Some 4.5 million Muslims live in the U.S. When it comes to investing, however, many in this demographic are staying on the sidelines because they don’t know how to invest their money in accordance with Islamic religious practices, or Sharia, notes Dilshod Jumaniyazov, co-founder and CEO of halal fintech platform Musaffa.
“I would say most Muslims [in the U.S.] do not invest, period,” says Jumaniyazov, who started his career as an equity research analyst and has led the trading platform at Wells Fargo Securities. Musaffa aims to help them access the market by researching which stocks and ETFs comply with Sharia law. Eventually, the company plans to add other liquid asset classes to its product line-up, including precious metals, REITs and cryptocurrency.
Musaffa has offices in New York City, Tashkent, Uzbekistan and Dubai, and employs about 2,000 financial analysts. The firm consults with Sharia scholars who sit on the board of the Accounting and Auditing Organization for Islamic Financial Institutions. The company has about 14,000 users in the U.S. with plans to appeal to more asset managers and financial advisors.
WealthManagement.com recently spoke with Jumaniyazov about the challenges practicing Muslims face in finding Sharia-compliant investments, the methodology they use and new projects they hope to unveil in the next six months.
WealthManagement.com: What is Musaffa?
Dilshod Jumaniyazov: The root of the word means “purify.” There are a lot of sources on Sharia-compliant investments, but we do our own research to screen for investments that are considered ethical under the criteria. Let’s say the U.S. has over 10,000 stocks. Based on our own analysis, about 28% to 30% of them are Sharia-compliant. That kind of limits your investable universe. But still, it’s a huge market.
We screen stocks and ETFs in depth. We have Sharia advisors on the board when we have questions. We make detailed reports on how these companies make their revenue and which ones comply with Sharia rules. People love that.
We started with stocks and ETFs because they are the most accessible and there is a lot of data. But we plan to include all of the liquid asset classes that are Sharia-compliant. For example, we intend to launch gold, silver, Islamic bonds. We are still in discussion about crypto right now, about whether it’s Sharia-compliant or not.
WM: Who are your clients?
We have over 470,000 people on the platform from 195 countries. I would say that Sharia-compliant investment is a relatively new concept. We think there are about 400 million Muslims who could be using the platform.
In the U.S., we’ve got around 13,000 to 14,000 people and over 500 are paying for the premium subscription service. We have not gotten into the U.S. as much, but globally, there is a huge demand.
WM: Why?
DJ: In the United States, it’s picking up because a lot of people, both Muslim and non-Muslim, are interested in the concept of how investments align with their values. We launched Musaffa academy as an educational resource, but we intend to develop a whole stand-alone platform to teach what Sharia compliance, or halal investing, means. I think the concept is quite attractive to U.S. investors.
The typical user is somebody who really cares where they invest their money. If you take a regular Muslim person and tell them, “There is this amazing investment, would you want to invest?” they will question, “What does the company do?” In general, that’s not the case in traditional finance. As long as the company makes money, a lot of people just want to jump in. But there are people who really care about what the company does. Sharia says whatever the company does, it has to benefit society.
For example, Apple makes the iPhone. It’s halal. Why? Because you are using it to better society in general. But let’s say that you have some products like tobacco, or maybe adult entertainment, all those things that are actually not really useful for society from an Islamic perspective. That’s not halal.
This is not something new. There are different names for this, like 'socially responsible investing' or 'ethical investing.' And you have environmental, social and governance screened investments. If you look at socially responsible investing and Sharia-compliant investing, there is about 80% to 90% overlap. We see that Sharia-compliant investing is not only for Muslims, it’s for anybody who cares about where they invest money. It benefits society. How? Because it’s rooted at the source in the idea that a company should provide a social good.
WM: Apple is considered halal, but Microsoft isn’t. They are both technology companies, what was the difference?
DJ: As I said, the criteria are quite strict; 95% of the revenue has to be Sharia-compliant. If it’s 94%, it fails. The last time I checked, Microsoft barely failed because it had some gaming revenue. The revenue generated from games that are not suitable for ages 10 and older, some of the games are classified as “doubtful.” The gaming business is not really promoting a social good. And also games that are for mature audiences are not permissible. They have some titles that contain violence, blood and rage, and sexual content. So, when analysts go to analyze, Microsoft is not only a software company. If you have educational gaming, that’s completely fine. But when it comes to adult gaming, it gets into violence, and that’s when it becomes a grey area.
WM: What else would make an investment non-compliant?
DJ: I have talked to so many people, and they say, “I put (my money) in a bag because I don’t want to deal with 'riba.'” Riba means usery, or interest. Interest is not allowed because the poor get poorer and the rich get richer, and it doesn’t benefit society in general.
In the U.S., so many people, when they talk about Sharia-compliant investing, say things like: “Oh, I did not know I could not invest in derivatives,” for example. And derivatives are one of the biggest traded liquid asset classes in the world. From the Sharia perspective, you cannot invest because you cannot sell something you don’t own. You cannot promise a contract that you don’t own yet.
I would say most Muslims do not invest, period. A small portion, the educated portion, for example, like software developers, do, but there is always a suspicion going on, asking, “did I do the right thing?”
So, a lot of Muslims put their money into a banking or checking account because they don’t feel they have other options. There might be billions of dollars right now sitting in the bank, not being invested just because people are not sure what to do with it. That’s why we started this company with the intention that there is going to be real demand. I started my career as an equity research analyst. As a Muslim, I was facing that challenge myself. I wasn’t sure if I should invest or not. There is always this thing lingering in your head “Does it align with my values?”
One more concept I am going to bring up because it’s exceptionally important is a concept called purification. Let’s say Apple has some amount of cash—what do they do with the cash? They put it in a bank or they buy Treasuries, they invest it. Now, the profit that comes from this is interest income, and interest income is the No. 1 reason Muslims don’t invest in the stock market because interest income is forbidden. But purification solves that problem.
Let’s say Apple—I am just throwing out numbers now—1% to 2% of their (financial performance) comes from interest income (which is forbidden under Sharia rules). You can still invest because the core operation of the business is good. The Apple business is not making money from money. They are not a bank. But the problem comes with the interest income. So, let’s say about 1% of the revenue that Apple makes is not Sharia-compliant. You invest in this stock, and let’s say you make a $100 profit after you sell it. You say, “This $1 that came from interest income is not mine. This has nothing to do with me, so automatically I will give it to charity.”
This purification concept, when we teach it to Muslims, they love it, but a lot of people don’t know about it. We have a purification calculator where we already integrated so many brokerages—for example, Charles Schwab and Fidelity are linked to Musaffa now. So, people can open an account themselves and link their portfolios and use the purification calculator.
At least what we do right now—we are developing as we speak, we are a growth stage company—when people integrate their portfolios, with some of them, we get the data on when they bought and when they sold their shares, with their agreement of course. Then, we automatically calculate a purification amount and give them the total of how much they need to donate to charity. Right now, we are building it, but soon we will have a list of charities they can donate to right on the spot and automate it. So every time they buy a stock, they won’t have to worry about purification.
WM: You mentioned that to get the relevant information, you have to dig into the quarterly and annual reports. Is that process automated? How is it done?
DJ: We have real people, about 2,000 financial analysts working every day, going through hundreds of thousands of financial reports. And then there’s the quality control—one analyst analyzes a company to make sure it’s Sharia-compliant. The second one re-analyzes it to make sure the first one didn’t make a mistake. We use technology to some extent—I would say 40% to 50%—but the rest has to be done manually because some corporate financial reports are really a mess, to be honest. There are no strict rules.
Again, interest income is a big deal. A lot of companies in the U.S. are not obligated to provide interest income separately. So, what they do is they net it. They take interest expense and interest income and net it, giving it one line. That’s when you have to do some manual work.
We started using machine learning and AI, but it’s going to take some time. There are people in the business who are using automation, which is why their results are not accurate. You have to go through the footnotes and make hundreds of different adjustments to come up with a solution. Given my equity research analyst background, going over thousands of stocks requires multiple adjustments, and we are using similar procedures at Musaffa to do analysis.
WM: How do you approach ETFs, especially as their portfolios change?
DJ: I can probably say that we developed the world’s first true ETF screener when it comes to Sharia compliance. With that, we’ve got over 40 to 50 ETFs that are considered Sharia-compliant right now.
We use a criteria called the AAOIFI methodology. It stands for Accounting and Auditing Organization for Islamic Financial Institutions. Three different criteria are used. No. 1 is the revenue source. The AAOIFI methodology dictates at least 95% of the revenue has to be Sharia-compliant. That means more than 5% cannot come from things like alcohol, tobacco, weapons and stuff like that. Financial screening is also important. We look at how the company engages with riba—usery or interest. Let’s say the company has a lot of cash sitting in the bank. The condition is that all interest-bearing assets should not exceed 30% of the market cap of the company. Interest-bearing debt of the company should not exceed 30% of the market cap of the company. And the third one is very important. Interest-bearing debt of the company should not exceed 30% of the market cap again. High-leverage companies, usually what happens in economic downturns, they are going to have a hard time paying their interest. They might even go bankrupt. Those companies we avoid; they are not Sharia-compliant.
Of course, you have to be detailed. You have to look at 10Qs and 10Ks, all the financial reports; you have to figure out all of this information.
ETFs are much more complicated. Rebalancing is something that’s important. Let’s say there are about 100 stocks comprising the ETF. Every time a quarter report comes out, we analyze those stocks, and it will affect the state of the ETFs because it is a combination of multiple stocks. If one stock goes non-Sharia-compliant, that will affect the ETF.
Recently, we had the question come up about how often do ETFs have to be rebalanced to stay Sharia-compliant. We don’t want to do it every time a stock changes. We came up with a rule of about every three months for ETFs, so the ETF can stay stable for these three months.
This Q&A has been edited for length, style and clarity
