Shari’ah Wealth Management: Why Choosing Halal Funds Is Only the Beginning

Shari’ah wealth management in South Africa covers far more than fund screening. For South African Muslims with substantial savings, it is too often reduced to a single question: “Is my fund halal?” That question matters, but it is only the entry point.

The fuller picture spans which retirement funds to draw from first, how much cash to take as a lump sum and the tax on it, whether a living annuity or a Shari’ah-compliant life annuity better fits your income needs, how to hold offshore assets within permissible structures, and how your retirement funds pass to your heirs. Settling each of those decisions requires the same planning rigour as conventional wealth management, applied through an Islamic lens.

For context on what a well-structured investment portfolio looks like before the Shari’ah layer is applied, what a well-structured investment portfolio looks like is a useful starting point. What follows builds on that foundation.

Which Investment Options Comply with Shari’ah Principles?

Shari’ah-compliant investment options exclude conventional interest-bearing instruments, businesses involved in alcohol, tobacco, gambling, conventional finance and other prohibited activities, and contracts that contain excessive uncertainty. What remains is substantial: Shari’ah-screened equities, sukuk (Islamic bonds that use profit-sharing or asset-backed structures instead of interest), commodity funds, Islamic property funds, and cash in mudarabah-based deposit accounts.

Locally, several asset managers offer Shari’ah-screened equity funds investing in JSE-listed shares that have passed screening criteria set by an independent Shari’ah supervisory board. The screening process typically applies two tests: a business activity screen (does the company earn revenue from prohibited sectors?) and a financial ratio screen (are the company’s interest-bearing debt and income ratios within permissible limits?).

Here is the common mistake worth flagging directly: passing the fund-level screen is not the same as having a Shari’ah-compliant wealth plan. A fund that holds only screened equities can still sit inside a retirement structure where the drawdown order is tax-inefficient, or where offshore assets are held in a conventional bond-heavy portfolio, or where beneficiary nominations conflict with the wealth transfer outcome you intend. The fund screen is necessary but not sufficient.

For South African investors, the relevant retirement vehicles, retirement annuities, preservation funds, pension funds, all have Shari’ah-compliant investment portfolios as underlying options with some providers. Understanding how those vehicles work, and how they compare to one another, is a separate question from fund screening. How a retirement annuity compares to a provident fund explains the structural differences clearly.

What Shari’ah-Compliant Savings and Retirement Products Are Available?

South Africa has a meaningful range of Shari’ah-compliant savings and retirement products available: retirement annuities, preservation funds, living annuities, tax-free savings accounts, and endowments, all of which can be structured with Shari’ah-compliant underlying portfolios where the provider offers that option.

Islamic wealth planning in South Africa starts with understanding the product wrapper before you choose the underlying portfolio. The wrapper determines the tax treatment, the access rules, and what happens to the balance when you die. The Shari’ah-compliant portfolio is the inside; the wrapper is the outside. Both matter.

Retirement annuities (RAs) are tax-advantaged vehicles for saving towards retirement outside an employer fund. Contributions are deductible up to 27.5% of taxable income (capped at R350,000 per year), growth inside is tax-free, and you access the fund from age 55. At retirement, you may take up to one-third as a lump sum (the first R550,000 of your lifetime total is tax-free), and the remaining two-thirds must purchase a retirement income product. Several major providers offer Shari’ah-compliant portfolio options within their RA structures. What to look for when reviewing a retirement annuity covers the key evaluation criteria.

Preservation funds receive transfers from employer pension or provident funds when you leave a job. They preserve the tax status of the original fund and, like RAs, offer Shari’ah-compliant underlying portfolios with some providers.

The two-pot system, introduced in 2024, restructured South African retirement funds into a savings component (one-third of contributions, accessible before retirement with tax consequences) and a retirement component (two-thirds, locked until retirement). Both components can be invested in Shari’ah-compliant portfolios where the fund rules permit.

Regulation 28 is the regulation that limits how much of a retirement fund can be held in each asset class: equities, property, bonds and offshore assets each face maximum limits. The purpose is diversification. For Shari’ah-compliant investors, Regulation 28 applies in the same way, which means sukuk and Shari’ah-screened property funds count toward their respective asset class limits, not to a separate “Islamic” bucket.

For a comparison of how provident fund investment choices work within these frameworks, comparing provident fund investment options goes into useful detail.

Living Annuity vs Life Annuity: The Islamic Wealth Planning Dimension

The choice between a living annuity and a Shari’ah-compliant life annuity is one of the most consequential decisions a Muslim retiree makes. It affects income certainty, estate outcomes, and permissibility all at once.

A living annuity keeps your capital invested and lets you draw an income between 2.5% and 17.5% of your fund value each year. On a R10 million fund at a 5% drawdown rate, that is R500,000 per year, or roughly R41,700 per month. The balance can be nominated to your beneficiaries when you die, which aligns well with Islamic inheritance planning goals. The important caveat: SARS taxes the balance and it does not automatically distribute according to faraid (Islamic inheritance rules) unless you have structured nominations carefully. For the faraid dimension, work with the estate planning specialists at GMI.

A life annuity (also called a guaranteed annuity) pays a fixed income for life, regardless of how long you live, in exchange for your capital. The capital does not pass to your heirs. Conventional life annuities are often structured on interest-bearing principles, which creates a permissibility question. Some providers offer takaful-backed or Shari’ah-structured guaranteed income products, though the range of such products in South Africa is narrower than the living annuity market. Confirm the underlying structure with the provider directly, rather than assuming the label implies full compliance.

The practical trade-off is straightforward: a living annuity preserves capital and estate value but carries longevity risk (you can run out of money if the drawdown rate is too high). A life annuity eliminates longevity risk but transfers your capital irrevocably to the insurer.

For many Muslim retirees with significant assets, a blended approach works best: a portion buys a guaranteed income floor and the balance stays in a living annuity. Transferring a retirement lump sum to a living annuity without incurring tax explains the mechanics of that transfer. For a broader view of income choices in retirement, income choices for South African retirees covers the full landscape.

How Much Should Your Portfolio Hold Offshore, and in Which Structures?

A Shari’ah-compliant portfolio can and should include meaningful offshore exposure. South African residents can invest up to R1 million offshore each year under the single discretionary allowance without needing SARS tax clearance, and up to R10 million per year under the foreign investment allowance, which does require a tax compliance status pin from SARS.

Within a retirement fund (RA, preservation fund, pension fund), Regulation 28 caps offshore exposure at 45% of the fund, with an additional 10% allowed in Africa. Outside a retirement fund, in an endowment or directly in your own name, there is no regulatory cap on offshore exposure beyond the annual transfer allowances.

For Shari’ah-compliant offshore investing, the asset class equivalent of bonds is sukuk: instruments structured on profit-sharing, leasing or commodity arrangements rather than interest. Global sukuk markets have grown substantially, and several international Shari’ah-compliant funds offer sukuk exposure alongside global Shari’ah-screened equities, Islamic real estate investment trusts (REITs), and cash in Islamic deposit structures.

The structure matters as much as the asset. Holding offshore assets through a rand-denominated fund of funds inside an RA keeps you within Regulation 28 and the South African tax framework. Holding offshore assets directly, through a foreign account or a foreign endowment-equivalent, gives you more direct currency exposure and potentially greater flexibility, but requires more careful estate planning.

How much of a R10 million portfolio to hold offshore gives a detailed framework for thinking about the split. Offshore investing for South African retirees covers the structural options, and why currency diversification matters for South African investors explains the rand-hedging logic.

How Do Asset Managers Structure Fees on Shari’ah-Compliant Funds?

Asset managers charge fees on Shari’ah-compliant funds in the same way as conventional funds: primarily through the total expense ratio (TER), which is the annual cost of running the fund expressed as a percentage of assets. The TER includes the investment management fee, performance fees where applicable, and administration costs.

The TER does not appear as a line item on your statement. It is deducted from the fund’s daily unit price, so you experience it as a drag on returns rather than a visible charge. When comparing Shari’ah-compliant funds, the TER is one of the most important numbers to request and compare. A difference of even 0.5 percentage points per year compounds meaningfully over a decade on a R10 million portfolio.

There is an additional cost concept specific to Shari’ah-compliant investing: purification. When a screened company earns a small proportion of its revenue from impermissible activities (within the tolerance thresholds of the screening methodology), the fund is required to donate a proportionate amount of its income from that company to charity. This purification amount is typically small and is disclosed by the fund manager. It is a cost of compliance, not a fee to the manager, and it appears separately from the TER.

For funds with performance fees, the fee structure must itself be reviewed for compliance: conventional interest-based hurdle rates would be problematic. Reputable Shari’ah-compliant fund managers have their fee structures reviewed by their Shari’ah supervisory board.

If you have substantial savings across several funds and are unsure whether the fee structure across your whole portfolio is appropriate, whether you need a financial adviser when you have substantial savings is worth reading.

Shari’ah Wealth Management vs Fund Selection: What the Full Picture Covers

Selecting halal funds is the starting point of Shari’ah wealth management, not the destination. The full picture requires planning decisions that cut across your entire financial position.

Inflation protection deserves a direct answer, because I get asked about it regularly. Shari’ah-compliant portfolios protect against inflation through real asset exposure (Shari’ah-screened equities represent ownership in real businesses), Shari’ah-compliant property funds, commodity exposure, and offshore diversification. The absence of conventional fixed-income instruments is partly offset by sukuk, though sukuk returns are typically linked to benchmark rates in a way the Shari’ah supervisory board has approved. Maintaining a meaningful equity allocation within your living annuity is the most reliable long-run inflation hedge.

How many funds to hold in a substantial portfolio addresses the diversification question in more depth. Managing retirement funds in the decade before access is particularly relevant if you are still in the accumulation phase.

Shari’ah-Compliant Options for Business Owners and Those Facing a Large Financial Event

Business owners and individuals facing a large financial event, a sale of a business, a retrenchment package, or an inheritance, need to make Shari’ah-compliant decisions under time pressure. Those decisions have both a funding structure dimension and a tax dimension.

For business funding, three Islamic structures are most commonly used in South Africa:

• Murabaha: A cost-plus sale arrangement where the financier buys an asset and sells it to you at a marked-up price payable in instalments. This replaces a conventional interest-bearing loan.
• Ijara: An Islamic lease arrangement where the financier owns the asset and leases it to you. Used for equipment, vehicles and property financing.
• Musharakah: A partnership structure where the financier and the business share ownership, profit and loss in agreed proportions. Often used for working capital or joint ventures.

For a retrenchment package or retirement lump sum, the first R550,000 of retirement lump sums received across your lifetime from retirement funds is tax-free (this is the 2024/25 figure; confirm the current threshold with a tax professional each year as it may be adjusted). Amounts above that are taxed on a sliding scale. Getting the drawdown decision right, how much to take as cash versus converting to retirement income, is central to tax-efficient Islamic wealth planning.

What to look for when reviewing an existing retirement annuity covers how to assess whether your current structure is still serving you at this stage.

Frequently Asked Questions

Which investment options comply with Shari’ah principles?

Shari’ah-compliant investment options include Shari’ah-screened equities, sukuk (Islamic profit-sharing bonds), Islamic property funds, Shari’ah-compliant commodity funds, and cash in mudarabah-based deposit accounts. The key exclusions are interest-bearing instruments, businesses in prohibited sectors (alcohol, tobacco, gambling, conventional finance), and contracts with excessive uncertainty. Each option should be certified by an independent Shari’ah supervisory board.

What Shari’ah-compliant savings and retirement products are available in South Africa?

Retirement annuities, preservation funds, living annuities, tax-free savings accounts, and endowments can all be structured with Shari’ah-compliant underlying portfolios where the provider offers that option. The two-pot system applies to retirement funds in the same way for all investors, including those invested in Shari’ah-compliant portfolios. The key is to check both the wrapper and the underlying portfolio for compliance.

How do asset managers structure and negotiate their fees on Shari’ah-compliant funds?

Fees are deducted through the total expense ratio (TER), which reduces the daily unit price rather than appearing as a visible charge. Shari’ah-compliant funds may also have a purification cost, where a small proportion of income from borderline-screened holdings is donated to charity. TERs on Shari’ah-compliant funds are broadly comparable to conventional actively managed funds, though you should request and compare the full TER before investing.

Which banks and financial institutions offer Islamic banking services in South Africa?

Several South African banks and financial institutions offer Islamic banking products, including home finance, vehicle finance and business banking on murabaha, ijara or musharakah principles. The major providers in this space are worth researching directly for their current product offerings, as the landscape evolves. For currency diversification ETFs for South African investors, Shari’ah-screened ETF options are also available through certain platforms.

What Shari’ah-compliant working capital or business funding options exist?

Murabaha (cost-plus financing), ijara (Islamic leasing) and musharakah (profit-and-loss sharing partnership) are the three main structures used for Shari’ah-compliant business funding in South Africa. Some Islamic banking providers also offer commodity murabaha as a working capital facility. These structures replace conventional overdrafts and term loans.

How can wealth be protected against inflation within a Shari’ah-compliant portfolio?

The most reliable inflation hedges within a Shari’ah-compliant framework are Shari’ah-screened global and local equities (which represent ownership in real businesses), Islamic property funds, commodity exposure, and offshore diversification into rand-hedge assets. Sukuk provides income but is not a pure inflation hedge. Maintaining adequate equity exposure within your living annuity is essential for long-run real return.

What are the best performing Shari’ah-compliant investment funds currently?

Chasing recent top performers is a well-documented mistake in long-term investing. What matters more is evaluating funds on risk-adjusted return over a full market cycle, the TER relative to peers, the consistency of the investment process, the independence and rigour of the Shari’ah supervisory board, and how the fund fits your overall asset allocation. A qualified financial adviser can help you assess this in the context of your full portfolio.

The Whole Plan Is the Point

Shari’ah wealth management done well means every decision across your retirement funds, your living annuity, your offshore assets and your estate is planned in a way that is both tax-efficient and fully permissible. Choosing halal funds matters. But the decisions that actually determine whether your wealth lasts, grows in real terms, and passes to your heirs as intended are the cross-fund decisions: the drawdown order, the lump sum amount, the offshore structure, and the beneficiary nominations.

If you have not had those decisions reviewed together, in one conversation, by an adviser who understands both South African financial planning rules and Shari’ah-compliance requirements, that is the gap worth closing.

For more on how I approach Shari’ah-compliant planning across the full portfolio, the Shari’ah-compliant investing guide covers the framework in detail. If you would like to discuss your specific situation, you are welcome to reach out through the private consultation page.

For context on what monthly income different retirement capital amounts can support, what monthly income to expect when restructuring a pension fund provides a useful reference.

This article is general information and is not personal financial advice. Your individual circumstances, tax position and goals require a personalised assessment before any decisions are made.