Rise of Islamic Finance Helps Muslim Family Offices Make Investments True To Faith

Muslim investors and family offices across the world have had to grapple with a unique challenge while managing money – their faith doesn’t allow them to earn interest on their assets. However, the rise of
bespoke banking and financial services in recent decades has allowed the 1.8 billion-strong community to
invest their money while keeping the faith.

Islamic finance is based on a traditional interpretation of Islamic law, or sharia, which prohibits riba, or usury. The religious law also prohibits investments in ethically dubious industries such as weapons
manufacturing or alcohol production. The laws encourage an emphasis on risk sharing instead of a direct return on investments. This means Islamic banking products must be based on Mudarabah (profit-sharing and loss-bearing), Wadiah (safekeeping), Musharaka (joint venture), Murabahah (cost-plus) and Ijara (leasing).

Perhaps the best example of an Islamic financial product is the sukuk or Islamic bond. The Kingdom of Saudi Arabia raised $9 billion through its first sukuk in 2017. It was split into two tranches: a five-year
bond paying investors 2.89%, and a 10-year bond paying a profit rate of 3.63%. The inclusion of the profit
clause makes the otherwise regular sovereign bond shariah compliant.

According to the World Bank, the Islamic finance industry has been growing at 10-12% annually and collectively accounts for $2 trillion assets globally. Growth in Islamic finance has been faster than
conventional banking in many majority Muslim countries. It has been particularly strong in Malaysia, where research from Cerulli Associates indicates wholesale Islamic mutual funds catering to high-net-worth individuals increased assets 23% compounded annually between 2013 and 2017. Interest in the industry is also growing in non-Muslim countries such as South Africa, the United Kingdom, Hong Kong and Luxembourg.

Arnaud Leclercq, head of new markets for Swiss private bank Lombard Odier, told CityWire Asia that some of the bank’s ultra high-net-worth and family office clients in the Gulf Cooperation Council require up
to 100% of their portfolio to be Shariah-compliant. This has prompted the bank to expand its Islamic banking segment since 2012. However, the industry has yet to catch on in the United States, home to over 3.4 million Muslims. Muslim industry veterans such as The Hajdari Group’s Zaim Hajdari want to change that. The Hajdari group recently launched “InvestHalal” – a financial planning platform that screens financial assets to ensure shariah-compliance. “Being a Muslim myself and having served many Muslim investors over my 25 years as an advisor, there has always been a high level of frustration with the lack of investment choices and guidance to Muslims in the U.S.,” says Hajdari.

According to his team’s research, a fifth of American Muslims earn more than $1 million, 81% of them are aged between 18 and 49, 65% have a college or post-graduation degree, and 69% pray at least once a day. “We feel that there is a high degree of probability that the same people who choose to live, eat and drink Halal (in compliance with shariah law)…would also choose to invest Halal given the opportunity to do so,” he said.

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