Shari’ah investing finding a foothold in South Africa

TIMOTHY RANGONGO Editor: MoneyMarketing

The Muslim community represents nearly a quarter of the world’s population, yet a handful of global financial assets are Shari’ah-compliant. Despite that, a growing number of asset managers and banks are increasingly catering to this sector, with actual and planned launches of Shari’ah-compliant investment products. Not only is the investor base large and growing, but the types of assets investors are attracted to are also expanding.

Shari’ah investing vs conventional investing

The key differences between Shari’ah and conventional investing relate to the screening methodology of investments, effectively resulting in enhanced due diligence to screen out non-compliant investments, explains Abdul Davids, head of research for Camissa Asset Management (formerly Kagiso Asset Management). He says the second key difference relates to responsible ownership through identifying and quantifying potential non-permissible income and donating that to charity.

Shari’ah is an Islamic principle that guides many aspects of a Muslim’s life, including the type of investments allowed.

Islam promotes the protection of religion, life, intellect, lineage and wealth, which guides investments towards accountable business activities that are socially responsible. Islamic finance encourages the sharing of risks and rewards, with Shari’ah-compliant products and transactions adhering to several widely accepted practices, says Hamzah Latha, investment analyst, 27four Investment Managers.

He explains that one of the key differences between Shari’ah investing and conventional investing is that Shari’ah investments are bound by religious principles, which prohibit trading in certain sectors that are impermissible (Haraam), the use of interest (Riba) in all forms, and transactions should be free from speculation or unreasonable uncertainty (Gharar). There are alternatives within Shari’ah investments compared to conventional investments.

Shari’ah investing’s growth in South Africa

The Shari’ah market in South Africa is only about 25 years old, with the bulk of the growth occurring in the last 10 years, according to Davids, who manages four Shari’ah-compliant retail unit trust funds, as well as institutional clients’ funds.

While platforms to access Shari’ah products have increased, the market is still in its infancy compared to the conventional market. Notwithstanding, the market seems to be mature. It has got steady growth with regular savings growth in South Africa, according to Nadeem Hoosen, portfolio manager in the STANLIB Multi-Manager team. Shari’ah investing is now well known and many investors looking for Shari’ah-based products can obtain them easily, he adds.

Shari’ah investing and the principles of Islamic finance have become a norm in the day-to-day offerings to clients across the globe. In the South African context, with a Muslim population of approximately 3% of the total population, some of the largest asset managers have introduced Shari’ah-compliant solutions as part of their product offering, says Latha.

He says products are constantly being developed, with much room to grow, “with more proficiency in Islamic financial knowledge, new products are being incorporated within the South African market”.

Hamzah Latha Investment Analyst, 27four Investment Managers

Shari’ah investing and ESG

Up to this point, we have established that compliance with Shari’ah or Islamic law and the principles of Islam rests on certain moral factors. ESG investing and Islamic investments may thus be united in one investment opportunity, given that they are both guided by principles of morality, transparency and fairness.

Another key driver for the growing demand in Shari’ah investing, according to Latha, is the shared principles of ESG focused investing. “Islamic finance and impact investing have areas of overlap, such as doing good and avoiding harm, investment restrictions, and a general emphasis on ethics underpinning investment decisions. The rising demand for investments that strongly consider the broader social and environmental impact has created an appetite for Islamic finance.”

While growing interest in Shari’ah investing was witnessed in the early part of the 2000s as new products were launched, Hoosen says that, at present, the interest/demand is in line with conventional investing. Asked if this is also across a new generation of investors, who are the predominant proponents of ESG investing, Davids says they have seen a greater awareness of Shari’ah investing in tandem with the broader interest in ethical/ESG type funds from millennials.

Shari’ah-compliant investments in South Africa

Latha says there are a variety of Shari’ah-compliant investment options available in South Africa, with both local and global exposure. Almost all products within the conventional investment space have been mirrored to Shari’ah-compliant investment alternatives, which include:

• Unit trust investments

• Tax-free saving accounts

• Retirement annuities, living annuities, endowments and preservation funds

• Equity investments

• Equity-based financing products (Mudarabah and Musharakah)

• Asset-based financing products (Murabahah and Ijarah)

• Shari’ah-compliant bonds – Islamic financial certificates (Sukuk)

• Shari’ah-compliant insurance products (Takkaful).

He says Shari’ah investments have proven viable and competitive compared to conventional investments. They follow similar objectives and guidelines, albeit limited with certain Shari’ah restrictions.

How Shari’ah-compliant investments weathered Covid-19

Camissa Asset Management saw strong outperformance of their Shari’ah funds versusconventional peers during the Covid-19 market turmoil over the last two years, while STANLIB says Shari’ah investment products suffered the same fate as the conventional products. However, some of the fixedincome products fared better during market volatility due to the nature of these being more stable, says Hoosen.

“The tenets of Shari’ah-compliant investing includes limitations on the quantum of interest-bearing debt that companies may be exposed to. As a result, the onset of Covid-19 would have meant that businesses with less debt were likely to have weathered the mayhem caused by Covid-19,” explains Latha.

While this is sector- and asset-specific, the principles of Shari’ah investing lends itself to a safer type of investment and one that may be more agile compared to conventional investments, he says.

Latha says Shari’ah investments managed to withstand the Covid-19 pandemic and bounce back quickly due to being based on profit and loss instead of interest, and being asset-backed instead of debt. “This is evidenced by the slow bounce back of companies that are reliant on interest.”

Undertaking Shari’ah investing

Investors do not need to practice Islam to undertake Shari’ah-compliant investments. While these products are tailored for a specific market, they are available to those outside of the Islamic faith, according to Latha, Davids and Hoosen. In addition to being open to everyone, Hoosen says there is an ethical aspect to Shari’ah investing that may appeal to a wider range of investors.

All three fund houses, STANLIB, 27Four and Camissa, offer a diverse range of Shari’ah-compliant fund options – some of which are also Regulation 28-compliant.

Abdul Davids, Head of Research for Camissa Asset Management (formerly Kagiso Asset Management)

Nadeem Hoosen, Portfolio Manager, STANLIB