Brian Payne, vice president of investments at Wells Fargo Advisors in Dallas, has had a close association with the Muslim community in the Dallas/Forth Worth area for about five years. His interest in the community, coupled with the realization that Muslims who want to invest per the guidelines of Islamic finance are not being served, have led him to become a specialist in Islamic finance.
Now, Islamic or Shariah-compliant investing has become a prime area of focus for Payne, and about 75% of his new business comes from the Muslim community.
“Any particular group that needs to adhere to specific investment guidelines can pose a challenge to a financial advisor,” he says, “but in a positive way, because putting together a quality portfolio within the boundaries that a client needs to stick to is also extremely interesting and really defines the role of any financial advisor who can rise up to the challenge.”
Payne believes that the Muslim community in the United States presents a great business opportunity for financial advisors. Muslims represent about 0.8% of the population, according to a study conducted earlier this year by the Pew Research Center, but that figure is slated to double over the next two decades to 1.7%.
“This community is well-educated and relatively affluent, but many Muslims in America do not know how to go about investing Islamically even if they want to,” Payne says. “They do not know about how to set up a Shariah-compliant portfolio, even though they know they want to invest as per those guidelines, and they are not sure whom to turn to for advice.”
For most Muslim Americans, financial planning and investing are relatively new domains, says Mohamad Nasir, general manager at Allied Asset Advisors in Oakbrook, Ill., whose Iman Fund is one of the few mutual funds in the United States with a strict Islamic investing mandate.
“There was a time when Muslims would prefer to keep their money in cash, but now, people want their money to grow,” Nasir says. “While Muslims want to invest in Shariah-compliant finance, many don’t even know that that’s possible here in the [United States] and that there are investment vehicles that allow for it. Financial advisors can do a great deal in bringing the word out to people who, like everyone else, need to save for their children’s education, their retirement and so on.”
Although the United States is still some ways behind Europe in terms of providing the framework for Islamic finance and investments to become more mainstream (and of course, the interest level in promoting it ebbs and flows with the political climate in the country), the Muslim demographic is an important one, says Fawad Butt, managing partner at Zeus Capital Advisers in Chicago, a firm providing consultancy and advisory services in Islamic finance. Muslims in America—mainly South Asians and Arabs—are, on average, in their 30s, he says. They are for the most part highly educated and relatively affluent, and even though second- and third-generation Muslims in the United States may be as “American as the next person,” tradition and religion are still important. The ability of this community to consume financial products suited to them in the coming decades is extremely high.
The Nuts and Bolts of Islamic Finance
Islamic finance as it stands today first came into being about three decades ago to cater to the needs of the global Islamic population for whom conventional financial products were not fully acceptable.
Based first and foremost upon the idea of the religious sanctity of financial products, Islamic investments have, through the years, shown themselves to be both sustainable and ethical, says Sunil Kumar, head of risk management for the Middle East at FRS Global in Dubai, and they’ve proven to be more resilient to market shocks than their conventional counterparts.
“Islamic finance is asset-based and this is the key to its resilience,” Kumar says. “The limited interplay of Islamic financial products across major global markets proved to be an advantage during the financial crisis, and Islamic finance prohibits gambling and excessive speculation, which makes trades more rational and real. Credit derivative swaps and other similar products that have been blamed as being the major sources of the financial crisis were also absent from Islamic finance and helped protect it.”
In a nutshell, halal investing, or investing according to the Shariah principles of Islamic finance—guidelines that are set by Shariah boards—requires avoiding investments in liquor, pornography, pork products, gambling, banks and insurance companies, and any business where interest, or “riba,” is the primary driver of income. Bonds and other interest-bearing instruments are a no-no, as are derivatives, and defense is also a forbidden sector.
Today, worldwide Shariah assets total an estimated $900 billion to $1 trillion, according to a report released in September by consulting and research firm Cerulli Associates. That’s three times the size of China’s mutual fund asset base, and the market is projected to expand to between $4 trillion and $5 trillion by 2015, Cerulli says.
Most global financial markets offer specific indexes covering Islamic companies, and many large funds have some exposure to Islamic products. The Dow Jones Islamic Market Index family includes thousands of broad-market, blue-chip, fixed-income, and strategy and thematic indexes that have passed rules-based screens for Shariah compliance. The indexes are the most visible and widely used set of Shariah-compliant benchmarks in the world.
In the United States, there is a growing demand from the Muslim population for investment vehicles that can meet Shariah-compliant guidelines, but there’s also a need for products like Islamically compliant mortgages and small business loans—products whose structuring and origination are also growing in certain parts of the country through community banks that specialize in them, says Butt.
“People tend to start with the basics, but the demand from the local consumer base here in the [United States] is certainly increasing, so we are seeing a greater interest in Shariah-compliant investment vehicles,” he says.
But Islamic investing is also gaining greater traction and popularity among non-Muslims, Butt says, simply because it meets the risk appetite of many people who have been burned one too many times by the financial market collapses of the past few years. Above all, the complete absence of investments in financials has been and continues to be a huge plus point in favor of Islamic investing, he says, and it has encouraged more people to want to learn how this investment universe works.
Islamic Investing: Adherence to Principles and the Long-Term Value Play
For people who are looking for value, including non-Muslims, allocating a portion of their assets to vehicles like Saturna Capital’s Amana Funds makes for a good bet.
“Some of the guidelines for Shariah-compliant investing have to do with the debt structure of companies, so for investors looking for the leanest, meanest companies that they can find, companies that have good cash flow and a low debt structure, Islamic funds like the Amana Funds are very attractive from a value perspective alone,” Payne says.
According to Nicholas Kaiser, director and chairman of Saturna Capital, the Amana Funds’ success has come primarily from advisors and clients who are not Muslim. While the three Amana mutual funds meet the guidelines for Shariah-compliant investing, “most people see us as core, stable funds that they can hold for long periods of time,” Kaiser says.