Until 9/11, Muslim investors seemed like an up-and-coming niche — a huge yet under-served market with a need for specialized investment advice.
To the handful of advisors who cater to Muslim Americans, the opportunity seemed almost limitless. With more than 5 million Muslims living in the United States and only an estimated $100 million of their assets in the market, these advisors saw a special opportunity to help Muslims make smart investments while respecting the Shariah, Islam's religious law, which forbids many basic investing techniques, including the earning of interest (classified as “usury”).
Then came the 11th of September, 2001, and everything changed. Muslim investors and their financial advisors soon found themselves tangled up in the anti-terrorist campaign. In the investigations that followed September 11, the heads of some Muslim charities were arrested. A number of Muslim immigrants were detained. Zia Mahmood, a financial advisor for Royal Alliance in St. Louis, said one of his clients was repeatedly interrogated at the airport because his name was similar to that of one of the hijackers.
Fearing a government witch-hunt, the brokers say some of their clients called up and asked if they should sell everything. They wanted out, not just because the market was tanking, but because they worried that the government might freeze their assets because they were Muslim. They read that the assets of some Islamic charities had been seized and began to worry that the government might do the same thing to their money, particularly if they owned one of the mutual funds that caters to the particular requirements of Muslim investors.
“There's that fear,” says Rita Mansour, managing director, regional manager for McDonald Financial Group in Toledo, Ohio. “I mean, Islam has been beat up in the media. People can say that it hasn't been, but it has. And the offshoot of that is, if I have an Islamic fund, is that under unfair scrutiny?”
For Mansour, a 38-year-old Palestinian-American who grew up in Toledo, this kind of concern was something new. Discrimination wasn't something she experienced in her affluent community of Arab and Pakistani professionals; it was something she knew only from childhood visits to relatives living on the West Bank. “My dad always says that this is the best country in the world,” Mansour recalls. “It is the only place in the world that provides so many opportunities and where one is rewarded based on one's work ethic and motivation.”
Almost a year and a half after 9/11, Mansour, Mahmood and other Muslim reps finally are sounding bullish again about the business of advising Muslims. One broker said that he thought the Muslim portion of his book actually improved since 9/11, maybe because Muslims turned to Muslims for support.
Strict Muslims do need more help with their finances than non-Muslims. Reconciling Muslim religious requirements with standard Western investment practices isn't easy. Brokers say their basics are not difficult to understand — the rules call for staying away from stocks that don't fit in with the Muslim way of life, such as companies that deal in alcohol or pornography, and keeping clear of any investment that involves the borrowing or paying of interest.
Sometimes knowing which investments are “halal,” or permissable, is tricky. Philip Morris and Anheuser-Busch are obviously out — but so are Viacom (entertainment runs afoul to Shariah) and Hilton (serves alcohol and pork in its restaurants).
A company that's compliant one quarter might move into a new business that's not acceptable the next. More often, it's the religion's “no interest” rule that makes it difficult to create an Islam-appropriate portfolio, advisors say. “Interest at the outset is easy, but if you really go into the details it becomes a little bit tougher,” says Mahmood.
It's simple enough to avoid bank stocks, brokers say, but there are often large interest-based businesses hidden within otherwise unobjectionable companies. Wal-Mart, for instance, might seem a good bet, but the Sam's Club division does a lot of lending. Heavily leveraged corporations are bad news, too, as the restriction applies to both paying and receiving interest.
Even if a company appears to have a solid cash position, the advisor still needs to find out if it's investing cash in interest-bearing securities, which also is forbidden. Since a given company's cash position can change from quarter to quarter, the result for advisors is far from buy-and-hold investing.
That's just the first step. Stocks that make it through this kind of screening tend to be growth stocks, especially ones in technology, brokers say, and they have to hunt for companies that have a different profile in order to reduce the portfolio's risk. To make the game even more difficult, hedging with risk-free assets such as bonds and interest-bearing savings accounts is also forbidden.
“I have tried to get other money managers to live by the criteria that I've given them, and they've always come back and said, ‘We can't do it. You're putting too many restrictions on us,’” says one broker.
Shariah rules create more work for advisors in an indirect way as well. The prohibition against taking out loans makes buying a house or financing an education for Muslims an even bigger challenge, according to one broker, who declined to be identified. Because of this cash-and-carry life, many Muslims invest with shorter time horizons than the typical investor, which makes ongoing financial advice even more important.
Mansour and other reps say that the fact that many of their clients are immigrants also tends to make them much more focused on their financial future than the average American.
“What I've seen in my lifetime is that people with either my heritage and/or religious backgrounds tend to be better savers than the average American,” says Mansour. “A lot of them come here as immigrants; they view it as an opportunity to be able to make something of themselves, and they don't want to blow it.”
One Muslim broker says he is also optimistic about the future of his specialty partly because Muslim America has its own set of Baby Boomers who are now growing older. “As clients get older and older, two things happen. Their need for income increases, but at the same time — it's human nature — you become a lot more religious than you used to be at a younger age. And I think that the older clients will demand more Shariah-compliant investing tools,” he says.
Challenges for Muslim-friendly investing go beyond devising strategies. “Saying the words Islamic and investing shouldn't have a negative connotation,” says Mansour. “People will tell you it doesn't, but I know in their minds what they're thinking.”
Brokers also say that although requests for Muslim advice have grown in the 16 years since Muslim mutual funds like Amana Income first began coming on the market, many Muslims are still just becoming aware of the kinds of investments they are allowed to make, often through seminars sponsored by their local mosque.
Muhammad Abdur-Rahman, financial advisor for American Express in Owings Springs, Md., says that, in his community, he still sees one of his largest tasks as simply educating potential Muslim clients about the stock market. Many of the Muslims in his area, largely Pakistani-American small-business owners and African Americans, still need to learn the basics of investing, he says.
Whatever their particular challenges, most Muslim brokers agree that there's a lot of work ahead as they expand the market — and a lot of opportunity. “Right now, I think the industry is in [only its] first inning. It's really, really budding right now,” says another broker.