Rise of the Muslim Entrepreneurs
In recent decades the landscape and number of small and medium-sized (SMEs) businesses has seen a huge transformation. Many of these businesses are formed and led by Muslim entrepreneurs such as Shahzad Younas (Muzmatch), and Ufuk Secgin (Halalbooking.com). With the growth of Muslim entrepreneurs comes an increase in demand for Islamic finance based lending solutions and strategies.
SMEs dominate the world business landscape. They account for approximately 60% of private sector employment. It therefore makes sense that SMEs will require funding options in order to sustain and succeed as a business. With close to 60% of SMEs failing in the first few years, ensuring they have access to adequate funding is critical.
SME lending has historically been centred on the traditional models of funding that are interest based. However, there has recently been a move towards SME lending based on Islamic finance principles.
In the UK, SMEs are considered to be firms that employ less than 250 employees. UK SMEs play a significant role in the UK economy, and the government is keen to ensure that they are sustainable and successful.
SURGE OF SMEs
SMEs account for a significant portion of the world economy. They not only contribute to employment and job creation, they also play a leading role in sustainability and community impact. In the UK a staggering 99.2% of the business population comprises of SMEs.
SMEs are considered to be major employers and they drive local economy growth.
Recent statistics found that the total value of loans to SMEs in the UK reached a whopping £65.1 billion in 2022. This was an increase of over 10% on the previous year and was the official highest on record.
New business lending in the UK totals in the region of £259 million. Demand from SMEs for inclusive and diverse lending options continues to grow.
SMEs AND SOCIAL IMPACT
SMEs play a critical role in society and our economy. Not only do they facilitate and generate employment, they also increase the flow of money from individuals to industries and through society.
At the beginning of 2023 there were estimated to be 5.5 million SMEs in the UK, an increase of 0.8% over the previous year. The professional, scientific, and technical industries accounted for 14% of all SMEs while another 10% are in the retail, trade, and wholesale industry.
Beyond contributing to the economy, SMEs can impact different areas of society. They encompass social development, community wellbeing, alleviating local poverty, job creation, innovation, and reducing income inequality.
SMEs also tend to be more forthcoming in embracing sustainable and ethical practices. They foster financial inclusion by providing local opportunities for local people.
WHY SMEs ARE THRIVING
There are 1 million SMEs in London and over 852,000 in the South East. These SMEs account for 34% of the UK business population. SMEs account for 60% of the employment in the private sector within the UK. They also account for over 50% of the employment in the UK.
As SMEs have grown, so has the need to provide lending that meets their particular demands. Many SMEs do not have the stellar trading history and records of large business.
SMEs therefore need an innovative approach when it comes to lending and funding.
SMEs can come with limited credit history and collateral but bags of entrepreneurial dynamism and innovation.
Distinct from larger businesses, SMEs have unique considerations relating to scale, financials, structure and characteristics. They may have limited access to capital markets, and therefore need tailored and bespoke financial solutions. A one size approach to lending does not meet the needs of SMEs that provide a range of services in the economy.
This is where Islamic finance really comes forth as a viable option for SMEs.
Sme Lending
SME's often demonstrate adaptability and resilience when faced with economic fluctuations, challenges and issues. SMEs are well placed to weather economic downturns and maintaining local communities through change. Lending to SMEs in the UK amounted to £4.8 billion in the second quarter of 2023.
In 2022 36% of SMEs used external funding and finance options. Over 69% of SMEs have stated that they turned to lending options due to cash flow related issued.
For SMEs, obtaining favourable funding options is not as easy as it is for big companies. Perhaps this is the reason more and more SMEs are turning to Islamic finance services.
Islamic finance is a great option of raising funds for SMEs for many different reasons.
For Muslim SMEs that want to avoid interest and want to be Sharia compliant, Islamic finance provides funding options not available in the wider banking sector. Islamic finance is able to adapt to the requirements of Muslim SMEs ensuring compliance and inclusion.
It is also worth mentioning that Islamic finance is based on a risk and profit sharing arrangement. This means that the funder and the SME share the profits AND the risks.
For SMEs, this is a huge benefit as it creates a sense of partnership with support for the new SMEs on the market. SME borrowing has a huge impact on their operations and customer base growth, so it is essential that the SME lending market continues to diversify and educate itself on the needs of SMEs.
Islamic finance is asset backed finance. What this means for the SME is that the financing is linked to tangible assets. In the long term, this is a more sustainable and stable form of financing for them.
Diversity In Business
The great thing about SMEs that often goes unnoticed is how impactful they are when it comes to inclusion and diversity.
In 2020, 16% of SMEs were led by women. Almost 24% of SMEs were equally led by men and women.
Workplace diversity is essential for SMEs as they often operate within diverse local environments. With Millennials currently making up 50% of the UK's workforce (and Gen Z accounting for 27% by 2025), businesses lacking diversity are missing out.
When it comes to investment for the future and the business operations of the SME, they need to ensure they recruit and retrain properly.
Empowerment Through Enterprise
SMEs are known to encourage empowerment through enterprise. This should be done at every stage of the SME process from project initiations, implementations, cost analysis, research, and education.
The result is that SMEs can ensure that they can recognise and eliminate barriers to growth. Enterprise enables SMEs to plan and prepare, ensuring they have the right insight into how to fund their operations and continue to succeed.
For Muslim entrepreneurs there are additional considerations relating to compliance with Islamic finance rules when partaking in financial services and considering lending options.
Why should Muslim SMEs focus on Islamic finance lending:
- Adherence to Islamic rules relating to financial transactions
- Interest free finance options
- Asset backed financing
- Profit and risk sharing
- Flexible finance structures and services
- Financial inclusion without compromising ethics and religious principles
- Community impact
- Flexible payment options
- Lending is not connected to an industry, product or service deemed impermissible by Islam (ie alcohol, gambling, porn)
Faith In Business
Those SMEs that are looking for ethical and sustainable models of finance and lending can find answers in Islamic finance.
Risk sharing, loss sharing, ethical considerations and non-exploitative practices all underpin Islamic finance and support SMEs in a way that traditional financial service cannot.
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WHAT IS ISLAMIC FINANCE?
Islamic finance at its very core is a way of managing money and financial transactions in a way that is compliant with Islamic rules and guidance. There is a significant interplay of sustainability and ethics in Islamic finance.
One of the foundational principles of Islamic finance is that money itself does not have any value. Instead, money is a means through which we can exchange products and services.
Islamic finance rules state that you should not use money to make money. This is why one of the most important Islamic finance principles is the one which prohibits interest in any form.
Paying or receiving interest is not seen as a permissible or equitable way of managing finances in Islam. You cannot make money by charging interest, this is seen as unethical and exploitative but also non-sustainable in the long-term.
Another important element of Islamic finance is that our transactions should not cause any harm to other individuals or wider society.
The focus should be on economic activities that are grounded in tangible assets and services, and partnership arrangements where each party shares in the profits and losses.
Ethics And Islam
Islam provides ethical guidelines within which to operate. These guidelines are based on the teaching within the Quran and from the experiences of the Prophet Muhammad (PBUH).
Underlying Islamic finance is a foundation based on integrity and fairness. The underpinning of Islamic finance with ethical considerations can be seen as contradictory to conventional business models, but ethical finance is a fast-growing industry.
Investors, individuals, and businesses are more socially conscious and want to operate in a more sustainable way.
It seems that everyone wants a more inclusive financial system where there is a real interplay between ethics and finance. Having witnessed the financial collapse of 2008 and the current global pandemic, existing Western finance models have proved to be volatile, unstable, and temperamental.
Islamic finance offers a sustainable, unique and viable ethical alternative. Applying normative ethics to financial and economic transactions brings more equality and sustainability to the table. This is mainly because operating from an ethical perspective is about duties and responsibilities rather than consequences.
Considering the consequences and impact of financial decisions means negative impacts can be identified and eliminated early. This leads to a more robust, fair, and resilient financial system.
Islamic finance recognises that finance has a useful role to play in economics. It requires overarching ethical considerations to be in place to ensure that there is intrinsic value in financial dealings, and these are supported by ethical and moral conduct.
Islam places a great deal of emphasis on ethical conduct. This is because Sharia rules derived from Islamic teachings are based on an ethical framework.
Islam requires us to align our values with the teachings of Islam in all areas of our lives. What this means for parties involved in any kind of financial deal is that the transactions are just, fair and equitable.
Islam And Wealth Distribution
Another important thing to note is that Islamic finance places emphasis on the concept of wealth distribution and social justice.
Practices including the payment of zakat every year, and regular charitable donations in the form of sadaqa aim to distribute wealth fairly. Sharing wealth is a key component of Islam, whether this is through donations or promoting those economic activities, projects, and practices that contribute positively to society.
Justice and fairness are fundamental concepts in Islam.
What Does Islamic Finance Say About Sustainability
When it comes to Islamic finance and sustainability, there is a unique interplay. Islamic finance principles are derived from Sharia law which places great emphasis on ethics and being socially responsible.
This social responsibility covers everything from wealth generation, wealth distribution, climate change, business, capital receipts, financial services, education, personal and business objectives, and education.
Sustainability in Islam must be viewed through the lens of being Sharia compliant in all dealings throughout life.
Adopting sustainable practices means you are promoting fairness and equality in every aspect of your life.
It has long been known that Islamic finance helps to divert capital into those environmental and social projects that benefit society.
There is growing recognition and support for the moral concepts of Islam and their link to global sustainability and development goals as set out by the United Nations.
Sustainable Development Goals
In 2015, the UN established sustainable development goals with the aim of achieving them by 2030.
These goals have common ground with Islamic finance as they both aim to promote social, economic, and environmental sustainability. In fact, there are several aspects of Islam and Islamic finance that align perfectly with the objectives within the UN's sustainable development goals:
- Zero hunger:
- Alleviation of poverty:
- Improving health and wellbeing
- Education
- Clean and affordable energy
- Industry, innovation and infrastructure
- Gender equality
- Clean water and climate action
- Reducing inequality
- Partnership arrangements
Role Of Islamic Finance In Sustainable Development Goals
Islamic finance is already playing a large role in contributing to the achievement of the UN's sustainable development goals. The foundations of Islam already align with these goals seeking to empower vulnerable communities.
Islamic finance initiatives such as zakat and sadaqa focus on poverty alleviation and working towards zero hunger. Islam promotes good health and wellbeing which is another UN sustainable goal.
Whether it comes to climate action, peace and justice, responsible consumption and sustainable cities, Islam is already ahead of the game.
With its emphasis on sustainable and ethical principles, Islam has been focusing on these kinds of goals for over 1400 years.
WHAT ROLE DOES SUSTAINABILITY PLAY IN ISLAMIC FINANCE?
Sustainability is a key concept in Islam, it therefore follows through that Islamic finance will also include elements of sustainability.
The Islamic finance and industry is well placed to support sustainability and sustainable development goals, whether that is individually or via collaboration.
Islam promotes social inclusion and socially responsible finance decision making. In today's global market where there is a wage labour crisis and worries about economic growth, sustainable Islamic finance is becoming more and more popular.
Research indicates that Islamic finance is one of the most sustainable and leading finance and funding models. Not only does Islamic finance base itself on ethics, it works with human beings to problem solve societal issues.
In the United Kingdom, the Bank of England recognises the significance of Islamic finance and the diversity it offers. Islam encourages inclusion and places great value in equality.
What this means for those using Islamic finance is that greater opportunities are available, and many argue that finance models based on Sharia principles will create ethical and socially responsible foundations.
Sustainability And Ethical Investments
Sustainable Islamic ethical investments are those investments that align with socially responsible and sustainable goals.
This interplay of finance and sustainability leads to positive benefits on an environmental, social and governance practices. Let's have a look at some sustainable and ethical Islamic finance investments:
- Green sukuk: green sukuks are Islamic bonds that invest in environmentally friendly projects. These projects can relate to renewable energy initiatives, climate action and other green policies.
- Islamic microfinance: Islamic microfinance provides financial services to people who may find themselves excluded from mainstream funding options.
Community development initiatives: these initiatives finance projects in agriculture, address the vulnerability in communities, and alleviate poverty.
Leveraging Islamic Finance To Build Sustainability
It is clear that Islamic finance has the potential to play an even greater transformative role in sustainability.
What is needed is for all stakeholders from individuals, governments, countries, and organisations to work together to maximise the impact of Islamic finance.
Some strategies that could achieve the synergy between Islamic finance and sustainable development goals include:
- Partnering with sustainability initiatives
- green sukuks
- sustainable investment vehicles
- support for socially responsible enterprises
- Increase in Islamic microfinance services
- Innovative finance models
- Using zakat for sustainable development
- International collaboration
A sukuk is a form of financial certificate that is issued in compliance with Islamic finance principles and Sharia law. Sukuk is an Arabic word meaning 'deed, cheque, or legal instrument'.
The main purpose of a sukuk is to create returns for investors that are similar to the returns available on traditional fixed income bonds.
As the Islamic finance market has grown over the last few decades, so has the interest in and demand for sukuk bonds. Essentially, sukuk bonds are similar to traditional bonds in that they have parties who are involved in seeking a return on investment, and sukuk bonds are subject to the same credit rating as conventional bonds.
Sukuks are commonly used by corporations and even governments to finance their business operations.
Islamic Finance Principles And Sukuk
Sharia law does not permit investors to partake in investment activities that involve riba. The payment or receipt of riba (interest) is strictly forbidden in Islam.
Most conventional Western market bonds are based on an interest paying structure, and this is not permissible for investors who do not want to receive or pay interest on their financial investments.
Sukuks were first issued over a decade ago in Malaysia who were forward-thinking when it came to creating and supporting financial investment products that Muslims could be involved in. Bahrain was quick to follow Malaysia in issuing sukuks, and these days sukuks can be found in economies across the globe.
Sukuks take up a respectable share in the fixed income market globally. Sukuks have emerged as a great Sharia compliant alternative to traditional interest based bonds.
Sukuks offer Muslim investors the opportunity to invest in bonds and subscribe to certificates that represent the right to actually receive a share of profits that are generated by an asset base. The profits are generated by the asset base being traded on the market.
What do we mean when we refer to fixed income bonds? Sukuks are fixed income bonds. This means that they are fixed income investments and they can provide what is considered to be a more steady stream of income.
Islamic Bonds
Sukuks are considered to be Islamic bonds. They involve asset ownership which is direct, rather than indirect interest based bonds that Western markets tend to offer.
Any income, return, or profits generated from a sukuk cannot be derived from any speculative activity. This would render the return haram under Sharia laws.
So, how do sukuks work? What normally happens is that the issuer of the sukuk certificate will sell an investor a certificate. The proceeds of the sale are then used towards the purchase of an actual asset. The investor then has a partial interest in the asset based on their respective investment.
Another element of sukuk that is important to note is that the issuer of the certificate must promise that they will buy back the sukuk at a future date.
When it comes to sukuks, compliance with Sharia law means that any profits that are derived from the investment must be totally free of speculative activity and interest.
Sukuk Versus Traditional Bonds
As Islamic finance rules do not permit interest, this means that the traditional Western debt and loan instruments are not accessible to Muslim investors who want to comply with Sharia rules.
Sukuks have therefore become a great alternative for investors (Muslim and non-Muslims) to use sukuks as a viable alternative method of raising funds.
Sukuks are considered to be an interest in an asset, and not a debt obligation or debt instrument.
Conventional bonds and sukuks do have some similarities:
- Both traditional bonds and sukuks offer investors a stream of income payments. The payments on traditional bonds include interest payments, and the payments from sukuks are based on profits from the assets.
- Both bonds and sukuks are sold initially by issuers of the certificates.
- Sukuks and bonds are viewed as less risky than equity based investments
When it comes to ownership, sukuks allow for partial ownership of the asset, whilst conventional bonds are more of a debt obligation. Sukuks are not debt obligations.
It is also important to note that often, conventional bonds finance businesses or industries that are deemed to be haram under Sharia law principles. These haram industries include the gambling industry, alcohol industry, and porn industry. Sukuk bonds cannot be linked to any form of haram activity or industry.
HOW ARE SUKUK CERTIFICATES ISSUED AND HOW DO THEY WORK?
Sukuks are usually found in the form of certificates, also known as trust certificates. In the United Kingdom, sukuk certificates are regulated by the Financial Services Authority. In other countries and economic landscapes across the world where sukuk certificates are issued, there is similar regulation of them.
There is a very specific process for issuing any form of financial certificate including sukuk certificates/ bonds.
The steps below outline the most common steps that are involved in issuing a sukuk certificate:
- Normally a company that requires some form of capital will establish a special purpose vehicle that is known as an SPV for short.
- The company is known as the originator.
- The special purpose vehicle aims to protect the underlying asset from potential creditors in the event that the originator gets into financial difficulties.
- The special purpose vehicle issues the sukuk certificates.
- These sukuk certificates are then sold on to investors for a price.
- The originator uses the funds raised from the sale of the sukuks to purchase the asset they want.
- The special purchase vehicle will then purchase the asset from the originator.
- The special purpose vehicle will then establish a form of lease to lease back the asset to the originator.
- The originator will make the necessary lease payments to the special purpose vehicle.
- The special purpose vehicle will then distribute the lease payments to the investors.
- Once the lease is terminated, the originator will buy back the asset from the special purpose vehicle at nominal value.
- The proceeds of the sale are then distributed by the special purpose vehicle to the holders of the certificate.
Different Types Of Sukuk
As mentioned above, most sukuk certificates have been presented in the various global markets as trust certificates. It is very common for English common law to govern the law relating to sukuk trust certificates in different countries.
However, the management of sukuks varies from country to country so it is always advisable to do your research about the jurisdiction that regulates your sukuk. Information and transparency are key when it comes to any form of investment, especially sukuks. Where possible, always carry out an analysis of the sukuk product or service before you proceed.
The main types of sukuk are as follows:
- Trust certificates - in this form of structure the originator of the sukuk will create the special purpose vehicle and issue trust certificates to the investors. The proceeds are then used to build a portfolio of assets which will eventually yield a return.
- Civil law structures - these types of structures have emerged to enable sukuk transactions to be undertaken in accordance with the local laws of the country where the originator is based. One example of a country that used civil law structures when it comes to sukuks is Turkey. Turkey have passed their own legislation relating to sukuks which has to be complied with.
Sukuk For Investors
As Muslim investors have historically not had the opportunity to invest in bonds without an interest element, sukuk bonds have been welcomed across many global economies.
Sukuks are a great way of enabling investors to link returns with the cash flow of financing assets without the riba of traditional form of debt financing.
However, it is important to point out that sukuks as a form of financing should only be used for identifiable assets. Identifiable assets are those assets whose commercial value can be ascertained at any given point of time. Identifiable assets include things like real estate, equipment, cash, and stock.
In this way, the holder of the sukuk bond /certificate does not own a debt, but as the owner of the sukuk certificate, they own a share of the asset that is purchased using the sukuk funds.
Even though the special purpose vehicles that issue the sukuk certificates are usually brand new, this does not mean that investors will bear exposure to the credit risk of that special purpose vehicle.
Advantages Of Sukuk
Here are some of the main advantages of investing in sukuks:
- For those looking for investment from Islamic economies and markets there is a great marketing benefit to sukuks who will appeal to investors looking for Sharia compliant ways of investing their money
- Sukuks are known to yield similar profit on par with conventional bonds
- More bank and financial institutions are offering sukuk products (always check the website of any organisation offering Sharia compliant products to ensure that you have all the information you need)
- The investor base of Sharia compliant investors is vast and continues to grow
- In addition to the Islamic finance investment market, there is also potential to tap into the ethical investment market which has developed over the last few decades and is always in the news
- Issuers of sukuk certificates are entitled to the same tax arrangements as the equivalent traditional financing arrangements
- Assets that are acquired by the sukuk bonds are jointly owned
- Instead of receiving interest, the holder of the sukuk certificate receives actual profits
- Sukuks offer banks the opportunity and tools to invest their excess liquid assets
- Sukuks can operate for contractual terms that are agreed upon between the parties
- Sukuks continue to grow with success attracting all kinds of high-quality investors including Muslim and non- Muslim investors
- Sukuks have been used across various locations and industries including transport, water, power, education, infrastructure and industrial
When it comes to investment strategies, ethical investing (also known as impact investing) is gaining traction. Some commentators have credited the likes of Greta Thunberg for the increase in demand for impact investment products, but this type of investing has been around for centuries in religious communities and societies.
Impact and ethical investments concentrate on approaches and strategies that facilitate inclusion and integration. As a result, the transaction has a positive impact on the social and economic environment. The investment itself is deemed to be one which benefits the investor and the wider community.
For investors looking to align their ethics and values with their financial output, they want to be sure that their portfolio grows in a sustainable way that supports their role as an ethical consumer and investor. Many mainstream funds do not offer ethical products and services, but the tide is changing fast and there are more companies offering bespoke ethical funds for discerningly ethical investors.The main benefits of ethical/ impact investing include the following:
- The values of companies and investors can be aligned
- Companies committed to social causes can be supported
- There is a feel good factor associated with ethical investments
- For religious communities, ethical investments are compliant with religious rules relating to investing (Sharia rules for Muslims)
- Ethical funds are a real catalyst for change
- The financial outlay does what it says on the label - ethical investment
Socially Responsible Investments
Socially responsible investing is a term associated closely with ethical investing. Socially responsible investment has a social conscience and does not negatively impact society. There are many companies on the market that offer investors the opportunity to invest in funds that provide positive social change and impact.
Of course, for Muslim investors socially responsible ventures have always been on the agenda, even when the opportunities to invest responsibly were not widely available on various platforms. Islamic finance dictates that Muslims should not invest in any project that could be detrimental to individuals or society as a whole. This is part of a much broader Islamic value-based social system. Muslims are instructed to safeguard society, the environment and make ethical choices that do not negatively impact society.
Ethical Investments
The definition of ethical investing is centered on the core concept that it is possible to align your financial goals with your moral and ethical values. Ethical ventures are focused on ensuring that the primary filter when selecting opportunities relating to money is based on ethical principles and considerations. There is a demand for increased transparency when it comes to shares, trusts, stocks, bonds and returns.
Used interchangeably with socially responsible and impact investing, ethical investments require due diligence before the capital is actually spent. Assessing whether a fund is ethical is based on using certain environmental, social, and governance criteria which can help you decide whether your investment is, indeed, ethical and socially responsible.
What ethical investment facilitates is the ability for individuals to allocate their capital with companies and funds that align with their own personal beliefs. One example of this is investors who want to avoid industries deemed to be unethical such as gambling, porn, weapons, and alcohol.
For Muslims, ethical ventures go further and also seek to ensure that the investments are compliant with the principles of Islamic finance and Sharia law.
Islamic Finance And Ethical Investments
Whilst ethical transactions may appear to be a relatively new concept in the West, Islamically, ethical investments have been a central principal of Islamic finance for centuries.
Historically, religion and ethical investing have been aligned. Islamic finance prohibits any financing of industries deemed to be haram.
Socially responsible investing and Islamic finance have seen rapid growth in recent decades, and it is no coincidence that the two go hand in hand. Islamic finance centres on principles of social responsibility and impact. This is achieved through principles of sustainability, positive impact, and strong governance.
More and more investors are joining Muslim investors in looking for ethical funds, and funds that offer green funds, or those that support the environment positively.
In recent years, the growth of ethical investing has been fuelled by religion AND social views. Social trends that have begun to lean towards ethics, environmental impact, and transparency have meant that ethical investments have become more mainstream.
In the 90s there was a move away from funds and ventures in the fuel and coal industries, and industries using animal testing, as these were seen as being harmful to the environment and society as a whole. Moving away from environmentally damaging industries was seen as a way of problem-solving some of the damage caused by the operations of these industries.
Sharia Compliant Investments
Ethical halal investing focuses on socially responsible principles, prohibiting:
- Riba (interest)
- Gharar (speculation)
- Financial transactions in industries deemed to be haram such as the tobacco, alcohol and gambling industries
Environmental, Social, And Governance Considerations
In order to assess whether your portfolio is indeed socially responsible and ethical ,there are certain criteria that you can use. The criteria can broadly be divided under three main categories - environmental, social, and governance.
Investors need to review a broad variety of behaviors to understand if the investment is indeed sustainable, responsible, and socially impactful.
ENVIRONMENTAL
Environmental factors to look out when investing include assessing the impact of the investment on the following:
- Climate
- Pollution
- Waste
- Water stress
- Energy use
- Renewable energy
- Conservation
- Carbon footprint and ecological footprint
- Local economic policies
Environmental criteria will assist investors and companies to ascertain the impact of their ventures on the wider environment. Ethical companies should be aware of the environmental impact of their investments by using the criteria above to ensure that the risks are being identified, assessed, mitigated, and managed.
For example, investing in land development may seem like an ethical project, but what if the development adversely impacts local populations, natural resources, and contamination?
GOVERNANCE
In similar vein, anyone investing with a company will want to ensure that the company they use has a very transparent and accurate governance structure in place. Without strong governance, there is less accountability when it comes to ensuring that the investments you make are socially responsible.
The financial reporting and accounting methods, shareholders involvement, accountability, and financial management must have clarity and be transparent. For Muslims, they will also want to ensure that the investment company does engage in any investment behaviours deemed to be haram under Sharia law and Islamic finance rules, and ensure that haram industries are avoided.
When examining the practices of companies and businesses claiming to have ethical investment services and products, the following criteria should be carefully examined:
- The ethical and moral stance and values of the company
- The diversity within the company, shareholders, and board members
- The voting rights of shareholders and profit sharing arrangements
- Previous governance records
- Tax treatment and financial transparency
- What anti-competition practices are in place
- How the company manages financial and ethical conflicts of interest
- Asset management strategies and choices
- How the company treats its customers and investors
SOCIAL
Social criteria focuses on the business relationships of the investment company/ investment and the social impact.
Socially responsible investing focuses on social values, the environment and good governance. Does the investment company you want to invest in hold similar values to you? How committed are they to ethical values? Do they uphold Islamic finance principles? Does the company donate to charities that align with your charitable focus?
When considering the social criteria, you need to look out for investment and financial impacts on the following:
- Supply chain labour
- Ethical sourcing
- Data and privacy
- Protocols relating to health and safety
- Impact and bonds with local communities and links with them
- Previous investment history and sectors invested in
- How the investment portfolio is socially responsible
Ethical Investing
In order to ensure that the investment you make is ethical, you need to ensure that you do your research and analyze the historical, present, and predicted performance and standards of the investment you are interested in. Of course, there are many companies that offer ethical investment products, but that does not mean investors are absolved of their own personal responsibility to undertake research and ask their own questions.
Investors should:
- Review the mission statement of the investment company
- Check their track record of investments
- Review their ethical values and see if they align with your own
- Check if the company complies with laws and statutes
- Understand how ethical investments and funds operate
Is Ethical Investing Profitable
Ethical investing does not guarantee a profit. However, when it comes to the performance of ethical funds as compared to traditional investment funds, there does not appear any significant difference. In fact, ethical investments can sometimes outperform traditional investment funds.
The whole point of ethical investing is that you can invest your money in a way that yields positive results on society and also makes a profit. According to an article in the Guardian (December, 2021), in the United Kingdom alone, the annual spending on ethical services and products has exceeded £100 billion [1]. With the onset of the global pandemic and climate change, people are looking for ethical investments and industries far more than ever before.
The Future Of Investing
We have entered an era when socially responsible investing is increasingly in demand. The increase does not only relate to ethics and morals, but is also centered on principles of sustainability, investor goal-setting, values, protection of the natural environment, whilst still making money.
Gone are the days when investing in the stock market was solely for the purpose of generating income, with no thought for the impact of the investment. Modern ethical investors are keen to ensure their investments are transparent, socially responsible and with solid governance structures in place. Sustainable long term results are seen as aligning with the much broader objectives and principles within Islamic finance and the wider society.
For too long, investments have focused on profit margins over values. Ethical investing means that profits can still be prioritized, but they ranked alongside ethics and values and do not lead to the social exclusion of marginalized groups or countries.
Tips To Invest Ethically
Investing ethically is about more than making sure your investment appears to be ethical. It is focused on investors learning about what it is they are investing in, the social and environmental impact, and holding investment companies to account.
The following tips will help you avoid investments that do not align with your personal values and goals:
- Assess and identify your values and principles
- Learn about ethical investments and how they operate
- Build your investment portfolio carefully with sustainability and social responsibility in mind
- If you have ISAs or pensions review where they are invested
- Check your investment strategy - do you want to focus on start-ups or existing ethical investment companies?
- Make sure you diversify your portfolio across regions and sectors
- Planning your investment in advance
Sources Used In This Report
[1] UK annual spending on ethical products surpasses £100bn for first time [The Guardian, Dec. 2021] [https://www.theguardian.com/money/2021/dec/31/uk-annual-spending-on-ethical-products-surpasses-100bn...]
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