Islamic finance offers a model for ethical investors
Islamic finance provides a great template for ethical investing, regardless of a client’s personal religious beliefs, and is set to become an increasing mainstream choice for investors.
There is a parallel here with the development of the organic grocery trade. When organic vegetables first arrived they were kept in separate aisles, tucked away from traditionally grown fruit and veg and clearly labelled. They were relatively expensive, but we knew they were good for us, certainly better than the conventional, mass-produced groceries sprayed with insecticides.
However, we still had to buy the latter every day; we had little choice because organic produce was not widely available. Yet today it often seems our standard purchases are organic and this diet has become more the norm. Some retail chains and restaurants have successfully based their sales strategies around the organic brand. They still charge a little more, but it is better for us and we know healthy food equals a healthy body.
There is a similarity between Islamic finance today and the early days of organic produce: rather specialist, inaccessible and misunderstood.
Moral and ethical principles
The introduction of Islamic finance into the retail market is far from developed. It is still badged as a specialist product for those whose faith imposes certain rules.
But sharia is not just for the religious. Numerous account holders with sharia-compliant banks are non-Muslim and many investing in a sharia-compliant way are doing so because of the transparency and ‘goodness’ it offers.
An article in Citywire’s New Model Adviser last December – Why it pays to have faith in sharia finance – outlined the important factors that sharia-compliance insists on. These are moral-based principles; investments must meet certain rigorous negative screens and take into consideration the positive impact on society.
In Islamic finance, one of the most important factors is the effect money has on society. It encourages entrepreneurship, ownership and growth, but not with a negative impact on those poorer in society. Wealth in Islam is regarded as a means to an end. It treats the owner as the trustee, and the faith supporting this creates a realisation that mitigates selfish and dishonest tendencies.
For any person wanting to incorporate a moral attitude into their savings process, Islamic finance offers a wall-established framework. There may be some less relevant features for non-Muslims, but these tend not to go against the aims of such investors.
Islamic finance follows five commercial ethics: the principle of stewardship of humanity; integrity; sincerity; piety; and righteousness and perfection at work.
Most people would not disagree with these. The principle of stewardship encourages a free market with a social conscience. It seeks to ensure wealth creation is directly linked to economic activity.
Growing investor awareness
Through education and experience, clients are becoming more aware of what they are investing in and the impact companies have on the environment. The perceived distance between the client and their investments is becoming smaller, and the interest in ensuring they are happy with the companies in which they are shareholders is heightening. An ethical approach is not necessarily an aspiration but a reality.
Today, many investors want to combine the need for long-term growth and income with having a positive impact on society. Therefore, it is more likely that companies will start to take ethical and moral standards more seriously to attract investors.
If Islamic finance can provide such balance, it may be that sustainable growth can be achieved without the use of opaque financial instruments and excessive and uncertain risk-taking.
Could Islamic finance be the silver bullet to save the Western banking industry?
For those whose personal ethics fit with the principles of Islamic finance, it offers a clear way of achieving results in a desired way. However, as happened with the organic veg trade, a behavioural change is required by the producers. That means the banking and investment industry must act more ethically.
Pressure from consumers to find more ethical investment practices could give Islamic finance the foothold it needs to become a mainstream option.
For those for whom ethics is already important, it offers a way forward. For others, it offers a different way of seeing how money can still work for the benefit of all.
It is good for individual investors and it is good for society. You could even call its growth ‘organic’.
Stuart Hutton is a Chartered Fellow of the CISI and a Branch Principal at Raymond James Investment Services. He holds the Islamic finance qualification awarded by the Chartered Institute for Securities and Investment.