Islamic Finance & Sustainability
Financial services constitute the least trusted industry in the country; just 26% of Americans polled in 2013 thought the sector benefits the economy. Income inequality in the United States is now at the highest level since 1928: 90% of the country receives less than half the national income. Additionally, 77 million Americans are delinquent on their debt — 1/3 of the United States population has debt in collections. As global water levels and ocean temperatures increase, the environment also suffers potentially irreversible damage because of corporate greed. In short, the economic system has severe problems.
Islamic finance presents solutions to many of the structural problems in the modern economic system. Sustainable investing can also mitigate much of the damage caused by this economic order. Combining these particular ideas in a socially responsible investment firm that adheres to Islamic rules could succeed to profit and create positive change.
Principles of Islamic finance, based in the sacred law of the religion, could combat inequality and instability. The most basic principle is that trade must be based on mutual agreement and benefit. Risk and profit ought to be shared. Transactions should avoid uncertainty and speculation. Muslims also cannot conduct business involving forbidden items and activities. Most outstandingly, interest is unequivocally forbidden. Interest, scorned by religious people and philosophers for centuries, creates inequality by taking from the poor and giving to the rich.
Socially responsible investing (SRI) focuses on environmental, social, and governance concerns. Principles of Islamic finance cohere with these values. Regarding the environment, Muslims must care for the planet, and prioritize such concerns over profit. Regarding social issues, Islamic finance emphasizes the rights and dignity of employees. Regarding governance, Islamic law does not explicitly endorse specific items such as public reports or diverse boards, but the tradition does include principles that support such measures.
A Muslim Investment Management company should be owned and operated by its stakeholders — employees, clients, and investors — in order to succeed anddemonstrate a better economic system. The firm ought to retain a board of experts, who understand Islam and finance, in order to boost credibility and assure ethical conduct.
Investors should use a two-pronged, positive and negative investment strategy. Potential investee companies should be evaluated for sustainability on a net positive system based on several metrics. Muslim investors should select securities based on four criteria: growth, real value, dividends, risk, and price. The firm ought to build diversified funds around five asset classes: domestic equity, foreign developed equity, foreign emerging equity, real estate, and precious metals.
If a variety of funds are offered, ethical investing, as a combination of sharia-compliance and social responsibility, has a large potential clientele. The global Islamic finance sector and the market for socially responsible investing hold over 6 trillion dollars in assets together. As both areas continue to grow, Muslim Investment Management has a market as well as the possibility to scale.
Originally published in the Journal of Environmental Investing. Download the full working paper at www.thejei.com.