With the gradual democratization of capital markets, more and more people are investing in stocks, shares, and more recently, cryptocurrencies. In fact, there has been an influx of armchair investors during the COVID-19 pandemic, and their composition has tended to be more diverse than previous generations of investors, according to the FINRA Investor Education Foundation.
However, there are still certain segments of the population that are at risk of being left behind when it comes to accessing investments. Muslim consumers have strict rules regarding how they invest due to their religion. Recent years have fostered a series of innovations specifically designed to meet the needs of Shariah-compliant investments.
What is a Shariah-compliant investment?
As Ibrahim Khan, co-founder of IslamicFinanceGuru (IFG), explains to FinTech Magazine, there are generally three distinct requirements that businesses must be aware of in order to attract Islamic consumers.
““Muslims must not invest in haram (unforgivable) activities that are against the tenets of Islam,” Khan said. “Explicit prohibition refers to the exclusion of investments that derive profits from areas that are not permitted, such as alcohol, weapons, and non-halal food.
“Certain types of income, such as interest, are also not allowed under Islamic law. For example, buy-to-let mortgages and highly over-leveraged stocks and bonds are not Sharia-compliant because they are not allowed to earn interest. yeah.
“Finally, a good example of a collateral prohibition is “gharar,” an Islamic concept that means “uncertainty” or “risk” in Arabic. Because openness and certainty are essential to Islamic finance, unstable or intangible financial activities such as insurance are also not permitted. ”
It is therefore clear why Muslims wishing to participate in the stock market have been underrepresented for so long as a result of management’s failure to live up to these beliefs. But a new generation of investment apps like Zoya and Wahed that aim to be Shariah compliant are helping to address that imbalance.
How many Muslims participate in the stock market?
The historical lack of Sharia-compliant investment options is still reflected in the number of Muslims who own stocks and shares. Muslims make up almost a quarter of the world’s population, but only 1% of their financial assets qualify as Shariah-compliant.
“There is a big difference between the number of Muslims in the world and the number of Muslims who actually invest their money according to Islamic rules,” said Kate Lehman, chief market analyst at Avatrade. To tell. “This gap is because many Muslims may not know about these investment options or may not have easy access to them. It is expected to help more Muslims participate in the stock market.”
Ibrahim Khan of IFG points out that there are other reasons why Muslims globally are so undervalued when it comes to owning financial assets.
“The world’s Muslim population is, on average, young and comes from developing countries,” he says. “We expect these numbers to change quite significantly over time as middle class growth begins in places like the Middle East, North Africa, Pakistan and Indonesia.”
In fact, five of the countries that Goldman Sachs believes will be among the 10 largest economies by 2075 – India, Indonesia, Nigeria, Pakistan and Egypt – have more than 850 million people. There is a significant Muslim population.
“Muslims are generally not well-educated when it comes to investing, and one of the reasons for this is that there are fewer options available to them as Muslims. Information is often not even available.”
Will Islamic investment products become mainstream?
As the Islamic law-compliant investment proposition becomes stronger, will more mainstream providers adopt or acquire Muslim-friendly solutions? Will Islamic investing become a mainstream service rather than a niche service? Is it? If so, what does this mean for the small investment startups that have traditionally pioneered this space?
“As the Muslim population and its wealth grows, I think Islamic investment options will likely become a mainstay of large banks,” Khan said.
“It is possible for large banks and financial institutions to offer investment products that follow Islamic rules and still fall within guidelines,” continues AvaTrade’s Kate Lehman. “They can create a separate part of the business just for this and need to be very clear and honest about how their products follow the rules. You need to make sure that everything is correct and have an expert check that everything is in line with Islamic principles.”
As the market inevitably grows, there are some things she wants to achieve that will inevitably make the market stronger. “Fires, and more than anything, people need to know more about fires. That’s why there should be more educational resources on this topic,” Lehman said. “There should also be a wider range of investment options to suit different goals and risk levels.
“It would be helpful to have global rules that everyone follows and strong rules to protect investors. Making entry into Islamic investing easier and using technology to make it simpler will help young We can attract Muslim investors. These changes can help the Islamic finance and investment market grow and provide more options while adhering to Islamic principles.”
Ibrahim Khan further added: “Currently, all of the wealth of Muslims is sitting in a limited space that accommodates Muslim finance because there are very few options available for Sharia-compliant investments.
“We need greater support for Islamic finance from mainstream financial companies and providers as part of our broader social responsibility and obligation to support diverse populations.
“Products currently on the market are in short supply and unable to meet the growing demands of largely underserved Muslims around the world. There is not a single home insurance company. It is always good when new Islamic financial products come to the market and this needs to accelerate sooner rather than later.”