Shari’ah-Compliant Investing for High-Net-Worth South Africans

Shari’ah-compliant investing excludes interest-bearing instruments, prohibited industries, and businesses whose financial structure does not meet Islamic screening thresholds. For high-net-worth South Africans, the good news is that this approach has moved well beyond niche products. Screened equity funds, Shari’ah living annuities, offshore Islamic mandates and Shari’ah-compliant endowments are all accessible today. The planning decisions that matter for any large, multi-fund portfolio translate directly into this framework.

This article walks you through how the screening actually works, where the real trade-offs sit, how South African retirement fund rules interact with Shari’ah requirements, and what your offshore options look like. If you have accumulated meaningful savings across a retirement annuity, a preservation fund, an employer pension and investments in your own name, the sequencing and structuring decisions are the same as for any high-net-worth retiree. There’s an additional compliance layer on top, but the fundamentals don’t change.

For context on what a well-structured portfolio at this level looks like regardless of screening approach, see what a R10 million portfolio should look like.

This article is general information and not personal financial advice.

What Makes an Investment Compliant with Shari’ah Principles?

A Shari’ah-compliant investment passes three layers of screening. All three must be satisfied simultaneously, not just one or two.

Layer one: the riba prohibition. Riba means interest in any form. This rules out conventional bonds, money market instruments that pay interest, bank deposit accounts and fixed-income funds as they are typically structured. In their place, Shari’ah portfolios use sukuk (Islamic bonds structured around asset ownership or profit-sharing rather than a fixed interest payment), commodity murabaha arrangements and profit-sharing deposits.

Layer two: the negative industry screen. Businesses deriving revenue from alcohol, tobacco, conventional financial services, pork-related products, gambling, pornography or weapons manufacturing are excluded. This is the screening most investors already understand. For a South African equity portfolio, the practical effect is that some large-cap financial and resource stocks fall away.

Layer three: the financial ratio screen. Even a business in a permissible industry can fail if its financial structure is too debt-heavy or if impure income, revenue from prohibited sources, exceeds a specified proportion of total revenue. The common thresholds are a debt-to-market-capitalisation ratio below 33% and total interest income and prohibited revenue each below 5% of total revenue, though different Shari’ah boards apply slightly different ratios.

Here’s the critical point: Shari’ah compliance is not self-certified. Any credible fund or product carries an independent Shari’ah board certification, renewed regularly as the underlying holdings change. When you evaluate a fund, ask for the board’s name and the date of the most recent certification. A label on the marketing material is not enough.

Understanding how Shari’ah funds sit within a retirement annuity or provident fund structure helps with the planning side. For a comparison of those fund types, see how retirement annuities and provident funds compare.

How Shari’ah-Compliant and Conventional Investment Strategies Differ

The core difference is straightforward: Shari’ah-compliant strategies restrict the investable universe and replace interest-bearing instruments with profit-sharing and asset-backed alternatives. This affects return profile, sector exposure and income generation in ways you should understand before committing capital.

Sector concentration. Because conventional financial services companies fail the riba screen and several large resource companies fail the debt ratio screen, a Shari’ah equity fund on the JSE will often carry higher weights in technology, healthcare, consumer goods and selected industrial shares. On a global basis, the MSCI World Islamic Index tends to be overweight technology relative to the MSCI World, which has worked in its favour during technology-driven bull markets but creates concentration risk you need to manage actively. See managing risk concentration in a portfolio for a fuller treatment of this problem.

The income instrument gap. The biggest practical challenge for a retiree or near-retiree is that conventional portfolios can hold a large allocation to bonds and cash to smooth volatility and generate income. In a Shari’ah portfolio, the equivalent instruments are thinner: sukuk availability in South Africa is limited compared to the conventional bond market, and the profit rates on Islamic deposit structures are linked to the benchmark rate environment. This does not make Shari’ah income portfolios unworkable, but it does mean you need a manager with genuine expertise in the alternatives, not one who simply removes bonds and holds extra cash.

For perspective on how much of a large portfolio should be placed offshore to diversify these constraints further, see how much of a R10 million portfolio should be offshore.

Retirement Planning with Shari’ah-Compliant Funds in South Africa

South African retirement funds, including retirement annuities, preservation funds and employer pension and provident funds, are fully compatible with Shari’ah-compliant investment mandates. The tax rules, the Regulation 28 limits and the two-pot system apply identically regardless of whether the underlying portfolio is screened or conventional.

Regulation 28. This rule limits how much of a retirement fund can sit in any single asset class. The 75% equity limit and the 45% offshore limit apply to Shari’ah funds in exactly the same way as to conventional funds. The practical effect is that your Shari’ah retirement annuity can hold a meaningful equity allocation and a meaningful offshore allocation, within those bounds. You are not forced into a more conservative structure simply because the fund is screened.

The two-pot system. From September 2024, South African retirement fund contributions split between a savings component, which is accessible before retirement, and a retirement component, which is preserved until retirement. Shari’ah retirement annuities that have updated their fund rules participate in this structure. If you are still contributing and hold a Shari’ah retirement annuity, check with your provider that the fund rules have been updated to accommodate the two-pot split.

Drawdown order and lump sum tax. At retirement, you face the same sequencing decisions as any high-net-worth retiree: which fund to retire from first, how much cash to take as a lump sum, and at what tax cost. Then you structure your ongoing income. The first R550,000 of retirement lump sums is tax-free in aggregate over your lifetime, and marginal rates rise from there. Getting the drawdown order right across multiple funds can save material tax. For a full picture of your income choices, see income choices for South African retirees and transferring a retirement lump sum to a living annuity.

Shari’ah living annuity. A living annuity keeps your capital invested and lets you draw an income between 2.5% and 17.5% of the fund value per year. The balance passes to your beneficiaries when you die. Several South African providers offer living annuities with Shari’ah-compliant underlying portfolios. The investment growth, the drawdown mechanics and the beneficiary nomination rules are identical to a conventional living annuity.

Shari’ah life annuity. A life annuity pays a guaranteed income for life in exchange for your capital. The Shari’ah life annuity market in South Africa is thinner than the conventional market. The number of providers offering a genuinely certified Shari’ah life annuity is small, which means less competitive pricing and fewer income escalation options. If a guaranteed income is important to you, factor in this limited competition when you compare quotes.

For decisions across multiple access ages and fund types, see managing retirement funds across different access ages.

Offshore Shari’ah Investing: Using Your Annual Allowance and Externalisation Options

South African investors can move capital offshore using their annual discretionary allowance of R1 million and their annual foreign investment allowance of R10 million, for a combined R11 million per year without requiring a tax clearance certificate beyond the standard process. For high-net-worth investors, this is a meaningful channel for building a Shari’ah-compliant offshore portfolio over time.

The MSCI World Islamic Index as a benchmark. When evaluating offshore Shari’ah mandates, the MSCI World Islamic Index is the most widely recognised benchmark. It applies the same three-layer screening described earlier to the global developed-market universe. Funds tracking or benchmarking against this index give you a credible, independently maintained reference point for performance and compliance.

Offshore Shari’ah-compliant structures. You can hold offshore Shari’ah investments directly in a foreign brokerage account, or through a rand-denominated endowment wrapper that invests offshore. For high earners with marginal tax rates above 30%, the endowment wrapper is worth examining: investment growth within an endowment is taxed at a flat 30%, which can produce a better after-tax outcome than holding the same offshore assets in your own name, where growth and income are taxed at your marginal rate.

Business sale or inheritance. If you have recently sold a business or received a large inheritance, you may have a substantial rand amount to structure. Placing a portion offshore into a Shari’ah-compliant mandate serves two purposes: it diversifies currency risk and it keeps the capital in a screened environment from the outset, rather than parking it in a conventional money market fund temporarily and re-screening later.

For the broader offshore framework, see offshore investing for South African retirees, a practical guide to investing offshore from South Africa and why currency diversification matters.

Estate and Beneficiary Considerations for a Shari’ah Portfolio

The retirement and investment decisions you make today affect what your family receives. For Muslim families there are several specific points worth understanding before you finalise your structure.

The living annuity pass-on. A living annuity does not form part of your estate. When you die, the remaining capital passes directly to your nominated beneficiaries outside the estate, which means it is not subject to estate duty and is not delayed by the winding-up process. For Muslim investors, this is significant: a living annuity can be a tax-efficient and administratively clean way to pass capital to your heirs, subject to your beneficiary nominations being kept up to date.

Section 37C and trustee discretion. Retirement fund death benefits, including the balance of a retirement annuity or preservation fund that has not yet been retired, are distributed under Section 37C of the Pension Funds Act. The fund trustees have discretion to allocate the benefit among your financial dependants, and they are not bound by your beneficiary nomination or by Islamic inheritance rules. This is a critical point for Muslim families: the amount your beneficiaries receive from an unretired retirement fund may differ from what Islamic inheritance law would prescribe, because the trustees apply the South African legal framework. Structuring your retirement income in a way that minimises the unretired balance at death is one way to manage this reality.

Estate duty and liquidity. South African estate duty applies at 20% on the dutiable estate up to R30 million, and 25% above that threshold, after the R3.5 million abatement. If your estate lacks sufficient liquid assets to pay the duty, the executor may be forced to sell investments at an inopportune time. For wills, trusts and estate plans, the estate planning specialists at GMI are best placed to assist. What you can address on the investment side is ensuring adequate liquidity.

For a broader view of whether you need a financial adviser at this asset level, see whether you need a financial adviser with R5 million or more.

Where to Find Shari’ah-Compliant Financial Services in South Africa

Shari’ah-compliant financial services in South Africa are available across several provider categories, though the range varies considerably by product type. Knowing where to look and what questions to ask saves you from accepting a product that is labelled Islamic without genuine board certification.

Unit trust and retirement fund managers. Several large South African asset managers offer certified Shari’ah unit trust funds, including both equity and income options. These funds can be held inside a retirement annuity, a preservation fund, a discretionary investment or a tax-free savings account. The key question is whether the certification is current and which independent Shari’ah board issued it.

Annuity providers. Shari’ah living annuities are offered by a reasonable number of providers. Shari’ah life annuities are offered by fewer. If a guaranteed income is part of your retirement plan, you will need to request quotes specifically from providers with certified Shari’ah life annuity products and compare them carefully.

Islamic banks. For cash management and sukuk exposure, the Islamic banking sector in South Africa offers profit-sharing accounts and term deposit alternatives. These are useful for the lower-risk component of a Shari’ah portfolio.

The common mistake. Many investors assume that holding a Shari’ah-compliant fund inside a conventional retirement annuity or investment wrapper makes the whole arrangement compliant. Product-level compliance does not equal plan-level compliance. Your adviser needs to look at the entire structure, including where your contributions go, how income is generated and how the estate is structured, to give you a coherent answer.

For a sense of what to look for when reviewing a retirement annuity, see how to evaluate a retirement annuity and what to look for in a retirement annuity review.

Frequently Asked Questions

The questions below cover the most common points of confusion around Shari’ah-compliant investing for South African investors with substantial savings.

What makes an investment compliant with Shari’ah principles?

An investment is Shari’ah-compliant when it passes three independent screening layers: it earns no interest (riba), it operates in a permissible industry and it meets financial ratio tests limiting debt and impure income within the company. Compliance must be certified by an independent Shari’ah board, not self-declared by the fund manager or provider.

How do Shari’ah-compliant income funds work?

Shari’ah income funds replace interest-bearing bonds and cash instruments with sukuk, commodity murabaha and profit-sharing deposit structures. The income you receive is a share of a profit or a return on an asset-backed arrangement, not an interest coupon. The return profile is linked to the profit-sharing rates available in the market at any given time, which in turn are influenced by the broader interest rate environment.

How do Shari’ah-compliant and conventional investment strategies differ?

The main differences are the exclusion of interest-bearing instruments, the screening out of prohibited industries and the financial ratio limits on investee company debt. In practice, this produces a narrower investable universe, higher sector concentration in technology and consumer stocks, and a thinner range of fixed-income alternatives. Performance relative to conventional funds depends heavily on the market environment and which sectors are driving returns at any given time.

Where can high-net-worth investors find Shari’ah-compliant financial services in South Africa?

Large South African asset managers offer certified Shari’ah unit trust funds accessible through retirement annuities, preservation funds and discretionary accounts. Islamic banks provide cash management and sukuk exposure. For annuities, several providers offer Shari’ah living annuities, while the Shari’ah life annuity market is smaller. The critical step is verifying that the certification is current and issued by a named, independent Shari’ah board.

Can I hold a Shari’ah living annuity and still benefit from the tax-free rollover on retirement?

Yes. When you retire from a retirement annuity or preservation fund and transfer the proceeds directly into a living annuity without taking a cash lump sum, no tax is payable on the transferred amount. This tax-free rollover applies equally to Shari’ah living annuities. If you take a partial lump sum before transferring the balance, the lump sum is taxed according to the retirement lump sum tax table, with the first R550,000 tax-free in aggregate over your lifetime.

What’s the difference between a Shari’ah living annuity and a Shari’ah life annuity?

A living annuity keeps you invested and lets you draw an income between 2.5% and 17.5% of the fund value per year, with the balance passing to your beneficiaries. A life annuity pays a guaranteed income for life in exchange for your capital, and the balance is not passed on. The Shari’ah life annuity market in South Africa is smaller and more limited than the living annuity market.

How does Regulation 28 affect a Shari’ah retirement annuity?

Regulation 28 applies to Shari’ah retirement annuities in exactly the same way as conventional ones. The 75% equity limit and 45% offshore limit apply regardless of whether the underlying portfolio is screened. You are not forced into a more conservative structure simply because the fund is screened.

Taking the Next Step

Shari’ah-compliant investing at the high-net-worth level is not a simplified version of conventional wealth management with a few funds swapped out. The same complex decisions apply: drawdown order across multiple funds, lump sum tax optimisation, offshore allocation, income sustainability and what your family receives. The additional compliance layer narrows the product universe and requires genuine expertise in the alternatives to interest-bearing instruments.

The trade-offs are real and worth acknowledging. The investable universe is smaller. Sector concentration is a genuine risk. The Shari’ah life annuity market is thin. None of these are disqualifying, but they do require active management and a plan-level view rather than product-by-product compliance checking.

For related reading, see building retirement income from a screened equity portfolio and property investment strategies for South African investors.

If you would like to discuss how Shari’ah-compliant strategies apply to your specific portfolio, visit the Shari’ah-compliant investing guide or book a private consultation at /contact.

This article is general information and does not constitute personal financial advice. Your circumstances are specific to you, and the right structure depends on your full picture.