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| Halal Consulting Services International, Inc |
upscale retailer Nordstrom's hosted a "fashion seminar" for Muslim women at their store in the Tysons Corner Center mall in McLean, Va. The Chicago-based Islamic Food and Nutrition Council of America (IFANCA) certifies food products as Halal (similar to Kosher certification for Jewish consumers) for major Islamic centers of the world. Citigroup, UBS, HSBC, and other financial services providers have responded to the increasing demand by developing domestic Islamic investment products. Dow Jones developed an Islamic index (IMANX) in 1999 and an Islamic equivalent to Morningstar, the Failaka Islamic Fund Review, opened its doors in Chicago in 1996. This year, it launched a branch in Dubai, one of two hotbeds of Islamic investment product development. The Muslim market is large--and global.
Sareem Khale, vice president and senior portfolio manager of Citigroup's Tailored Portfolio Group in Stamford, Conn., notes the significance of Halal products to Islamic Americans. "They approach Islamic products as an expression of their identity. For example, in buying food, they practice their Islamic faith by looking for certified Halal products. In like manner, they would prefer to invest in Shariah compliant investment products." Shariah refers to the entire scope of Islamic law which governs every aspect of Muslim life.
Service providers see the demand within the U.S. stemming from three sets of numbers: A North American Islamic population of eight million, according to an April 2002 Cornell University survey; earning power--66 percent have household income upwards of $50,000; and investable assets--estimated by Khale to be $400 billion globally with $50 billion of that in the U.S. An estimated 14 percent of Islamic Americans have incomes between $100,000 and $150,000 compared to 26 percent for the national population; and 7 percent earn between $150,000 and $250,000 compared to 12 percent nationally. The Cornell study found that the disparity evens out at $250,000 and over, to 5 percent for both the general population and Islamic Americans.
It may seem ironic that while America is a target of hatred in many Muslim countries, it remains an attractive destination for Muslim immigrants. Last September 10, the New York Times reported that in 2004, the number of people from Muslim countries coming to live in the United States rose by 20 percent. And in 2005, 96,000 people from Muslim countries became legal, permanent U.S. residents--a 20-year record.
So with the Islamic population expected to reach 14 million by 2014--based on a 6 percent growth rate cited by the 2000 U.S. Census data--their earning power can be expected to grow accordingly. With such powerful numbers packing the punch, advisors looking to differentiate themselves may have the opportunity to specialize early in a rapidly growing marketplace.
To work effectively with American Islamic investors, advisors need not be Muslim themselves. And female advisors are as welcome in the Islamic community as male advisors. But it is important to understand who Muslims are, how they think, how they make decisions, and what is important to them.
"[Advisors] must have a clear understanding from an investment perspective of what's required and/or allowed under Shariah law," explains Mike Driscoll, managing director and head of client service with Citigroup's Tailored Portfolio Group. "Someone trying to penetrate this segment without such a background will fail simply because they lack education in the unique cultural factors that must be considered. More importantly, they have to be viewed as a trusted advisor, not just someone coming in and pushing product."
For a start, be aware of terminology and avoid false assumptions. According to Salim Omar, CPA and managing member of The Omar Group CPAs in Cliffwood, N.J., the term "Muslim" applies to anyone who subscribes to the religion of Islam. It is important to note that not all Americans from Middle Eastern or Southeast Asian countries are Muslim. In 2002, a Zogby International survey identified 3.5 million Arab Americans, of which only 24 percent were Muslim. And of course, not all Muslims are Arabs.
Nor are all Muslims the same. Omar observes that Muslim investors are becoming more westernized now because of their children. For example, Omar himself has two children growing up in America. "I have to create a balance in order to connect with them because they are certainly more westernized in their thinking than I am. Muslim investors as a whole are becoming more open to discussing what's important to them--what their goals are, their needs, their wants. I see this as a western attribute," he says.
Omar believes that American Muslim investors seek the same attributes in advisors as do other investors. "They want to work with someone who understands them and with whom they can place their trust." The reality of older, more traditional generations living under the same roof as younger, more westernized family members may require a little more time for advisors to build a trust relationship. But Islamic investors across generations need someone to help them make sense of the plethora of investment information available, and to make that information real for them and connected to their own lives.
In Islamic investing, "there are two basic tenets," Omar explains "One is that interest may not be earned, so that excludes bonds, CDs, and interest bearing savings accounts," Earning interest, or earning money on money, is called riba, an Arabic word for "excess." Since U.S. law often requires interest to be paid on cash balances, a purification method has been devised that allows any residual interest income in the portfolio to be donated to charity. This satisfies the prohibition for American Islamic investors.
The other tenet involves social responsibility, which means there can be no U.S. businesses that promote tobacco, alcohol, gambling, or pornography--guidelines similar to what is labeled socially responsible investing (SRI) in the West. "So-called green funds that are concerned about the environment also can be good choices for an Islamic portfolio," Omar adds.
Simply put, Islamic investing involves following the canon of Shariah or Islamic law. "An important way of building credibility in the Islamic community is to give some reassurance that the product you're offering is certifiably Shariah compliant. That means you have a Shariah Board that oversees the range of products you offer. This board is composed of a group of Shariah scholars who provide oversight from an Islamic perspective," explains Khale. The Shariah board not only certifies investment vehicles as Shariah compliant, but also monitors the investment activities of those vehicles to ensure they remain so.
Islamic investment products are not plentiful on a global scale, much less within the U.S., making a comprehensive asset allocation for Islamic clients difficult to achieve. According to Driscoll, "Product growth is slow but steady, and as new products become available and a broader solution can be offered to Islamic clients in the U.S., you'll start to see this marketplace heat up. You have corporate executives of the Islamic faith that have concentrated positions and want a more diversified approach."
The epicenter of product development is still the Middle East--Dubai and Bahrain--"but London is an increasingly important center for Islamic product development, especially as you start getting into derivatives and structured product offerings," says Khale. "Some of these products have yet to be offered in the U.S., but it's only a matter of time before they become available."
Meanwhile, the desire to offer more robust opportunities to his clients has prompted Omar to screen investment choices according to criteria he has developed that eliminate forbidden investment practices. If companies within a fund invest in practices that are illegal according to Islamic law, "we'll pull those investments or funds out. On the other hand, we want diversification and an allocation that would normally require fixed income investments which, under Shariah law, are not allowed. So we balance the portfolio by allocating a percentage to dividend-paying stocks that characteristically would outperform the overall stock market in periods when stock prices drop. Those would typically include sectors such as energy and pharmaceuticals." Real estate investment trusts would be another alternative as long as the debt to equity ratio is within acceptable limits.
The most readily available Islamic products in the U.S. are mutual funds, separately managed accounts and some short-term investment accounts. But the global list now includes Islamic-acceptable hedge funds, REITs, private equity and venture capital funds, and asset-backed securities called Sukuks, according to Khale. "As the breadth of product expands, advisors can begin applying conventional tools and principles of asset allocation within a Shariah compliant framework."
Product expansion can also introduce issues which test the limits of what Shariah prescribes. For example, the topic of insurance is a debatable one in Islamic investing. "Some scholars say it should be allowed, others say it shouldn't," says Omar. "I view it as safeguarding and providing for the family members in the next generations, which is a responsible thing to do. But some scholars prohibit it, saying it involves trying to second guess Allah's ability to provide for you." The Institute of Islamic Banking and Finance in London supports the view that "pooling resources to help the needy does not contradict Shariah."
Demographically, the largest percentage of American Muslims are business owners and professional people such as engineers and doctors. Omar says they understand the value of money, and they don't like to carry debt. Paying off their home mortgage is a priority. From an educational perspective, an October 2006 survey of American Muslim voters conducted by the Council on American-Islamic Relations (CAIR) found that 62 percent of respondents held a bachelor's degree or higher; the corresponding percentage for the national electorate is 30 percent. With quality of education a priority, Omar says, Islamic investors may emphasize education planning over retirement planning.
The CAIR survey says many American Muslims are in their prime earning years with 47 percent between the ages of 35 and 54. Approximately 70 percent were born overseas, although two-thirds have lived in America for more than 20 years. The number of Muslims who are married--78 percent--is 50 percent higher than the national average, indicating the high importance of family.
American Muslims tend to be very involved in community service. Federal government data show that only 29 percent of all Americans over age 18 were involved in their communities in 2005 compared to a 42 percent volunteerism rate for Muslims. "One of the tenets of the Islamic faith is charity--it's one of the elements the Koran says you must follow, just like the Hajj pilgrimage to Mecca. There is a principle called Zakat which can be translated into tax that holds for the American Islamic investor, as well," says Khale.
The CAIR voter survey found that 89 percent of Islamic Americans vote regularly, indicating their desire to enjoy the American way of life. And 84 percent of the Islamic Americans who responded said Muslims "should strongly emphasize shared values with Christians and Jews."
That said, advisors who want to develop this niche should educate themselves regarding the principles of Islamic investing--what's permitted (Halal) and what's not (Haram)--and the nuances of the criteria to be used when putting together an investment portfolio. Approaching a Mosque and asking about opportunities to speak can be a logical step as well as getting oneself invited to social gatherings and contributing articles to Islamic magazines and newspapers.
Driscoll points out that the needs of wealthy Islamic investors are similar to those of other investors of high net worth. They already have accountants, attorneys, and other advisory professionals, so another avenue for financial planners would be to show such professionals that they are credibly knowledgeable about the needs of Islamic investors. Khale adds, "In order to be involved in the Islamic community, you don't necessarily have to have a religious involvement; you can have a social involvement. If advisors could position themselves within the community in terms of some type of philanthropic activity or community development perspective, the community would be very open to interacting with them."
"And as with any other niche market, advisors must show American Islamic investors the value they bring to the table," Omar emphasizes. "There are so many no-fee places available, investors can say, 'you don't know me or understand me, so why do I need you?'"
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