By Mohsen Allam Youssry Helmy, founder of IdealRatings, wants to provide information, not enter into a religious debate. By Mohsen Allam Mohamed Donia, CEO of IdealRatings, saw the need for a Shariah-compliant investment tool.

By Ali El-Bahnasawy

In the ever-changing investment universe, the quest for profits is the only constant. But not for all: A growing number of investors are eschewing a purely profit-based approach and instead looking for investments that also meet particular ethical standards. This is particularly true in the Islamic world, where Shariah guides the investment decisions of many Muslims.

Finding a company that is not in violation of Islamic principles is not as easy as it sounds. The global marketplace is a complex and fluid network of deals, investments, buyouts and mergers. A company that produces appliances may hold military contracts and a global fast food chain may sell pork and alcohol in some of its thousands of restaurants.

For an individual investor, fund, or even financial institution, wading through the mass of information available to track Shariah compliance has been an almost impossible task. That’s where the startup IdealRatings comes in with its service that helps investors identify and manage Shariah compliant stocks.

IdealRatings is the latest project of Youssri Helmy, founder of major local players ITWorx and Swan Labs. It was actually Helmy’s California neighbor Mohamed Donia who came up with the concept. Donia, who has spent his life delivering computer solutions for the finance sector, approached Helmy to open a company to cater to the rocketing demand for Islamic investment products. The idea was to give investors and fund managers an intelligent, computerized solution to help them identify companies that comply with Shariah.

According to a recent report by global financial services firm Ernst & Young, Islamic assets under management worldwide doubled from $20 billion in 2003 to hit $44 billion earlier this year, while the number of Islamic funds grew from 200 to around 690 funds over the same period.

“Back in 2005, oil prices reached an extraordinary level, and Middle Eastern investors started to have an appetite for investing in the US market again,” says Donia, CEO of IdealRatings. But there was a catch: Many of the new investors wanted their investment to comply with Islamic beliefs. They demanded that their fund managers follow Shariah, and with billions of oil-fueled dollars waving in front of them, no one was going to argue. Of course, the challenge was how to monitor the activities of thousands of potential investment targets so as to ensure compliance.

The service IdealRatings offers is based on a software engine that surfs the internet for articles, newsfeeds, financial statements and a range of other indicators covering approximately 42,000 companies across 106 countries. The data produced by the engine is then reviewed by a team of researchers who then feed analysis back into software that rates each company’s degree of Shariah compliance.

Twenty-eight elements are included on IdealRatings’ list of activities that may be considered impermissible investments. These include the obvious: alcohol, tobacco, pork products, casinos and adult entertainment. But it also contains bans such as music, cinema and broadcasting, publishing, advertising and stem cell research.

The breadth of the list arises from the different interpretations of Shariah across countries; Saudi Arabia has different rules from those of Indonesia or Malaysia for example, and different interpretations mean different considerations when it comes to investing.

IdealRatings provides utility here as it allows fund managers and investors to deal with multiple Shariah interpretations at the same time.

This flexibility also ensures that the company does not step into religious debate. “We don’t deal with fatwas and we don’t have scholars,” says Helmy.

The software also allows investors to determine the purification percentage of their investments. “Purification means the portion of revenue that [investors] should give away because it came from impermissible [sources],” says Helmy. This purification process depends on each investor. Some will not tolerate investing in a company that has as little as 1% of its revenue from impermissible sources, while other investors are comfortable putting their money in companies with 5% or 10%.

“Giving the purification percentage in advance of starting the investment is very important for investors. It allows them to predict the amount of money left after purification,” says Donia.

Rather than closing down investment avenues, providing more accurate information on Shariah compliance can also show investors companies that were previously considered off limits.

In the past, investors could not invest in many food sector companies due to their involvement with pork. IdealRatings contacted McDonalds and determined that 2% of its revenue came from pork sales, according to Donia, meaning that investors have to donate 2% of their investment revenue to purify any gain.

While Helmy would not reveal IdealRatings’ revenue or the company’s complicated pricing scheme, Hani El-Sonbaty, who serves on the company’s board and is a partner at EFG Hermes, says that the fees are less than hiring one staff member to do the same job for a year.

“Clients see the solution as a competitive advantage. It is a tool to help you narrow down and visualize the investment universe — this is every fund manager’s dream,” says El-Sonbaty. “Fund managers usually go through hundreds of companies, reading everything about them. Suddenly, there is this tool that is flexible and has visual representation. It will reshape the day of each fund manager.”

IdealRatings is now looking to apply the same model to other fields. The company is studying the feasibility of providing an environmental version of their service that would quantify a company’s carbon footprint, recycling program and other environmental indicators much as it now quantifies pork and beer sales. “I’m trying to help people who want to do good, to do it. This will be good for everyone,” says Helmy.  bt