalidates the contract. Iltizam, the binding obligation that flows from a valid contract, depends on both parties knowing what they’re actually bound to.
But as we know, student finance is built on regulations (ie terms) that ministers can vary by statutory instrument. And they often do. BBSI flagged exactly this point in Section 4.8 of their February 2024 guidance, quoting the government wording and noting that any material amendment would require the Shariah analysis to be reconsidered.
What BBSI didn’t push on is the sharper version of the question. Not “will ASF remain compliant if terms change” but “is ASF even a compliant contract at the moment it’s signed, given unilateral variation is baked into the statutory framework it sits within?” One is a reanalysis problem. The other is a formation problem, and formation problems are harder to fix.
Back in the day, Martin Lewis (worked on with someone called Wes Streeting) would have stripped ministers of the power to make negative changes to student loan terms after sign-up, and would have brought student loans under FCA regulation. The amendments were defeated, and Labour has pulled the stunt itself now it’s in office.
Which leaves ASF participants in a strange position. They’ll be asked to enter a Shariah-certified contract within a statutory framework whose design permits the exact kind of unilateral modification Islamic contract law is most uneasy about. The Islamic Finance Supervisory Board may well conclude that the mechanism is acceptable – perhaps by treating some terms as essential and others as accidental, or by arguing that informed consent to the statutory regime counts as advance acceptance of variation. But still.
Problems pile up
And that’s not the half of it.
When does an ASF participant stop contributing? The current gov.uk page is explicit that secondary legislation is still required to specify “how we will calculate contributions back to the Takaful fund”. The mechanism – the thing that determines when a participant has contributed enough to stop – has not been set out publicly. And the design choice determines whether ASF breaks parity with Plan 5 or breaks with Takaful itself.
Under Plan 5, the stop condition is mechanical. You’ve got an outstanding balance – drawdown plus accrued RPI interest. You pay 9 per cent of earnings above £25,000. You stop when either the balance hits zero, or the 40-year clock runs out since you became first eligible for repayment. About half of graduates never clear the balance and hit the time limit – the other half pay it off before 40 years.
Under a Takaful structure, the concept of a personal “outstanding balance” doesn’t really exist. You’re contributing to a mutual pot, not paying off a debt. So the stop condition has to be constructed from scratch, and every option creates a problem.
- Option A – stop at drawdown (no interest-equivalent). Cumulative contributions equal the amount you drew down, then you stop. This is theologically clean – you’ve contributed back what you received, exactly in line with the mutual principle. But parity breaks, because high-earning Plan 5 users repay their drawdown plus substantial interest accrued over years of repayment. High-earning ASF users under this model would stop when their contributions match their drawdown, paying materially less than Plan 5 equivalents on the same original amount. But the political story becomes “Muslim students getting preferential treatment”.
- Option B – stop at drawdown plus a notional uplift. Contributions keep coming until they match what a Plan 5 user would have paid on the same drawdown. This maintains parity, but immediately runs into the Shariah analysis. The uplift is calculated on a time-and-rate basis, and a time-and-rate charge on borrowed money is functionally interest. Any mechanism making ASF financially equivalent to Plan 5 has to capture something like the time value of money, which is the thing Islamic finance is supposed to exclude.
- Option C – stop at a fixed time limit. You contribute for 40 years, period, regardless of drawdown or cumulative contributions. High earners who’d clear Plan 5 in 15 years would keep paying into ASF for the full 40. They’d contribute vastly more than Plan 5 equivalents on the same original amount. But then the political story becomes “Muslim students being penalised for their faith”.
- Option D – shadow Plan 5 balance. SLC maintains, for each ASF participant, a notional Plan 5 balance with RPI interest accruing as if the loan were conventional. Contributions are calculated at the Plan 5 rate, and participants stop when the shadow balance hits zero or 40 years pass. This is mechanically identical to Plan 5. But now every ASF participant has an interest-accruing fictional debt being tracked against their name, and “pay contributions until your interest-accruing debt hits zero” is textbook riba regardless of what you call the debt or who holds it. The Shariah analysis looks at the calculation mechanism, not just the cash flow, so wrapping the same arithmetic in mutual-fund language doesn’t automatically neutralise the problem.
The guidance says contributions are of “the same amount and at the same time” as traditional student loan repayments, and that contributions are “ringfenced” to help future students. Previously ministers have talked about “repayments that reflect the value of the financial support they received” – a phrase that could mean drawdown alone or drawdown-plus-calibration, depending on how you read it.
The 2019 research captured participants asking the stop-point question and DfE never answered in the published response. The 2014 BIS consultation response sidestepped it. The April 2026 procurement notice doesn’t address it. And the current gov.uk page is frank that the contribution calculation remains to be set out in secondary legislation.
Even if a calculation method gets chosen, the participant needs to be able to see their status. Under Plan 5 you log into your SLC account and see a balance and a projected end date. What does an ASF participant see? A projected contribution period? A shadow balance they’re tracking against? A running total of contributions with no end state?
Each option telegraphs a different underlying theological logic. If your SLC account shows a balance decreasing with every contribution, that’s pretty hard to square with “you’re contributing to a mutual fund, not paying off a debt”.
The regressivity problem
Another problem is that Plan 5 is regressive – it takes proportionally more from people with less. Plan 2 used to soak rich grads to pay for insurance features for lower-earners. But the Tories switched to RPI interest only.
The British Board of Scholars and Imams (BBSI) – the UK’s independent assembly of Muslim scholars and imams – explicitly flagged this as a concern in their February 2024 guidance document, BBSI Guidance on Student Finance: Between Prohibition and Lawfulness. They wrote that Plan 5:
…operates like a more regressive income tax, which has a disproportionate negative impact on lower income students generally and Muslim students in particular.
Classical Takaful has a simple underlying principle – those with surplus help those in need. It’s meant to be redistributive from richer to poorer. That’s the theological point. Which means BBSI’s concern about Plan 5 regressivity isn’t just a technical point about UK tax policy. It’s a point about whether a structure mirroring Plan 5 can coherently be called Takaful at all.
A defender of ASF might argue that the redistribution in ASF isn’t meant to be between higher earners and lower earners in the same cohort – it’s meant to be between generations. Today’s contributors help tomorrow’s students. Intergenerational mutual support rather than intragenerational. On that reading, the regressivity within a cohort matters less because the theological work is being done across time rather than across incomes.
That reframing would salvage something – but it still wouldn’t fix the equilibrium problem. The fund still has a built-in expected-value shortfall on every £1 lent out, regardless of how you conceptualise the flow. And within each cohort, it’s still the lower earners paying proportionally more.
And the rest
Somewhere between 6 and 10 per cent of UK undergraduates leave their course before completing, depending on how you count. Students who leave part-way through have already drawn down money from the fund. They may never complete their studies. They may never reach the earnings threshold for repayment. Under conventional loans they still owe whatever they drew down, and the income-contingent repayment rules apply as normal.
Under ASF – are they contributors on a shortened timeline? Non-contributors who just took money? Non-members who now have a moral rather than contractual obligation? The Takaful analysis plays out differently in each scenario and the scholarly certification may differ accordingly.
ASF is undergraduate only. Postgraduate Masters and Doctoral loans are outside the scheme. Can that position hold?
What’s that you say? The LLE? The Lifelong Learning Entitlement (LLE) is built around module-level drawdowns rather than annual tuition tranches.
Classical Takaful assumes regular contributions against defined needs. A student drawing down two modules in autumn, skipping spring, then three modules in year two, doesn’t map cleanly onto Takaful administration. When does the contribution clock start? How do you track cumulative drawdown against cumulative contribution when both are discontinuous?
LLE compatibility is exactly what’s been used to justify the launch delay. DfE says ASF can’t launch before LLE because ASF has to mirror LLE. Ironically, ASF may be the only bit of LLE there’s any real demand for. The one part of LLE that has sustained demand is the part that has to wait for all the other parts that don’t.
Theological questions
Mohammed Amin – a former PwC Islamic finance partner – wrote during the 2014 consultation that he expected three behavioural responses from Muslim students. Some would keep using conventional loans. Some would adopt ASF when it arrived. Some would reject ASF as not truly Shariah-compliant – meaning they don’t think ASF solves the problem – and continue to forego university.
BBSI’s 205-scholar survey supports this tripartite split. Which means ASF won’t solve the participation problem for the third group. That group may be larger than government projections assume, because the BBSI analysis encourages the “conventional loans are fine” camp to grow at the expense of the “we need ASF” camp.
The international Islamic Financial Services Board (IFSB) – based in Kuala Lumpur, and a separate body from the UK Islamic Finance Supervisory Board despite the similar acronym – has published detailed prudential standards for Takaful (prudential meaning rules about how much capital and reserves operators must hold). IFSB-11 is the solvency standard. It exists because Takaful funds can face the problem of running dry. The standard-setter has thought hard about how to prudentially buffer a mutual fund against insolvency.
ASF is being designed without visible reference to IFSB-11’s solvency framework. The UK isn’t an IFSB member and ASF sits outside normal prudential regulation. The international expertise on exactly the problem identified in the arithmetic above exists in a developed standards framework. The UK scheme shows no public sign of drawing on it.
There’s also a governance question about scholarly representation. The three-person Islamic Finance Supervisory Board consists of Professor Akram Laldin, Dr Sajid Umar, and Mufti Faraz Adam – all respected, all operating within Sunni scholarly traditions. Twelver Shia jurisprudence has its own distinct treatment of financial contracts, and individual Twelver Shia Muslims follow a living marja-e taqleed – a senior religious authority whose rulings the individual takes as binding.
It isn’t obvious from the public design how a product certified by a Sunni-only board interacts with the authority structures of the UK’s Shia Muslim population, or whether the governance architecture envisages any mechanism for scholarly input from traditions outside the board’s own. In practice the certification may be broadly accepted across the UK Muslim population. But given the theological specificity of Islamic finance rulings, it’s a governance question that ought to be addressed.
Graduate tax, reinvented
In 2009, the National Union of Students published a full policy proposal called Funding Our Future: A Blueprint for Funding Higher Education, which did the same structural trick ASF does – take earnings-contingent contributions, put them into a ringfenced fund that’s notionally independent of government but actually depends on government for seed capital and ongoing top-up, and insist the thing is not-a-loan even though it operates very much like one.
NUS called its vehicle a People’s Trust – ASF calls its vehicle a Takaful fund. NUS wanted progressive honesty – BBSI wants theological honesty. Both end up pointing in roughly the same direction – this is close to a graduate tax, stop pretending otherwise.The government won’t say it’s introducing a graduate tax. But in building ASF, it has accidentally reinvented most of the architecture that would make one work.
So thirteen years after David Cameron’s 2013 commitment, twelve years after the 2014 consultation, nine years after the primary legislation in HERA 2017, and with the preliminary bank account engagement only just out, the government is on track to deliver a product with a structural design problem it hasn’t addressed in public, mirroring a Plan 5 regime the UK’s main independent Muslim scholarly body considers theologically worse than the thing it replaced, with no coverage for postgraduates.
ASF is being sold as a no-detriment Takaful alternative to Plan 5, but the public design has still not explained where the Plan 5 subsidy sits, how a mutual fund remains solvent while mirroring an income-contingent loan book, or what participants are actually contributing towards once interest is removed from the language but not necessarily from the spreadsheet.
Honestly? I’m still not holding my breath.
