According to the 2021 ABS Census, there are 813,392 Australians who self-identify as Muslim—or 3.2% of the Australian population. 

Of this cohort, it is estimated that approximately 20,000 engage in Sharia-investing. This points to a general lack of awareness as well as a lack of suitable investment options rather than a lack of “interest” (excuse the pun). 

The laws of Islam govern every aspect of a Muslim’s life, including how they participate in the financial system, how they invest, and how they earn money. 

For instance, Islamic principles prohibit borrowing on or earning interest. As a result, many Muslims are unable to access traditional banking products like home loans, traditional savings accounts and term deposits. 

Interest-based loans are considered “usury” - a monetary loan that enriches the lender. In such scenarios, the principles of Islam see the bank, mortgagee or deposit-holder as "unfairly" taking advantage of another’s more vulnerable financial position. 

In fact, Hejaz’s 2021 research[1] revealed that one in three Australian Muslims keep significant cash savings at home to avoid earning interest and because of a lack of suitable, Sharia finance options.

Islamic laws further restrict the types of assets into which Muslims can invest. Investment in alcohol, gambling, defence, media and pork products is prohibited for example, as is investment in banks that lend on interest or firms that invest in a non-Sharia compliant way. 

Cryptocurrencies and derivatives are considered Haram ["forbidden"] by Islam, as these assets are seen as highly speculative and carrying too much inherent risk. 

Benefits of Sharia investing

Consumer preferences are changing. When we go to a café, we are spoilt for choice: soy, dairy, oat, almond, lactose-free milks. When it comes to investing, many consumers want to support companies that are purpose-driven with strong Environmental, Social and Governance (ESG) credentials. Many Australians are looking to invest in a way that aligns not only with their ethical values but also with their religious beliefs. 

With this as a background, the global Islamic Finance market is forecast to grow at an average annual rate of 8% until 2025[2]. By then, it will be worth an estimated US$4.94 trillion dollars according to Refinitiv. 

In today’s volatile economy, more investors want to minimise their exposure to risk. Sharia investing is potentially a more defensive option, in Hejaz’s opinion. 

Underpinned by Islamic governing principles around risk, Muslims are prohibited from investing in companies that carry more than 30% debt. The objective is to avoid exposure to potentially "immature" start-ups and the scale-at-all-costs mindset of some businesses. 

Companies must increasingly prove that they’re pursuing sustainable growth and have built enough liquidity to navigate changes in the economy, such as the Reserve Bank of Australia’s 10 consecutive interest rate rises. 

In Hejaz's opinion, Sharia investing offers several social and financial benefits for investors, by avoiding unnecessary debt and liquidity risk. 

Risks of Sharia investing

Sharia investments carry other risks just like a conventional investment.  These include geographic risk, benchmark risk, liquidity risk and currency risks, to name a few. 

Islamic investment portfolios may also have a high turnover rate as investments will be removed from a portfolio if they no longer meet Sharia investment principles. This could happen, for example, if a company’s debt levels increase above an allowable threshold or the percentage of tainted income earned by the business exceeds an acceptable level. 

This might be seen as an added benefit however, as Sharia requirements might potentially improve the quality of a portfolio - under those principles, companies which are highly indebted cannot be invested in and investment managers must avoid highly speculative instruments. 

Australia’s first Sharia-compliant ETFs

Late last year, Hejaz Financial Services launched two of its funds—the Hejaz Equities Fund (ASX: ISLM) and Hejaz Property Fund (ASX: HJZP)— as Exchange Traded Funds (ETFs) on ASX.

While Islamic ETF products are widely available overseas, this was an Australian first with the goal of providing Muslims and other ethically conscious investors greater access to two of Hejaz's Sharia-compliant funds. 

Both funds refrain from investing in activities that are considered to be morally or socially injurious under Islamic principles, and in companies which primarily operate in sectors such as tobacco, adult entertainment, weapons, conventional banking and insurance, and gambling. 

How Sharia-compliant ETFs work

Hejaz Financial Service’s proprietary Sharia Investment Screen combines qualitative and quantitative filters. 

The first element filters companies by industry and involvement in prohibited activities, as determined and corroborated by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). 

The second element of the screen is financial, using information derived from indexes such as the FTSE, S&P Dow Jones and MSCI. The financial screen removes companies that fail to meet certain financial ratios:

• Conventional Debt/Total Market Capitalisation <30%
• (Cash + Interest Bearing Deposits)/Total Market Capitalisation >33%
• Total Interest Paid /Revenue <5%

Finally, investments are screened against Hejaz’s Ultra Ethical Code of Governance, which forms the basis of a commitment statement provided to each Hejaz customer. 

Conclusion

ETFs are a popular investing format as they offer investors diversification and exposure to a range of investments. 

When it comes to Sharia investing, the objective is to financially empower Australian Muslims without compromising their Islamic beliefs. The ethical screening processes applied may also resonate with non-Muslim Australians, in Hejaz’s opinion.

DISCLAIMERS

The information provided in this article has been prepared by Hejaz Financial Advisers Pty Ltd (AFSL 517686). It provides general information only, which means it does not take into account your individual objectives, financial situation, needs or circumstances. Before making any financial decision, you should assess whether the information is appropriate for you. You should also seek appropriate financial advice tailored to your needs before making any financial decisions. For more information refer to our Financial Services Guide at https://www.hejazfs.com.au/. This information is not an offer or recommendation to make any investment or adopt any investment strategy. Past performance is not a reliable indicator of future performance.