The Halal Status of Robo-Advisors and “Muslim Friendly” Funds: A Shariah Compliance Perspective #
Original Question: Is it halal for Muslims to invest in Robo-advisor funds with ESG or Shariah neutral themed such as Syfe and Endowus? What about “Muslim Friendly” funds purported by certain insurance advisors?
Unfortunately, the funds offered by Syfe and Endowus and other Robo-advisors in Singapore are currently non-shariah-compliant even if they have shariah-neutral-themed funds such as Biotech or Technology-themed funds.
The same non-shariah-compliant ruling is applied to “Muslim-friendly” funds that some insurance advisors purport.
This is because, for an investment fund to be shariah-compliant, it needs to satisfy several shariah requirements overseen by a certified shariah (financial) advisor.
Having a local ARS-certified Asatizah endorsing an investment fund does not warrant it shariah-compliant.
While our ARS certified Asatizah have the general knowledge on fiqh muamalat (business dealings), they may not have an adequate understanding of both matters of finance and shariah, which requires specialized scholars to sift through the fund prospectus and analyze its shariah-compliant concerns carefully.
Because of this cumbersome task of sifting and analyzing each of the fund constituents (fund holdings), international Muslim scholars have set an international standard that warrants a certified shariah advisor to oversee the fund’s operations and investments.
In a nutshell, the shariah advisor will first screen the business activity of the fund’s constituents and check whether it contravenes shariah permitted activities (such as the alcohol industry, casinos, etc.).
If it passes the first filter (business screening), they will then screen the constituents’ financials based on their respective methodologies (6 methodologies), whether it meets the threshold of:
Cash: 30% – 33.33%
Debt: 30% – 33.33%
Accounts Receivable: 33% – 50%
Non-compliant income: 5%
Once this filtration process is done, the shariah advisor will continue to monitor the fund quarterly or semi-annually.
If any constituent is found non-compliant, they will flag it to the fund manager.
The fund manager then has the option to:Monitor it for another quarter and see if it still does not pass the shariah criteria.
Liquidate it immediately and earn the returnsHold it until it breaks even before liquidating it.
This is usually the case when it is currently at a loss position.
Lastly, the fund goes through a purification process whereby the constituents are purged from tainted income and given to general charity causes.
On top of these cumbersome processes, retail investors would not have access to the complete fund holdings without specialized professional resources such as Bloomberg terminal or Eikon.
Usually, fund houses would only reveal their top 10 holdings of funds they offer to the public while the shariah advisor is given access to the complete list, which can amount to more than 100 stocks.
All and all, although Muslims now have access to screening tools such as Idealratings and Islamicly, verifying the level of shariah purification would be tricky as funds allocate different percentages or weightings on various constituents.
In addition, it is important to note that we as Muslims in Singapore should promote and only opt for the shariah-compliant funds since we have access to an array of shariah-compliant investments such as the Wahed FTSE Nasdaq ETF (HLAL). Wallahu A’lam.
