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14 November 2018

Access to Islamic investment for everyone

Wahed Invest, which is poised for an official launch in the UAE and Saudi Arabia, talks about their plan to make Shari’ah-compliant retail investment accessible across the world


Do you believe that Islamic financial institutions have underserviced retail investors?

They don’t bother with retail. It’s all high net worth and institutional. With people under a million dollars, it’s hard to go anywhere and get wealth management. For that, when we first started off, we looked at the product universe where people could invest. We wanted people to have a diversified portfolio. For retail clients with no access to Sukuk, no access to globally diversified ETFs, there was nothing out there. What we’ve had to do is select funds and ETFs from a very small pool and over time, to make it efficient, we have to start pushing out our own index funds.

We are a passive investor—we don’t stock pick, and don’t want to be active investors. We have done this exclusively for our US clients with the S&P Shari’ah Index, with a minimum invest of $100, which gives exposure that outperforms any of the mutual funds when you take their fees into account. We’re quite proud of that in terms of product innovation, because we see in the market that Islamic finance institutions try to compete with each other, but we’re trying to compete with conventional institutions. It’s a whole different world.

There’s a huge inefficiency gap. The reason for that is that we see a big part of our market use conventional finance. Even practicing Muslims don’t care if it’s Islamic or not Islamic, because they don’t see the actual difference—it doesn’t make sense to them. As long as we can compete with conventional finance, and offer an ethical and Islamic product, we feel the market is ten times as big as people actually think it is. That’s what we’re trying to do.

Not every Islamic investment market is immature. Malaysia, for example.

Malaysia is more mature in terms of everything. They have their own ETFs—they have everything—but it’s also localised. Right now, we’re taking over the dollar-denominated clients, so anyone who wants to invest with us, all of our portfolios are dollar driven. Malaysia has its own local markets, similar to Indonesia or India. The GCC is still happy with the dollar, Africa is happy with the dollar, and America is happy with the dollar. The dollar market is more than big enough, but when we go east, we’re going to have to start thinking at the other currencies. When we do that, the good news is there are enough products out there in Malaysia.

How did Wahed Invest begin for you?

I grew up in Dubai, but I went to the US for my Masters at Columbia University studying industrial engineering and operations research with a specialisation in stochastic math, which is all financial optimisation. I worked in Wall Street Investment Banking for a bit, and set Wahed up three years ago state-side. It took around a year to get all the licensing and compliance infrastructure set up, but we are SEC regulated, which is a big deal. We launched there a little over a year ago, and it did a lot better than we thought it did. In the first three months, we crossed 1000 wealth management clients.

That’s a huge number just from word of mouth. That’s three times the growth rate of the leading conventional roboadvisors in their first year. We realised that retail Muslims have no way to invest. These guys keep their money in cash or real estate—otherwise there’s absolutely nothing. So, we come out there saying, you don’t need to be a multimillionaire, if you have $100, you can try it out. We had many trying it out with $100, seeing that it works, and then investing more money. The vast majority started enabling recurring deposits, which is not a normal thing for mutual funds. For us, you have clients who have $1000 a month deposited, which is very good for us in terms of AUM predictability.

What issues did you face in making an Islamic investment proposition valuable?

We ran into the obvious infrastructure issue of, how do we trade Islamic finance securities? How do we get exposure to all of the markets and make an actually diversified portfolio? The biggest issue we had was, how do we trade Sukuk? Sukuk is usually traded over the counter in $100,000 blocks, illiquid. Eventually we figured that out and manually negotiated with the funds to be able to access at fractions with no entry, no exit, and cut the price. The next problem was fractional trading. If you want exposure to everything you’ll need a minimum balance of $10,000, so we had to build infrastructure in house to be able to fractionalise ourselves.

As soon as we learned how to fractionalise securities, as there’s only a handful of people in the world that can do this, it really changed the game, because then we could say that our minimum is $100. We took on institutional investors to go east. The UK was the next obvious market—it’s a mature regulator with passporting rights throughout Europe and ten times the number of Muslims compared to the US. It was significantly easier than the US, and we’re seeing that market is unbelievable big.

We’re also seeing that it’s a much higher funding rate in the US. There’s no substitute products— there’s no one else doing retail Islamic finance. For us, it’s all online. In America, we have people from all 50 states. For the UK, the Government is very supportive. They’ve assisted us and are always there for support, so we feel very comfortable. One concern we have now is Brexit, as we set up in the UK to cater to all of Europe. We’re hoping some sort of deal will be struck, and most likely it will, as with finance you can’t just stop, but that is in the back of our mind.

What markets are your next priority?

Because of our mandate to cover the world, we have an office in Dubai to figure out how to cater to the GCC region, and we have an office in India to cater to 200 million Muslims who are ignored by Islamic finance. We have an office in Malaysia and we are registering now, which should be done by the end of the year. We’re also registering in Australia and are thinking about Turkey as well. Our next main priority is the UAE and Saudi Arabia. We have a large number of preregistered clients all over the world. By pushing out in the UAE, we get to learn a lot about a very diverse client base in terms of behavioural economics of how people think, what they think about the product, and more. So far, the response has been great. We’re trying to figure out what the best legal way to do it is to make sure that everyone is happy.

 In case anyone is not familiar, what is roboadvisory?

Roboadvisory is automated wealth management, often for people who are ignored by the wealth management divisions of banks, or people who do not have the time for physical contact with a financial advisor, who want full transparency and access 24/7. The best thing about passive investment is that it outperforms active managers, statistically speaking. In simple terms, it’s wealth management for everyone in the world.

What are the challenges of making it Islamic in particular?

It’s very different to Islamic finance because Islamic finance is a very broad term. Most of that refers to the lending institutions. When you think of Islamic finance, you think of Islamic banks. We don’t do anything with lending. As an investment platform, we have people who already have money investing in certain companies. We have to ensure that these companies and securities that we are investing in are Shari’ahcompliant. For that, we have a three person Shari’ah board run according to AAOIFI standards who make sure there is nothing impermissible.

No excessive debt, no firearms or other non-Halal industries. In addition, at the end of the year, we publish a purification report that shows every single security you’ve had exposure to, and how much of the income was derived from impermissible means, because, whether you like it or not, people don’t like to admit it, but every company has issues with staying Shari’ah-compliant. Even for AAOIFI standard, there’s a threshold. We allow them to know how much has approached that threshold, and then let the clients decide what to do with that amount of the funds. I think people have really appreciated our complete transparency, because it lets them know how vigilantly we look at our investments. It’s not just investments—the company itself is run in a Shari’ahcompliant manner. So, every contract goes through the Shari’ah board, all the marketing material, everything. It’s a fully Shari’ah-compliant institution.

What is important to your clients—is it about returns, or Shari’ah-compliance?

Considering that we launched in the US, at first, it was all about trust, as the community has been burned in the past. Everyone, without exceptions, would deposit the minimum $100, withdraw it to see it hit their bank account, and then they decided to trust it. Then, all the questions became, what is Islamic investing, how are you different to conventional players, and what makes you special. We run surveys, and we found that the vast majority of people don’t trust Islamic finance institutions. A big part of our education is saying that Islamic finance is broad, and that we do not lend.

The clients then often, once they understand we are not an Islamic bank, decide they can trust us. It’s very unfortunate that it is like that, but that is where we are. We see that a lot of people don’t trust Islamic finance institutions. From there, it’s about teaching the benefits of a diversified portfolio, what it means to be Shari’ah compliant in investing, and the roboadvisory element. We launched this project for the common man, but the majority of our clients are very educated and young. These are young people starting off their journey who don’t want to go to a wealth manager.

They are tomorrow’s millionaires, which is a very valuable segment. In the UK, it’s a whole different world. Trust is also a huge deal, as the UK Muslim community has been burned by scams in the past. We have to push the fact that we are regulated, stable, and have credibility. Then we find that the market is very Islamic-oriented. Our marketing thus is tailor-made to a more religious audience, explaining the Islamic elements in detail. A lot of our clients are first time investors, who just keep their money in cash. But what they don’t realise is that their money is being used for loans.

Once we explain that, they are more incentivised to move their money into investment, where it benefits the Islamic economy. Islamic banks don’t have products to push to retail investors. They don’t know how to fractionalise. They don’t have exposure to all that we do. We have built an international ecosystem so that we can give access and exposure to retail investors. There are more than enough people focusing only on HNWIs and Institutional clients. We want to give people a safe, efficient way to give people a place to keep their money, so efficient that it rivals Deutsche Bank and JP Morgan. Our product value is very strong.

How many high net worth clients do you have now?

The vast majority of our clients in the US are high net worth clients, but we do not limit ourselves to high net worth clients. The high net worth clients pick us for their liquid exposure because they don’t want to go to the manager who charges them exorbitant fees when there’s a passive, simple, transparent solution for them. Although it’s open to anyone, the vast majority of our clientele are high income.

 How many preregistrations do you have in the Middle East?

We have around 50,000 of them last time I checked, which is a crazy number. We should be able to sign up 100 clients a day in these countries, which is also a crazy number for wealth managers or even banks. 





CPI Financial was established in Dubai in 1999 to meet the needs of an ever-expanding financial community, offering a comprehensive portfolio of market-leading products and services tailor-made for the banking and financial services sectors.

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