How much of Robinhood’s revenue comes from haram?

Robinhood earns its revenue from the following revenue sources:

  • Net Interest Revenues:

Includes interest earned from margin lending and cash deposits.

  • Transaction-based Revenues:

Includes revenue earned from routing customer orders for options, equities, and cryptocurrencies to market makers.

  • Other Revenues:

Includes revenue generated from Robinhood’s Gold subscription service that provides users with premium features such as enhanced instant deposits, professional research, Nasdaq Level II market data, and access to margin investing.

As per their S-1 filing, Robinhood’s revenue breakdown is the following:

Net Interest Revenues, which comprise approximately 12% of Robinhood’s total revenue, is clearly haram revenue as it is riba.

Transaction-based revenue from options trading accounts for 38% of Robinhood’s revenue.

While in some cases risk mitigation using options may be halal, Practical Islamic Finance is uncomfortable with most naked option trading.

So at least 50% of Robinhood’s revenue is heavily suspect.

The remaining transaction-based revenue is also suspect since it comes from Payment-for-Order-Flow, which means Robinhood makes more money the more trades their customers place.

This dynamic incentivizes Robinhood to encourage its customers to make more trades.

The problem with this is that numerous studies have found a strong correlation between excessive trading and lower returns.

A business model where the interests of the business are at odds with the interests of its customers is fundamentally unIslamic.

Practical Islamic Finance concludes:

A material part of Robinhood’s revenue comes from haram.

Does Robinhood rely on interest to operate?

Year-to-Date
for period ended
3/31/2021
Fiscal year
ended
12/31/2020
Fiscal year
ended
12/31/2019
Interest Income (net)$62,497$177,437$70,639
Total Revenue$522,174$958,833$277,533
Interest Expense (net)
Total Expenses$463,788$945,053$384,463
Interest Income (net) / Revenue11.97%18.51%25.45%
Interest Expense (net) / Total Expense
*Numbers in thousands, U.S. dollars

Practical Islamic Finance concludes:

There is a systemic reliance on interest in Robinhood’s operations.

What is Robinhood’s Environmental, Social, and Governance (ESG) impact?

Environment

No notable environmental highlights.

Social

To its credit, Robinhood has gotten more people interested in the stock market, which has been one of the greatest wealth creators of the last century.

In addition, Robinhood pioneered zero-commission and zero-minimum investment accounts, which has become the norm after other brokerages needed to compete with Robinhood’s trading platform.

However, Practical Islamic Finance believes the combination of Robinhood’s gamified user interface and its platform “democratizing” the use of leverage has had negative consequences.

In June 2020, a 20-Year-Old Robinhood customer committed suicide after seeing a negative $730,000 balance on his Robinhood account, leaving behind a note to his parents on his computer stating, “How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?”.

Governance

No notable governance highlights.

Practical Islamic Finance concludes:

Robinhood has a net negative ESG impact.

Comfort Rating

From Robinhood’s business, financial, and ESG reviews, Practical Islamic Finance rates Robinhood stock as:

Uncomfortable to invest in from a Halal perspective.

Justification for our rating

The Prophet Muhammad (peace be upon him) cursed the one who consumes riba (interest), the one who pays it, the one who writes it down (documents the contract), and the two witnesses of the agreement, and he said: they are all the same (in sin).

It’s clear from this hadith that being involved in riba-based contracts is a serious sin that Muslims should avoid.

Moreover, Robinhood’s fundamentally unIslamic business model makes our feeling of discomfort investing in Robinhood from a halal perspective even more pronounced.

Sources

Robinhood S-1 filing

20-Year-Old Robinhood Customer Dies By Suicide After Seeing A $730,000 Negative Balance 
Robinhood S-1 Filing

Authors