By Norzailawati Mohd Noor
The article “Islamic finance is making a case for impact investment” published by Gulf News on May 23, 2017 focuses on Islamic investments in sustainable environmental projects to deal with challenges of poverty, social inequality and financial exclusion. The article discusses the collaboration of two institutions, Islamic Development Bank and UNDP’s Istanbul International Center for Private Sector, who launched together the Global Islamic Finance and Impact Investing Platform. The platform seeks to engage in developmental investments in accordance with the United Nation’s 2030 Agenda for Sustainable Development. The article covers the initiative by developmental institutions to invest ethical, environmental, and social values within finance and business which are main aspect of Islamic theology and jurisprudence.
While using the concept of “value-based investment” and “inclusiveness” to attract Muslim and non-Muslim consumers is not new, it has not unlocked its full potential yet. Even though Islamic banks pay Zakat yearly, spend money on charitable activities, and make other social gifts, still researches and consumers have questioned and criticized on the direction of Islamic finance by asking why it is not promoting economic growth at the macro level, reducing unemployment and failing to distribute resources in accordance with Islamic principles of social justice.
In essence, Islamic economic is a paradigm concerned with mainly three aspects: the Islamic (Quran and Hadith sources), legal, and ethical, it lead to the fact that the centralization of Islamic value will not change the law of Economics (Laliwala, 1989). Therefore this becomes imperative to emphasize a set of ethical values while understanding human economic problem and find solution from Islamic perspective to resolve that problem (Ahmad, 1992). Along with that, Khan (1984) and Arif (1985) both define Islamic economics a study to organize resources which lead to the concept of “falah” which means to wellness and success (this life and in the hereafter) on the basis of co-operation and participation. The concept of wellness, success and development in Islam can have three dimensions: individual development, development of the earth/environment, and the development of the human collectivity (Bennett and Iqbal, 2013).
Although, it has been more than 30 years for Islamic banks to be establish but no greater impact projects launched so far in result lack confidence. General consumers will not be serious at such news until and unless such collaboration and institution effect their life at micro and macro level. Much more transparency is required to apply such social real projects on ground. Successful examples need to be shared using all channels for other Islamic financial institutions to follow and practice the positive effect on society. Thus Islamic social impact projects need to be energized and promoted for the purpose of saving current economic issues and ecological imbalance.
It can be done by effectively utilizing Research and Development (R&D) to design Shariah based social, eco-based and financial inclusion projects on a proper systematic basis. Particularly through region partnerships, such projects should benefits from mobilizing young Islamic finance graduates for identifying issues and solutions, creating “Islamic SocialResponsible Venture Lab” where exchange of knowledge from experts of Islamic finance industry, sharing experiences and best practices, learning skills and technology become possible.
To have effective outcomes in managing huge-scale impact based projects, Islamic finance necessarily required experts and specialized human resource in different key sectors (such as renewable energy, education, poverty, waste and water management, sustainable forestry and agriculture, inclusive finance and products and services) to plan and design effectively. Key factors which will be enhancing the Islamic financing aspects of sustainable development, can be building more partnerships, and capacity building.
Furthermore instead of long pauses and time, it needed more consistent and systematic approach in designing Islamic finance value based social and financial inclusive projects timely. They need to be open to experiment, learn and implement. It needed to be out from theoretical framework concerns. Currently there is more of showcasing in reports and news about Islamic value based projects but not enough learning about what is possible and what is not, absence of true sales in current ṣukūk operations poses legal uncertainties, therefore key players in the Islamic financial industry, particularly the lawyers and shariah scholars who do legal documentation can create awareness and bring authenticity. Their focus will be to review each proposed ṣukūk to ensure that the tenets of Islam are not violated in any way and the ethical nature of the use of the product, not harmful to the society. Bennett and Iqbal (2013) indicated that it is a rigorous process. If a ṣukūk is structured to provide funds to a specified development project (renewable energy project or a low-cost housing program) that is appealing to investors, such as a there is little chance the investors’ money will be diverted and used for another purpose. Impactful investing strategies are largely expected to such criticisms since they demand specific disclosure of how the money invested will be used. A further inducement, to confront these risks successfully, it will require shariah leaders and investors to insist on precision on practical detail and ensuring transparency in providing information. Misleading and false showcasing is contrary to the principle of justice in Islamic economic, thus vigilance required.
Moreover, at this juncture, addressing the negative perception associated with Islamic impact investing projects among consumers, investors and intermediaries and educating them about risks and rewards by highlighting examples of successful Islamic value investments. Furthermore, to contemplate and elevate the profile of realistic social entrepreneurial opportunities, publishing a list of the top 10 social–environment impact project of the year. These efforts would help make success stories public region and category wise. So far $500 million ‘Vaccine ṣukūk’ issued in 2014 to fund disease prevention was largest debut ṣukūk ever and won an award of innovative product structure. It gain coverage because it has economic, social impact and a competitive rate of return while supporting the immunization of more children in developing parts of the world. Another example, in Malaysia a responsible Sustainable investment with USD25 million with ṣukūk framework initiated. The issuance can be classified as impact investing as it focuses on funding schools, with the objective of improving the accessibility and quality of education through a public-private partnership with Ministry of Education. Beyond the uniqueness of the issuance, it will also allow ṣukūk-holders to convert their investment into a donation at any point of the tenure.
In actual, intricate structure of Islamic element, difference of tax in region, coordination and implementation generate comparatively high administrative costs. The matter of question is here that can same model can be applied in different countries as well such as Pakistan or Iran? Or is their additional room for improvement in terms of regulatory framework and facilitative infrastructure required to achieve a more balanced growth.
Though the article gives hope that such collaboration using Islamic financial structure can bring high impact change in society, we are looking forward to encourage such ethical and inclusiveness, which is growing in visibility and importance. While constructing Islamic financial structure, the focus of Islamic economic definition cannot be ignored that without ethics it would be vain and meaningless. Thus to achieve “falah” in Islamic finance sustainable growth, it further need to strengthen resilience, require systematic effort and commitment in building the base in term of practices and outcomes, marketability in educative way and making a serious attempt in filling the gaps to decrease social and environment related vulnerabilities in society.
Ahmad, Khurshid, “Nature and Significance of Islamic Economics,” in Ahmad and Awan, (1992): 19-48.
Arif, Muhammad. . “Toward a Definition of Islamic Economics: Some Scientific Considerations.” Journal Research Islamic Economic 2, no. 2 (1985): 79-93.
Bennett, Michael and Iqbal , Zamir. “How socially responsible investing can help bridge the gap between Islamic and conventional financial markets.” International Journal of Islamic and Middle Eastern Finance and Management. 6, no. 3 (2013): 211-25.
Khan, Akram. “Islamic Economics: Nature and Need”. Journal Research Islamic Economic 1, no. 2 (1984):51-55.
Laliwala, Jafer Ismail. “Comment: Nature and Scope of Islamic Economics”, Journal of King Abdulaziz University: Islamic Economics 1 no. 1(1989): 129-41.