Sharia-Compliance and Sustainability

JEI Working Paper 3: Sharia-Compliance and Sustainability

Mujtaba Wani
Yale University
10 March 2015

Executive Summary

This paper introduces Islamic finance and outlines a plan for a hypothetical, socially responsible investment firm that adheres to Islamic rules. Islamic finance presents solutions to many of the structural problems in the modern economic system. Sustainable investing can mitigate much of the damage caused by this economic order.

Statistics regarding debt and income inequality evince serious problems in the economy.

Principles of Islamic finance, based in the sacred law of the religion, could combat these problems. 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 hypothetical Muslim Investment Management should be owned and operated by its stakeholders—employees, clients, and investors—in order to succeed and demonstrate 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 five 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 combined.

As both areas continue to grow, a potential Muslim Investment Management has a market as well as the possibility to scale.

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