Alcohol, gambling, cigarettes, pork, and even interest are forbidden, yet social media and new financial technology companies are helping Muslims align their portfolios with their ethical standards.
In a crowded field of social media influencers who dispense financial advice, Sheikh Joe Bradford has found his niche. An expert in Islamic law, Bradford teaches his audience how to invest their money the Halal way.
The comment sections of his accounts—where 85,000 followers across Facebook, Instagram, and Twitter convene—are full of questions about exactly which investments are allowed for Muslims and which are forbidden, or haram. The queries reveal the challenges facing a generation of financially and technologically literate Muslims who want to know how traditional Islamic guidelines apply to everything from stocks to nonfungible tokens.
Some of the rules under Islamic law, or sharia, are straightforward: Observant Muslims are not allowed to profit from interest, sales of pork, or so-called sin stocks linked to gambling, alcohol, and pornography. That generally makes shares in technology heavyweights such as Apple Inc. and Tesla Inc. permissible but excludes financial companies such as JPMorgan Chase & Co. Owning stock in Berkshire Hathaway Inc. is forbidden because of its large holdings in property and casualty insurers, which receive substantial interest income from bond investments.
But things quickly get more complicated. Netflix Inc., with original content such as the reality show Too Hot to Handle, where participants lose money if they hook up with their fellow contestants, is a toss-up, since it may promote promiscuity. Even the status of grocery giant Walmart Inc. is questionable because it sells alcohol, pork, and tobacco. Companies are also disqualified if they have debt that’s more than 33% of their market value—a ratio that’s constantly moving for some businesses. Now that interest rates are rising after a decade in which the Federal Reserve kept them close to zero, companies that borrowed heavily may exceed the limit. About half of the companies in the Russell 2000 would not pass the debt-to-market-cap test, according to Bloomberg data.
The Islamic finance industry globally is well established and estimated to be worth about $3.6 trillion. Of that, about $630 billion in Sukuk, or Islamic bonds. Rather than lend money to a conventional borrower in exchange for interest, Sukuk holders own a share of the asset that backs the debt and receive income from any profit it generates.
Halal investing is still relatively new to the US, where Muslims make up about 1% of the population. Older generations of Muslims often stuck to home purchases and physical gold for investments or picked a few stocks that were recommended by friends and unofficially sanctioned in their community. The same is true in Canada, where Jawad Kanani, 32, who works for a pharmaceutical company in Montreal, says his immigrant parents eyed public stock markets warily after seeing the Enron Corp. accounting scandal and others like it in the early 2000s. For them, he says, “Cash was king.”
The complexities have made Islamic finance something of an afterthought for many. But that’s starting to change as technology evolves and demographics shift. “You have kind of a twofold development,” says Bradford, who’s been working in investment education since 2015. Some high-earning Muslims have become more religious as they’ve gotten older and want to alter their portfolios. Then there’s “a full new generation of people whose parents maybe were not as wealthy,” but now have money to invest for the first time.
Tasmia Mustaquim, 27, is a healthcare consultant in Centreville, Virginia. She became interested in investing during college when, during an internship, a manager explained the importance of a retirement plan. “That planted a seed for me,” she says. But Mustaquim knew there was a rule forbidding interest and looked online for clues on how to avoid it when investing. “I’ve spoken to family members about investing, but they weren’t very knowledgeable,” she says.
Along with financial educators such as Bradford, fintech startups, halal stockpickers, and special exchange-traded funds are filling the gap. Meanwhile, the rise of zero-fee brokerages has made finance more accessible to Muslims adhering to very particular rules. These low-cost platforms make serving clients who “have otherwise been overlooked or unprofitable” more viable, according to Aamir Rehman, co-founder of Dubai-based private equity firm Fajr Capital and former head of strategy for HSBC Amanah, the Islamic finance arm of HSBC Holdings Plc.
Those who want to actively trade equities can use stock screeners such as Zoya Finance, which launched in 2020 and will soon add a trading platform. Its app lets users know which companies are halal or not and why—or at least as much as possible. Zoya’s frequently asked questions section includes advice that “these are meant to be guidelines” and adds, “as always, Allah knows best!”
Saad Malik, a former JPMorgan executive who co-founded Zoya with an ex-Amazon Web Services engineer, grew up with the perception that investing is like gambling, which isn’t permitted in Islam. “When there’s no knowledge, there’s fear,” Malik says. It’s easy to see how that fear arises given the confusion around some newer financial instruments. Last year the religious council of Indonesia, the most populous Muslim country, ruled that owning crypto, which has elements of wagering, is forbidden for Muslims. Neighboring Malaysia’s council has labeled digital assets as permissible.
Options for observant Muslims are particularly limited when it comes to retirement savings. Few 401(k) accounts are compliant with Islamic law, because they often contain interest-paying bonds or forbidden stocks. Only about half of employers offer self-directed brokerage accounts that would allow Muslims to select halal investments, according to data from benefit services provider Alight Inc. If neither option is available, Muslims are often advised to pick the most halal option and purify gains by giving away the percentage that’s invested in noncompliant holdings.
In the nine years that Khwaja Siddiqui, 33, has been working as a doctor, none of his employers has offered a halal 401(k) option. To maintain what he calls his “financial morality,” Siddiqui has avoided contributing to the plan entirely and instead invests his retirement funds in a Roth IRA, which his employer doesn’t match.
Ellen, 27, who asked not to be identified by her full name because her company discourages speaking to the media, has faced the same challenge. When she became a Muslim last year, she learned she needed to make adjustments to her retirement plan. She emailed her company’s plan provider, asking if it offered a halal fund. They returned with a “canned response that was unhelpful.”
Ellen then went to human resources at her Houston-based engineering firm to request a Sharia-compliant fund to be listed as an option. “I have a feeling the answer will be no,” she says, in which case she plans to ask for a self-directed brokerage account. Ellen says she feels “obligated to be the squeaky wheel” for the Muslim employees at her workplace.
It’s not clear how many Muslims prefer to invest according to Islamic rules, and even in Muslim-majority countries where sharia-compliant options abound, some choose to bank and invest conventionally. When Muslims can invest the halal way, they might find that returns are different than those of conventional investments. The first sharia-compliant US mutual fund, the Amana Income Fund, was established in 1986 and has $1.5 billion in assets. Its holdings include pharma giant Eli Lilly & Co. and Microsoft Corp. In the five years through mid-November, its price has increased by 17%, versus 52% for the S&P 500. (Total returns are closer: 59% and 68%, respectively). A newer fund, Amana Growth, has bested the benchmark index, jumping 59% and doubling investors’ money overall.
“People have to choose what matters most to them,” says Boris Khentov, head of sustainable investing at online investment adviser Betterment. Excluding entire sectors from a portfolio will mean “deviating from market returns” in the long run, he says. Betterment offers portfolios for investors concerned about the environment and social issues, but none tailored to religious investors.
“We’re all human, so we want the best returns,” says Suhail Alhreish, 39, a pharmacist in Phoenix who uses a self-directed brokerage to invest his workplace retirement savings in a halal fund. He also raised funds for his graduate education from close family members because taking a loan was out of the question for him. “I’d rather have a little bit of a lower return than risk my relationship with God,” he says.
Originally published on www.bloomberg.net