PHILIPPA: Welcome back to PensionBee’s Pension Confident Podcast. I’m Philippa Lamb. Now, when it comes to being socially responsible, you might be recycling or doing meat-free Mondays, maybe taking a train instead of a plane. And more and more of us are investing in line with our beliefs too. We can already choose to put our money into companies or sectors we support, like say green energy. And of course, we can avoid sectors we don’t want to support. You can make those choices about your pension too. And today, we’re going to be investigating an approach you may not have considered before and that’s Shariah investing. It’s a socially responsible option which complies with goals and the values of the Shariah, or Islamic law that Muslims live by, but it’s open to everyone. So what are Shariah investments? How do they work, and how could a Shariah pension be right for you, even if you’re not Muslim?
More than 3.3 million Muslims live in the UK, and to put that in context, that’s more people than the whole population of Wales. And while most non-Muslims know something about Islam, Shariah investment may be a new idea. So whether you’re familiar with Islamic finance, or completely new to it, this episode is all about how it works and why it’s worth knowing about. Globally, Shariah investing is on the rise. Recent data from Reuters estimated that the global market for Shariah funds has ballooned by more than 300% in the last decade alone. So there is growing demand for Islamic investments, but how are they different from other investments? I’ve got two experts with me to answer that. Ibrahim Khan is a former lawyer, and he’s Co-founder of Islamic Finance Guru, that’s an investment and personal finance platform, all about helping Muslims make smart decisions with their money. And the business and investing magazine Forbes recently rated him in their 30 under 30 list of entrepreneurs to watch. Ibrahim, welcome to the podcast. Quite an accolade!
IBRAHIM: Hi, it’s a pleasure to be here! Yeah, it was great. It was great to be on the list.
IBRAHIM: Yeah, it was - it was great to see that they, you know, were looking at people, not just from the mainstream finance world. And I think that’s fantastic.
PHILIPPA: Also, here with us, we have PensionBee’s own Head of Product, Martin Parzonka. He’s here to give us his take on Shariah investing, and also to tell us about PensionBee’s own Shariah pension. Welcome back, Martin.
MARTIN: Thank you Philippa, good to be here. Excited to get into it.
PHILIPPA: Now, before we get going, the usual disclaimer. Anything discussed on this podcast should not be regarded as financial advice and when you’re investing, your capital is at risk. We’re talking about Shariah investments and how they fit into the ethical investment landscape. So I’m going to put our guests on the spot, I’m going to ask them what changes they’ve made in their own lives to be more socially responsible. Martin?
MARTIN: Well, we were laughing about this before we got into the studio but I drink/eat a thing called Huel, which is a powdered food.
PHILIPPA: Other powdered foods are available.
MARTIN: Mix it with water and it hits all the nutrient profiles that you need. You know, it reduces meat consumption. And that’s important.
PHILIPPA: Yeah, now the breakfast choice, Ibrahim and I were less convinced. I’ve got to say, less keen on that. But -
IBRAHIM: That’s the, you know, that Huel I’m sure is the substance that, you know, Neo was getting pumped on it in The Matrix.
PHILIPPA: Yeah, and he was happy with that. That’s the scary thing. How about you? I mean, socially responsible choices, what are you doing?
IBRAHIM: So I drive a Toyota Prius, which is a hybrid, which is fine, there’s loads of them. But then the thing that takes it to the next level, is that if you drive below 28 miles an hour, it uses just the electricity. So next time you’re stuck behind a Toyota Prius driver driving slowly, you should understand that he’s doing it for this reason.
PHILIPPA: And feel good about yourself too -
IBRAHIM: And feel good about yourself, you’ll be a little bit late, but it’s alright.
MARTIN: It’s also safer.
IBRAHIM: It’s safer, it’s safer for the environment. And you know, the guy’s saving money.
Halal and haram investments
PHILIPPA: I’m not sure you’re selling the idea, really, but point taken, point taken. Shall we start with the basics Ibrahim, what exactly is Shariah investing?
IBRAHIM: So Shariah investing is really just looking at the two words. It’s, you know, Shariah-compliant, so it’s compliant with Islamic law. What that actually means is you look at the Quran and the sayings of the Prophet Muhammad, peace be upon him. And then investing, is just investing in line with those rules and regulations. So in a nutshell, that looks like not investing in things that, you know, generate interest, or gambling, or investing in alcohol or pork. These will be like the really obvious ones, and then there’s some others that are under the surface and a bit more technical.
PHILIPPA: Okay. So Shariah compliant investments, they have different criteria, completely different criteria from, say, fossil fuel free investments, but you would still classify them as socially responsible.
IBRAHIM: I think there’s a really strong overlap between the two. But there is still a difference.
PHILIPPA: So yeah, so the crossover is, I mean, it’s directly excluding certain sorts of companies, and also its business practices as well, isn’t it?
IBRAHIM: Yeah, absolutely. So if, you know, a company is, I don’t know, involved in, let’s say, the war in supporting Russia in some way, shape or form. That could be, you know, a clear question mark.
PHILIPPA: So there’s judgments involved?
IBRAHIM: 100%. So there’s two types of mindsets that you approach when you’re analysing, you know, is this Shariah-compliant or not? There’s a quantitative side, you know, looking at the debt levels and looking at the amount of impermissible income that’s coming into a particular stock. And then there’s a qualitative side, you know, then you’re just eyeballing and it’s a moral question.
PHILIPPA: Yeah. You talk about debt. So yes, companies that are highly leveraged. That’s an issue.
IBRAHIM: That’s an issue. Definitely. So the most that you can be is 33%. Debt to total assets.
PHILIPPA: So there’s a hard number there?
IBRAHIM: Exactly. So if you go over that, you’re in trouble.
PHILIPPA: Do you want to fill us in on some of the terminology?
IBRAHIM: Yeah, for sure. So a “Riba“ is the term that is to do with interest essentially, and that’s not allowed. And then you’ve got “Gharar“, which is uncertainty or doubt and that would rule out certain areas such as, as I said, derivatives or lots of types of insurance will not be allowed. And then you’ve got “Maysir”, which is gambling. So you know, Bet365 cannot be in a Shariah compliant portfolio. And then you’ve got a few other technical things as well.
PHILIPPA: Okay. So they will be described as haram?
IBRAHIM: They will be haram.
IBRAHIM: That’s the one.
PHILIPPA: What about Halal investments, Martin? The opposite end?
MARTIN: Well it’s basically everything else that Ibrahim hasn’t covered there. It’s the opposite of all that. And a lot of companies are actually Shariah compliant without even realising it. So Ibrahim mentioned, there’s some - there’s a lot of overlap with fossil fuel investing, and the Shariah fund, that we have at PensionBee, for example. And you’ll find that if you look at the underlying investments - that a lot of that is tech companies, right? Because they’re not ones that are, you’re not earning interest on them. They’re ones that may not be entirely leveraged. It’s interesting, the comment there about looking at them and understanding their business practices, though. So Netflix is tech, right? Inverted commas, but then the content they serve up - questionable. You look at platforms like say Facebook maybe, might be also questionable, because you know, are they a platform? Are they a publisher? It’s an ongoing discussion right now. But in the main, you will find that there is that overlap, and a lot of tech companies do form part of a Shariah compliant portfolio.
PHILIPPA: It’s subtle, isn’t it?
MARTIN: Yeah, it is. It is.
PHILIPPA: And it’s topical. I was reading the Financial Times a couple of weeks ago, the trade union that represents Uber drivers. It was so interesting to me that they were threatening legal action against Uber because their pension scheme was not Shariah compliant.
IBRAHIM: Yeah, I love a bit of a fisticuff when it comes to the pension world, because you get so few of them. So Uber, yeah, is being threatened with legal action by a union of Uber drivers, which I think is - it’s great, right, that people are standing up for their rights. You know, they actually got in touch with us and asked us to publicise and promote this, because again, there’s two sides of this one is the, you know, the legal action, which is to make sure that Uber drivers have the possibility of going for a Shariah option, which they don’t have right now. But then the other bit where they say, “Look, can you help us out a bit?” is educating Uber drivers about the point of pensions in the first place. And, you know, if you’ve never had a Shariah compliant option ever available to you in your life, why would you even start thinking about that? You know, it’s a boring subject. And, you know, you kind of have to prompt people, and there’s a big education piece as well.
PHILIPPA: I think the majority of their drivers are Muslim.
PHILIPPA: 75%, apparently, which I thought was fascinating that, you know, they hadn’t actually thought about that when they came up with their pension scheme. Were you surprised to hear that?
MARTIN: Honestly, I wasn’t. I think the pension industry, the finance industry does come from a place of, you know, Anglo Saxon, to be honest, and so doesn’t consider the entire community when these products are devised, right? I’m also glad that this is happening. It really shakes up the industry and says, “Hey, guys, like, there’s an underserved community here. Why are we being so sort of blinkered about it?”
PHILIPPA: Yeah, it’s stretching inclusivity in ways that finance hadn’t thought about before, isn’t it? I mean, in fairness, you were telling me that Uber - they’re not objecting to this. They just hadn’t thought about it.
IBRAHIM: Yeah, I think that’s a great signal for businesses just across - well, for Muslims vis-a-vis businesses across the UK, because Uber is pretty litigious, right? They, you know -
PHILIPPA: They have their issues.
IBRAHIM: They fight things to the Supreme Court and yet on this point, they’ve said, “Look, the law is very clear here. And we’re going to get this sorted, just give us a few months.” So, you know, that as a signal I think is fantastic.
PHILIPPA: Head’s up for everyone.
IBRAHIM: Yeah, exactly.
PHILIPPA: It should be a heads up for all employers, shouldn’t it?
MARTIN: Yeah, I think some are a little bit passive. Honestly, they are a bit lazy about it. Like I’m reading the pension firms comments back, it’s like “I try to do the right thing”. But everyone’s like, did you really? Did you really look at this? Did you - do you talk to your customers?
IBRAHIM: They’re not evil, right?
IBRAHIM: They’re just a bit slow. And you know, perhaps not thinking about the wider picture. Yeah.
PHILIPPA: Yeah. Well look, now we’ve got the basic idea. Can you tell us a bit about the origins of Shariah?
IBRAHIM: Yeah, Shariah or Shariah pension?
PHILIPPA: Shariah investing. Otherwise we’re going to be here for a long time!
IBRAHIM: So it all starts with the creation of the universe. So, Shariah investing, I think it, you know, ultimately derives from the Quran and the teachings of the Prophet Muhammad. The rules or the, you know, the guidelines came up in the seventh century. And over this, you know, the centuries thereafter, you know, very, very rigorous schools of law developed around understanding this stuff, and then applying it. If we fast forward through the centuries, the latest modern incarnation of all this stuff, I would say, started probably around the 1970s, 1960s-70s. It’s when we had the first Islamic banks, this coincided very nicely with the huge financialisation that we’ve seen of the mainstream economy as well. And so, you know, Muslims are thinking, how do we fit into this, you know, massive kind of new world of financialisation? We’ve decoupled from the gold reserves, how does it all work now in this new world? And so you had Islamic scholars and practitioners who came up with a body called the AAOIFI, which is a catchy name, yeah. And they’re based in Bahrain, there’s an equivalent version, which is also very respected in Malaysia, so that Malaysia and the Middle East are the two big hubs of Islamic finance. And so these guys took the traditional teachings and applied them and came up with guidelines. For example, how do you deal with hedging, currency exchange? Or what does Islamic law have to say about, you know, insurance? Or, how does Islam screen different kinds of stocks? What about crypto? I mean, this is a huge new thing, right? So this is a very living kind of application manual that people look to now.
PHILIPPA: But that’s really interesting. It is, as you say, it’s a living mechanism. And it’s kind of constantly being reformatted to keep pace with everything else that’s going on in the financial world.
IBRAHIM: Totally 100%. I mean, even within stock investing, we saw the craziness over the last two years. And now we’re seeing, you know, continued craziness in the other direction. And as a result of that, scholars actually said that the debt to asset ratio that I was talking about, they actually shifted that to the debt to market cap ratio.
PHILIPPA: Okay, before you go any further, market cap?
IBRAHIM: Market capitalisation - how big a company is, and -
PHILIPPA: Value rather than assets per se.
IBRAHIM: Exactly. Just because there was so much, you know, volatility going on. And so that’s a really live example of Shariah in practice. And then of course, you’ve got crypto which is, you know, its own beast.
PHILIPPA: You see, I’m glad you raised that, because actually, now I have to know. What is the thinking on crypto?
IBRAHIM: I think the majority would say that it is permissible in principle and they see it as a digital asset. And then you need to analyse it, each crypto asset for whether or not it’s structured in a Shariah compliant way or not, and most of them are, but then some of them, let’s say something like compound, or yearn finance, or other interest-based crypto assets, where the purpose is just to do lending, but in the crypto world, that will be problematic. Yeah. It’s cool. I’m enjoying screening these things.
PHILIPPA: It’s intensive, isn’t it? Because this is such a fast-moving world, and things come along constantly that need consideration about whether they’re going to work or not.
MARTIN: You mentioned the crypto currencies themselves, like is the blockchain tech compliant itself?
IBRAHIM: Yeah, there’s no issues with the software and the underlying technology and, you know, decentralised ledger. I think the issue comes with cryptocurrencies being very volatile. I guess one of the principles was Maysir, right? Not gambling. So they’re a bit concerned about, you know, is this just a massive Casino? The Shariah, at heart, you know, I’ve mentioned all of the rules. But actually, if you take a step back really what this Islamic law is about, when it comes to finances, they want - you want to stop injustice, and you want to stop uncertainty in the market. And if you can deal with those two things, you know, that’s a good situation.
PHILIPPA: So the regulatory framework, for people who aren’t used to it, that is a bit confusing, isn’t it? I mean, that’s a bit unexpected, because we’re used to regulation. You can do this, you can’t do that in financial services. But that’s not quite how it works.
MARTIN: That sounds preferable somewhat, like having a discourse rather than just the central body saying, “This is what I think”, because that’s going to be quite centralised, in their opinion will be their opinion. Where if you have a discourse, you’ve got other views coming into it, which is probably a more interesting way of dealing with these things.
PHILIPPA: More collaborative?
IBRAHIM: I agree, I actually think that there’s a lot of alignment between how, let’s say, the FCA sets its rules and Islamic law because the Financial Conduct Authority when it sets its rules, you know, they talk to consumers, they talk to the government, they talk to companies, and then people look at the laws and they apply them. And same with Islamic law, where, you know, there are the discussions within the academia, and then the discussions with the practitioners, and then it gets kind of codified into these like standards that AAOIFI put out, and then it gets applied. So I think there is a parallel kind of situation.
PHILIPPA: So, but Martin, I mean, what about investment returns? Because you know, there is big money to be made from Haram industries, like tobacco, isn’t there, realistically? So does that mean Shariah returns are bound to be lower than conventional investments?
MARTIN: Like all investments, it’s a bit of a cop-out answer, but it depends. There can be money to be made with haram investments and using tobacco as the example. I think the reality is that whilst those companies might pivot into something that’s not tobacco, necessarily, the general community will look at those companies and say, “You know what? I know what you’re all about, and I’m just not going to invest in you”. And so, you know, those companies by virtue of that their market cap will decrease.
PHILIPPA: So your argument is they’re not actually sustainable?
MARTIN: I don’t think they are. That’s my personal view. And I don’t think they’re sustainable and I think money will go elsewhere, to more sustainable investments. The other comment about returns, though, it is fair to say that the Shariah investments are certainly the ones that we have at PensionBee, it is 100% equity, which means stocks in companies, therefore, it is subject to market turmoil. And that fund doesn’t invest in things like bonds, because of the riba component, right? Can’t earn interest. So there is a consequence that, you know, bonds are usually used to offset the volatility of stocks, because it can’t invest in bonds, it’s going to, as a consequence, have a volatile risk-reward profile in Shariah compliant investments, certainly the one we have.
PHILIPPA: So you would say this is long-term, as you said, and that’s maybe the point to really stress. We’re not talking about immediate wins here.
MARTIN: No, not at all.
PHILIPPA: And the wins aren’t necessarily as tangible, maybe. So we are talking about - to put it slang-ily - feel good wins, as well as cash wins. You know, you feel good about yourself doing this stuff, because it’s socially responsible. Yeah, there’s quite a lot to be said for that.
IBRAHIM: 100%. And really, you know, with pensions, the majority people would be investing for the long-term anyway. Right?
PHILIPPA: Absolutely. It’s fascinating, isn’t it? And then we’re going to talk about PensionBee’s own Shariah pension in a moment. But this is an intensive business, selecting investments. Presumably, that feeds into charges, does it?
MARTIN: Yeah, it does. So there is a committee actually, that and going back to that discourse point we said earlier, there is a committee that looks at the portfolio mix of the Islamic Finance Fund that we have, and then make decisions on what’s in what’s out. I guess, you know, customers that want to purchase this plan, can have that level of trust with it. They know that it’s been looked at properly. That does have a consequence, it does have an impact on fees compare to other investments, because of the level of scrutiny and the additional work that goes into it. There’s also fortunately, unfortunately, diversification is impacted. You know, we mentioned the word “bonds” before because they earn interest, in riba, and so they can’t be compliant. But this talks to limited scope of Islamic finance and something that like industry really needs to address and find other ways to make this work. It’s very interesting not to like harp on the whole crypto thing. But it’s interesting that that as a product isn’t necessarily like excluded from the outset. So there is an ability for new products and services to come into this Islamic finance world and actually be -
PHILIPPA: It’s work in progress.
MARTIN: Be part of it. Yeah.
Shariah finance in UK
PHILIPPA: Yeah. It’s so interesting. I mean, because, like all investments, there are pros and cons aren’t there, to Shariah? But there’s this huge community worldwide, millions and millions of people who will not invest their money in anything that is Haram. So if people are thinking about this and thinking, this is interesting, how hard is it to find Halal investment?
IBRAHIM: Historically, I think it was pretty difficult, because there weren’t as many around and it was a little bit harder to surf it as well. That problem has, you know, somewhat receded and there’s a lot more products in the market. Now, I think, going to Martin’s point about, you know, in the pension space, where are these products? Therefore, I think there’s a couple of issues. The first is that, you know, because these products are still relatively nascent, it will take time to build up the assets under management and the scale that is needed to make it viable in the pension landscape. I mean, to give you some context, the HSBC fund from memory is something like $3 billion or £3 billion. That is actually relatively small in the widest, you know, wider picture. BlackRock and others. They’ve got huge. They’ve got literally trillions of dollars under management.
PHILIPPA: It’s a minnow.
IBRAHIM: Yeah, exactly. And because the fees that we’re talking about are in the 0.2, 0.5 kind of range, in order for a company to be able to offer that in a viable way, it wants to make sure that it has as much you know, of assets under management that it can get a hold of. But if you’re targeting a niche audience, that is already restricted. And so that means that the fees need to then therefore creep up a little bit. So there’s a whole bunch of different factors. But from our side, we will really want to encourage Islamic Sukuk bond. So there’s an Islamic version of a bond, which is called the Sukuk, and there’s funds that offer that. So I really want to encourage those kinds of, you know, those kinds of funds to be a lot more easily accessible to people like, let’s say PensionBee.
Future of Shariah pensions
PHILIPPA: Yeah. So I mean, I’m interested to know whether Shariah financial services are actively targeting non-Muslims now with these products. I mean, is that seen? Are non-Muslims seen as a market for them?
IBRAHIM: Yeah, absolutely. The majority or a very significant number of people who use the Nest Shariah workplace pension, were actually non-Muslims, just because they were attracted to the tech stocks aspect of it and the high growth.
MARTIN: Shariah out was like finances based on religious principles. But so what? Right you can be non-religious and still be interested, like you say, tech stocks, right? People that want to take on that risk, high growth kind of fund at the start of their career - they look at it and go “100% equity? Cool, that’s for me, why not be invested in this?” And then also, you know, that it’s got that sort of moral aspect of excluding bad industries. And so it sort of ticks a couple of boxes for a lot of people.
PHILIPPA: Yeah, a lot of wins. So I mean, we mentioned PensionBee’s own Shariah pension plan. It is, of course, open to everyone, Muslim or not. Tell us about that.
MARTIN: Exactly right. So the plan is, from us, it’s managed by State Street Global Advisors. They purchase it from HSBC, which is, you know, a massive investment firm or asset manager globally. And they’re the ones that have the Shariah committee that looks at the investments to make sure that they’re appropriate for the fund. It follows the key principles. So no interest, you know, the ban of uncertainty, you know, speculation and gambling. What we charge is 0.95% annually. And for anything above £100,000 with a PensionBee plan, that fee is halved. The more people that get into it, you get scale, right? And so then, you know, fees can change in time. It is 100% equity, like we’ve talked about. And what that means is its company shares, so investments physically into individual companies that are held in the fund, which isn’t uncommon with Shariah savings, because for example, bonds can’t be included because they own their own riba. Although interestingly, Ibrahim’s made that comment around - there’s an Islamic finance approved version of a bond. That’s quite interesting to see where that goes.
IBRAHIM: Yeah, there’s a lot of Sukuk out there, which is the Islamic finance version. And instead of lending being the basis of it - its rental. You know, there’s some kind of asset that is the basis of it. The UK government issued its own Sukuk where they put a government building as the basis for that and it was a sale and leaseback so the government sold that to the bondholders and then leased it back from them. So that was how you were getting a regular return from it.
PHILIPPA: This is the government issuing a Shariah compliant bond effectively? Well -
PHILIPPA: Yeah. I mean, that kind of takes me into my next question, really, which is expansion into the wider financial services sector, but from what you’re saying that’s happening already?
IBRAHIM: Yeah, absolutely. I think, you know, Islamic finance touches on pretty much every area that you can think of from, you know, be it insurance, pensions, bank accounts, you know, you name it, every single thing that you can think of, when it comes to the financial sector, there’s an Islamic aspect to that, which just needs to be thought through.
PHILIPPA: And then presumably, you’d say the same. This is - I can see that you’re thinking this is a really wide landscape now.
MARTIN: Yeah, for sure. It’s the tip of the iceberg, but like, who knows, until we have these kinds of discussions like this, no one really knows about this stuff. And it’s like, it kind of needs to be promoted more by industry within industry, so that people do get an appreciation of what’s out there.
PHILIPPA: Actually, there’s one point I want to make. I mean, listening to you two talking about it, and I didn’t know very much about it before. The thing - apart from the whole, you know, socially responsible thing, the transparency of Shariah investing feels very appealing to me, because you do know where your money’s going. Do you think that’s going to be a big factor for people?
MARTIN: 100%, it will be. We often have customers say to us, “I want to know what my plan is invested in”. It’s fair enough, you know, it’s people’s money. They want to know where their money’s gone and historically, the financial sector has been this big sort of like smoke and mirrors.
PHILIPPA: They just take your money and do something with it.
MARTIN: Do something with it. Where does it go? I don’t know, somewhere? Just worry about it in 50 years when you’re lifting your pension, what happened in that time? We’re trying to promote people to take retirement savings seriously, right? And by being transparent, I think there’s that level of comfort with knowing what’s going on and so people will engage with it more.
PHILIPPA: Okay, there is so much to talk about here. But we’re going have to wrap this one up anyway. It is such an interesting subject. I have learnt loads and I hope everyone else has too. Ibraham, thank you very much indeed.
IBRAHIM: It’s a pleasure.
PHILIPPA: Martin, thanks.
MARTIN: Thank you. Happy to be here.
PHILIPPA: Thanks to everyone for listening. If you’ve enjoyed this episode, please rate, review and share it. While you’re at it, why not subscribe and make sure you never miss a future episode. You’ll find the series in all the usual places: Apple, Spotify, wherever you’d like to get your podcasts. If you’d like to find out more about Shariah investing, you can find loads more information in the show notes. If you’d like to get in touch with any feedback or questions, email us at firstname.lastname@example.org or tweet using the handle @PensionBee. A final reminder that anything discussed in the podcast should not be regarded as financial advice. And as with all investments, your capital is at risk.
Next month we’ll be back with an episode you will not want to miss because it is all about staying safe from financial scams. Join us then.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.