Can the Integration of SRI Principles in Islamic Finance Help Bridge the Gap Between Aspirational Islamic Moral Economy and Realistic Islamic Finance?

Islamic finance is considered as an alternative moral and ethical based finance. Its principles, known as the “Islamic finance pillars” offer an alternative for investors seeking more ethical use of their funds. Since its early inception in 1970s, the industry developed significantly with an annual two-digit growth of 15 to 20% and an expansion beyond traditional markets. However, this growth has not benefited much to the social and environmental developments. Thus, Islamic financial institutions (IFIs) are usually criticized for their social and environmental failure and heavy reliance on debt-based transactions such as commodity murabaha.

Recent studies suggest that there should be a convergence between socially responsible investing (SRI), that is mainly booming in Europe and US, and Islamic finance as they share common ethical and moral values. However, those ethical values already exist in the foundational Islamic moral economic principles and the disconnect that we observe today between theory and practice is due to various factors such as regulatory changes, investor preferences and the inter-linkages with conventional finance. In fact, the earliest Islamic finance initiatives (Tabung Haji in Malaysia and Mit Ghamr in Egypt) were mainly driven by social and development considerations.

This paper suggests that integrating the broader Islamic moral economy principles in IFIs’ activities as well as broadening the scope of the shari’ah review function will help create an ethical Islamic financial system that focuses on social and environmental considerations with the ultimate objectives of social justice, poverty alleviation and human beings’ welfare and not only the prohibition of usury and illicit transactions. The paper also suggests innovative forms of Islamic finance transactions with less intermediation and enhanced real economy and social and environmental impacts such as green and social impact sukuk and crowdfunding. Green bonds is a category of « themed » bonds that has specific rules governing the use of proceeds. Other categories include social-themed bonds, climate-themed investments, water bonds, etc. Themed bonds were initially issued by Multilateral Development Banks to target investors demanding investment products that deliver sustainable outcomes in addition to the returns. The market has grown to include corporates and banks in addition to supranational institutions. Crowdfunding has emerged recently as an alternative participative financing mode and has different advantages such as financial inclusion and social impact, which are key in Islamic finance.

 The analysis will focus on both Islamic finance and SRI in order to determine the areas of convergence and difference. The SRI movement is rooted in investment approaches based on Christian beliefs, whereas Islamic finance is based on the principles of Shari’ah (Islamic law). Both evolve in separate markets and target investors who wish to align their money and values in ways that generate financial return along with positive social and environmental change. The purpose is to confirm whether the integration of SRI criteria in Islamic finance can bridge the gap between aspirational moral economy and realistic Islamic finance and lead towards the achievement of sustainable development. To conduct this analysis, we will first discuss the concept of custodianship or vicegerency that is shared by both Islam and Christianity. We will elaborate on the moral purpose for human existence in Islam by examining the concept of maqasid al Shari’ah, particularly the maqasid of wealth preservation, based on traditional and contemporary literature. In fact, by seeking to protect peoples’ wealth, intellect, and posterity, the Islamic approach to development has important parallels with notions of sustainable development that promotes economic, social and environmental development.

 We will then analyze the current critics of Islamic finance in order to determine the roots of the disconnect between the current application of Islamic finance and the aspirations of Islamic moral economics. Modern Islamic finance is still considered young and evolving where commercial banking dominates the industry and sectors like zakat, waqf and microfinance are still not well developed. This leads to high intermediation and limited and inefficient social sector. The “substance over the form” and “murabaha syndrome” are often presented as the main critics of the industry. In fact, the industry is criticized for being focused on prohibitions rather than ensuring social justice and the overall well being of humans. It is often argued that Islamic finance must return to its spiritual roots in order to achieve the expected social and environmental impact. In other words, Islamic finance should go beyond “halalizing” financing modes and be more concerned with achieving social welfare and environment preservation. We will complete this analysis by making a parallel with the SRI market, also known as green or ethical investing, by analyzing the SRI principles, its global context, modern applications and target investors. We will also assess its social and environmental impacts.

Returning to the spiritual roots suggests reconsidering the broader Islamic economic system, which promotes sustainable development and social justice. This paper also argues that social and environmental impacts need to be assessed in the Shari’ah review process in order to overcome social and environmental failure. Although environmental concerns such as climate change do not figure prominently in Islamic financial practice, the same could not be said for Islam. In fact, the underlying content in Islamic teachings is seen as consistent with the global emphasis on sustainable development and growth, complemented, of course, by an insistence on morality and justice. In this regard, we will briefly compare the sustainable development goals (SDGs), that were launched in September 2015 and that the international community is mobilized to achieve by 2030, with the concepts of vicegerency and maqasid Al Shari’ah.

Finally, we will attempt to define what “ethical” means based on the principles of Islamic moral economy, Islamic finance and SRI. This paper, thus, tries to highlight those areas where innovation is needed to better integrate social and environmental considerations into IFIs operations. More clearly, it will go back to the moral Islamic economy principles and compare them to the current principles of Islamic finance and SRI. Therefore, to accomplish this objective, this paper pursues an analysis, through which it aims to highlight how the modern ethical finance principles are being defined.