Islamic investing: the rise of Shariah-compliant apps

The gradual democratisation of capital markets has seen more and more people investing in stocks, shares, and recently cryptocurrencies. Indeed, according to The FINRA Investor Education Foundation, there was an influx of armchair investors during the COVID-19 pandemic – and they tended to have a more diverse makeup than previous generations of investors.

But there is still one particular demographic that risks being left behind when it comes to access to investing. Because of their religion, there are strict rules facing Muslim consumers when it comes to how they invest. It has, in recent years, prompted a flurry of technological innovations specifically designed to meet the need for Shariah-compliant investing.

What is Shariah-compliant investing?

As Ibrahim Khan, Co-Founder of IslamicFinanceGuru (IFG), explains to FinTech Magazine, there are generally three separate requirements that operators must be aware of in order to attract Islamic consumers.

“Muslims must not invest in haram (impermissible) practises contrary to the tenets of Islam,” Khan tells us. “Obvious prohibition points to the exclusion of investments that derive profits from impermissible verticals like alcohol, weapons, non-halal foods, and more. 

“Certain types of income like interest are also not allowed in Islamic law. For instance, a buy-to-let mortgage or highly over-leveraged stock or bond would not be Shariah-compliant, because making money from interest is impermissible. 

“Lastly, a good example of ancillary prohibitions would be ‘gharar’, an Islamic concept that means ‘uncertainty’ or ‘risk’ in Arabic. Openness and certainty are integral to Islamic finance, so insecure or intangible financial practices such as insurance are also not permissible.”

It is clear to see, then, why Muslims wanting to participate with the stock market have been underrepresented for too long, as a result of operators failing to cater to these beliefs. But a new generation of investing apps like Zoya and Wahed, which aim to be Shariah-compliant, are helping to address that imbalance.

How many Muslims participate in the stock market?

The historic lack of options for Shariah-compliant investing is still reflected in the number of Muslims who own stocks and shares. Muslims make up nearly a quarter of the world’s population, yet barely 1% of financial assets qualify as Shariah-compliant.

“There is a big difference between the number of Muslims in the world and how many of them actually invest their money in a way that follows Islamic rules,” says Kate Leaman, Chief Market Analyst at AvaTrade. “This gap is because many Muslims might not know about these investment options, or they might not be easy to access. However, there is hope that special investment platforms that follow Islamic rules can help more Muslims become involved in the stock market.”

IFG’s Ibrahim Khan points out that there are other reasons that explain why Muslims globally under-index so heavily in terms of ownership of financial assets.

“The global Muslim population is on average younger and comes from developing nations,” he says. “We expect these numbers to change quite significantly over time, as the burgeoning middle class starts to develop in places like the Middle East, North Africa, Pakistan and Indonesia.”

Indeed, of the countries that Goldman Sachs believes will be the 10 largest economies by 2075, five of them – India, Indonesia, Nigeria, Pakistan, and Egypt – have sizeable Muslim populations amounting to more than 850m people.

“Muslims are generally not as well educated when it comes to investing, and this is partly due to a lack of available options for them as Muslims. Even basic information pertaining to Shariah-compliant investments is often not available to most of the Muslim population.”

Will Islamic investing products become mainstream?

As the Shariah-compliant investing proposition becomes stronger, will we see more mainstream providers adopt – or acquire – solutions aimed at the Islamic population? Will Islamic investing become less of a niche offering and more of a mainstream one, and if so, what will this mean for the small investing startups that have so far pioneered the space?

“I think Islamic investment options will likely become a mainstay of major banks as the Muslim population and their wealth grow,” Khan tells us.

“It is possible for big banks and financial institutions to offer investment products that follow Islamic rules and still stay within the guidelines,” AvaTrade’s Kate Leaman continues. “They can create separate parts of their business just for this, and they need to be very clear and honest about how their products follow the rules. Additionally, they need to make sure their staff understand the rules and they should have experts check that everything stays in line with Islamic principles.”

As the market inevitably grows, there are some things that she would like to see happen, which will inevitably make the market stronger. “First and foremost, people need to know more about it, which is why there should be more educational resources on the topic,” Leaman says. “There should also be a wider variety of investment choices to fit different goals and risk levels. 

“It would help if there were global rules that everyone followed, and strong rules to protect investors. Making Islamic investments easier to get into, and using technology to make it simpler, can attract younger Muslim investors. These changes can help the Islamic finance and investment market grow and provide further options while still following Islamic principles.”

Ibrahim Khan adds: “Right now, all of the Muslim wealth is sitting in limited spaces that cater for Muslim finances because the options available for Shariah-compliant investing are so scarce. 

“We need to see more support from mainstream financial companies and providers to Muslim finances as part of their wider social responsibility and obligation to support diverse populations. 

“The products currently on the market are scarce and unable to meet the increasing demand of the largely underserved Muslim population across the world. To put this into perspective, there isn’t a single Islamic home insurance provider in the UK. It’s always good to see new Islamic finance products on the market, and this needs to accelerate sooner rather than later.”