the global financial crisis: can islamic finance help? - Institute of ...

NEWHORIZON Muharrum–Rabi Al Awwal 1430
ANALYSIS
Naveen Raza, head of Islamic finance at
Cru Investment Management. These are
also the objectives of the ethical and socially
responsible investment movement in the
conventional world. Raza is looking to
promote the synergies between the two
banking models, saying: ‘I think the future
of Islamic finance lies in the overlap between
Islamic and ethical investing. If we
want our industry to grow then we need
to start tapping into an audience which
goes beyond the borders of the Islamic
world.’
Mufti Mohammed Zubair Butt, chairman
of the Al Qalam Shari’ah Scholars Panel,
the first ever UK-based panel of Shari’ah
scholars, agrees, saying: ‘Islamic finance is
socially responsible finance. It is designed
to come to the market and promote the
public interest.’ He thinks there are some
things in common between the understanding
of ethical finance and Islamic finance,
for example, both forms avoid investment
in gambling, prostitution and alcohol. ‘But
the main difference, of course, is the Islamic
prohibition on interest-based transactions
and interest-based finance. As far as conventional
ethical schemes are concerned this
doesn’t even register.’ The effect of interestbased
lending, Butt thinks, ‘is that conventional
banks gear their project financing
decisions on the creditworthiness of the
borrower, as opposed to Islamic banking
where the viability of the project is the
main concern because the bank itself is a
partner’. The outcome is that the Islamic
system must exclude investing in interestbased
products or companies that deal
with them such as banks and finance
companies.
Box 1
What is ethical investment and socially responsible investment?
Ethical investment has been defined as putting your money where your morals are, or
investing according to your beliefs.
Ethical investments tend to use negative criteria to avoid investing in companies
involved in areas such as:
✖
✖
✖
✖
✖
✖
✖
✖
✖
Environmentally damaging practices;
Trading with oppressive regimes and countries with poor human rights records;
Pornography and offensive advertising;
Gambling;
Tobacco and alcohol production;
Unnecessary exploitation of animals;
Unsafe products and services;
Genetic engineering, abortion and embryonic research;
Armaments.
Socially responsible investments, as well as adhering to agreed negative criteria, actively
seek out firms which make a positive contribution to society, for example:
✔ Products and services which are of long term benefit to the community;
✔ Conservation of energy and natural resources;
✔ Environmental improvements and pollution control;
✔ Good relations with customers and suppliers;
✔ High employee welfare standards;
✔ Organic farming and foods;
✔ Strong community involvement;
✔ A good equal opportunities record;
✔ Respect for the sanctity and dignity of human life;
✔ Openness about their activities.
The list is not exhaustive. Each fund tends to differ in negative and positive criteria
and also in investment risk. It is, therefore, very important to select the right funds to
match your views.
Source: The Ethical Partnership Ltd
Other differences may be more readily
understood by conventional banking’s
ethical investment community. These
differences include the avoidance of shortselling
and the more conservative use of
derivatives, which would typically be used
only as hedging tools if they are used at
all. Many in the West may well now sympathise
with this position, particularly in light
of the current turmoil in the conventional
financial markets and the abuses that have
reportedly taken place.
Mohammad Khan, director of takaful at
PricewaterhouseCoopers, speaking at the
conference mentioned above, pointed out
that in Malaysia it is estimated that about
40 per cent of Islamic banking is done by
the non-Muslim, ethnic Chinese community.
He thought that this showed that Islamic
banking has the potential, and appeal, to be
used outside of the Muslim community. He
suggested that when addressing the Muslim
community the differentiation of Islamic
banking to conventional banking should
be stressed – showing the faith-oriented
differences between Islamic modes and the
conventional and indeed stressing those
differences. But to the non-Muslim market,
non-differentiation should be stressed
because to that market, banking is just a
commodity item.
Possibly there is a third alternative, that of
stressing what the Islamic model has in
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