This post was originally produced for Forbes.
Halal investing forbids investing in debt, making many traditional investment vehicles off-limits to Muslims seeking to follow Sharia guidance. As a result, many in the Muslim community have limited their investments to cash savings and real estate, leaving them poorly diversified. Junaid Wahedna decided to fix that.
Wahedna, who graduated from Columbia University and spent years working in finance in New York City, was in a good position to launch Wahed Invest, making Halal investing easy.
“I’ve been very, very fortunate to have a good education, the resources and wherewithal to be able to do something and so I felt quite personally responsible to give back,” Wahenda says. “What right do I have not to actually go in there and fix this problem?”
Wahenda reports raising $7 million from venture capitalists and angel investors.
Halal investing has not been especially difficult for wealthy investors. A variety of products and advisors have been available to the high-net-worth individuals for generations. The challenge has long been finding compliant investments for small investors.
Halal investment standards are fundamentally ethical investment standards. In addition to proscribing investments in debt and traditional fixed-income securities, the standards require investments to be in ethical companies.
“What we do is run an ethical filter over all our investments. So, what that means is we screen for excessive debt, alcohol, tobacco, firearms, pornographic material and a few other you know minor unethical things,” Wahedna explains.
One key to building a successful platform for ordinary investors to conform to Islamic investing standards was to give them access to sukuks, a Halal fixed income product traditionally sold in $200,000 minimum increments. “Sukuks are in essence Islamic bonds,” Wahedna explains. Yields closely parallel traditional fixed-income investments along the yield curve.
Wahed Invest allows ordinary investors to open an account with just $100 and to participate in Sukuk investments along with carefully screened equity investments.
Wahedna hopes to prove that ethical or religious investing needn’t come with a cost by efficient use of technology.
This is all enabled by technology commonly called robo advisors. Virtually all broker-dealers are employing some level of technology to facilitate investing today. By dropping the cost of managing an account to near zero, minimum account sizes drop even while allowing people to participate in more sophisticated investment strategies.
Wahed Invest has automated processes that calculate debt ratios, cash balances, and other keys to identify companies that meet ethical and Halal screens, the company also has a full-time Sharia review board and ethical review board that ensure Halal investment standards are followed.
But it isn’t all technology driven. Wahedna is proud of the firm’s annual “purification report,” which calculates earnings from “impermissible” sources, like excessive interest income from one of the companies in the portfolio. This gives investors an opportunity to purge those funds by donating to charity.
“This is just something we feel is necessary that people should have at the end of the year to see exactly what has happened,” he said.
The ethical standards of Halal investing are appealing not only to Muslims but to other investors with a similar ethical view. Still, the service solves a big problem for ordinary investors wishing to comply with Halal investment standards who haven’t had the option in the past.
“Clients tell us that ‘We are so happy we don’t have to just keep our money in cash!’” Wahedna says, noting that many customers are first-time investors.
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