Israeli investment house launches Islamic mutual funds

Erez Zadok,  credit: Nachshon Philipson, adaptation: Tali Bogdanovsky
Erez Zadok, credit: Nachshon Philipson, adaptation: Tali Bogdanovsky

Aviv Fund Management CEO Erez Zadok: Muslim workers with provident funds are in distress.

Mutual funds are one of the oldest forms of investment on the Israeli capital market. This sector will shortly be joined by mutual funds of another kind, which will be classed as satisfying the requirements of Islamic Sharia law. The funds were launched last week by Erez Zadok, a veteran, and independent-minded, capital market player.

Besides his record in finance, Zadok, who went to live in Elkana in Samaria, was also involved in the Habayit Hayehudi (Jewish Home) and Likud parties, and was an economics commentator on Channel 14, a television channel associated with the right wing of Israeli politics.

Zadok’s Aviv Fund Management has launched two funds intended for observant Muslims labelled "Halal", that is, compliant with Sharia.

In the past, Zadok has launched "kosher" funds that are compliant with halakhah (Jewish law) and "ethical funds". The ethical funds examine companies according to criteria of corporate governance, and are similar to funds that comply with ESG (environmental, social, governance) criteria, which have become popular worldwide.

The idea of funds that comply with religious requirements is not new, but they have not so far taken hold in Israel, and have remained a small niche. Altogether, mutual funds in Israel manage over NIS 425 billion, while the 35 existing kosher funds (active and passive) manage a little over NIS 4 billion, or 1%. The funds in Aviv Fund Management have NIS 300 million in assets under management (including portfolio management and other services). Talking to "Globes", Zadok talks about how the kosher funds were set up, why the returns on them are comparatively low, and about the new venture and its potential for becoming an attractive investment instrument.

Before we get to Islam, how did you come to set up the kosher mutual funds, that operate according to Jewish law?

""In 2019, I started to invest in kosher companies. I discovered that there are rabbinic organizations that sort public companies into kosher and not kosher according to two criteria: observance of shabbat, and observance of kosher dietary laws. This is a strengthening trend, but, as a religious investor, I got to know about it only then. At first, it was an investment world confined to the haredi (ultra-Orthodox Jewish) community only, but today there are also people form the nationalist religious camp who invest in it."

Zadok admits that the venture has not been successful, and has so far yielded returns that are low in relation to the rest of the market. "If you look at pension funds, you find that the kosher investments have lower returns than ‘regular’ investments, but when religious investors complain about that, they are told ‘Switch to a regular investment track and make more,’" he says. "There are several approaches to the subject. There is the approach of extreme haredim who are not prepared to invest in stocks at all, but who will invest in stock indices or futures contracts on stock indices, and government bonds. There is the approach under halakhah whereby 80% of the companies are kosher for investment, and only 20% are not. But the higher the companies’ market caps, the lower the percentage of companies that are kosher. Still, 80% of the portfolio is something that a portfolio manager can work with."

So the performance of the kosher investments is less good?

"There is no reason that the halakhic funds should have worse returns than other funds. But a narrative has become fixed that kosher investments yield less. The change is progressing, but very slowly. In my view, part of the problem is that until now the haredi public has been conservative in its investments. It invests a great deal in government bonds, and in recent years, until 2022, this has been an instrument giving negligible returns; it is only now starting to yield something. So clearly, the kosher funds were at the bottom of the returns table because of this. Another reason is that if you offer the haredi public something better in terms of returns, the response will be: ‘But the rabbi told me to invest in this.’ They are seen as a captive customer, who won’t make the effort to switch out of a fund because the return isn’t good, as the general public does. A narrative has become fixed that I try to combat. I always say in interviews with haredi outlets: Demand returns."

And how did you come to launch the halal mutual funds?

"It started with the Abraham Accords. I said to myself: There’s an agreement with the Emirates, so perhaps we’ll set up a fund to invest in Tel Aviv for residents of the Emirates according to Sharia rules. During the Covid pandemic, the Israelis flooded the Emirates. At first, many people thought that it would be a matter of intelligence meeting money. Then they discovered that in the Emirates there are both intelligence and money, and they aren’t suckers at all. If you want to persuade them to invest, you must first invest yourself, or raise money yourself from Israel."

So what did you do?

"I started to study the subject, and I found out that there wasn’t a single mutual fund for Muslims who live here in Israel and perhaps want to invest. I started to talk to Islamic religious leaders. I spoke to Dr. Iyad Zahalka, a Qadi in the Sharia Court of Appeals and director of the Shari'a Courts in Israel, a person who is well known in the Muslim community. He said that people who work in Israel and who have provident funds and advanced training funds come to him in distress. These are prohibited profits. So they donate their gains, and not only that, it’s considered a sin rather than a good deed, because they made illicit gains.

"Later, I met Dr. Ihab el-Sherif, Imam in the Sahaba Mosque in Nazareth, who holds a doctorate in Islamic jurisprudence and who advises the Sharia Committee in the Ministry of the Interior. He has over twenty years experience in Islamic legal rulings. We agreed that he would supervise the mutual funds that I would set up. Under Sharia rules, the policy is that investment in companies that charge interest (banks, non-bank credit, insurance) is forbidden. It is also forbidden to invest in arms manufacturers, in companies that produce and sell pork (Tiv Ta’am on the Tel Aviv Stock Exchange), and companies that produce and sell alcohol (such as Carmel Corp.)."

What response have you received to the move?

"I talk daily to people from the Arab sector, and I receive new data and information every day. There is enthusiasm, alongside curiosity as to how it works. I also talk to the banks, which are also enthusiastic. But it’s a process that will take time. The banks estimate that there are nearly 100,000 religiously observant Arabs who operate with an account at the Postal Bank only. They don’t want to be involved in interest and forbidden investments, and so they maintain a current account only.

"The banks like the idea, because there’s a public that isn’t catered for to which they can provide a necessary product. What’s more, this is a service that will make these people put their money into the banking system and be players in it. That in itself is something very welcome. If you don’t put your money into a bank, you don’t care if it’s legitimate or not. As soon as you have an interest in putting money into a bank, you also have an interest in ensuring that it’s clean, properly accounted for money. That’s the start, but it’s good for the whole system."

Published by Globes, Israel business news - - on September 10, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Erez Zadok,  credit: Nachshon Philipson, adaptation: Tali Bogdanovsky
Erez Zadok, credit: Nachshon Philipson, adaptation: Tali Bogdanovsky
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