Islam is a diverse religious tradition that boasts more than one billion adherents around the world. Muslims have applied their faith to the realm of finance for more than 14 centuries, and since the 1970s modern financial institutions have introduced and strengthened the position of Islamic investing in the global economy. Assets managed in accordance with Islamic finance were valued at $2 trillion in 2015 and are projected to grow to $3.5 trillion in 2021.
Here’s a look at the basics of Islamic finance and how it creates opportunities for impact investing.
Shariʽa and Islamic Investing
Shariʽa is a system of law based on the Koran and traditional teachings of the Prophet Muhammad that governs Muslim life and regulates Islamic finance and business. Although interpretations of Shariʽa vary among different schools of thought within Islam and among individual scholars, some core principles are widely accepted. These include prohibitions on interest, speculative transactions such as short selling, and profiting from haram, or forbidden, businesses such as those that sell alcohol or weapons, produce pornography, or enable gambling.
In Shariʽa, money does not have intrinsic worth, and financial transactions should reflect real-world value rather than simply facilitate the exchange or growth of monetary accounts. Transactions also emphasize fairness—all parties are intended to share both risks and profits equitably. A set portion of an investor’s wealth is reserved for zakat, or charity. And in the event that investors benefit from business activities that don’t accord with Shari’a, such as when they own stock in a company whose subsidiary is not Shariʽa-compliant, income is purified by giving money resulting from prohibited business to charity.
For more than 40 years, modern Islamic financial institutions have applied these principles to their work. Now, some are calling for the Islamic finance sector to broaden its focus beyond ensuring adherence to Shariʽa and to embrace impact investing. Shariʽa compliance already overlaps with impact investing in some areas; for example, Muslim investors’ resolution not to back businesses that sell haram products mirrors impact investors’ use of negative screens to avoid specific industries or environmental, social, or governance (ESG) risks. Shari’a’s driving principles such as fairness, equitable profit sharing, and interest-free loans can all be seen as impact values.
Some organizations have already begun the work of integrating Islamic finance and impact investing. In 2016, the United Nations Development Programme and the Islamic Development Bank Group founded the Global Islamic Finance and Impact Investing Platform (GIFIIP). GIFIIP facilitates collaboration and knowledge-sharing among Islamic financial institutions and supports dialogue and advocacy. It aims to create faith-based investing tools and resources from an Islamic perspective and to connect impact initiatives with funding from Islamic finance sources. GIFIIP also conducts impact investing training, and since 2018 it has piloted its Green Sukuk Initiative to issue Shariʽa-compliant bonds, also known as sukuk, that fund clean energy projects in Turkey. The organization has plans to expand to other countries in the future.
According to the Singapore-based funders’ network AVPN, Malaysia has encouraged the development of Islamic impact investing through its socially responsible investment sukuk model. This made it possible to fund nonprofit Yayasan AMIR’s Trust Schools Programme in 2015, revitalizing schools and improving access to education. And in 2016, Islamic finance accounted for 20% of approved funding for projects in the Malaysian Green Technology Financing Scheme.
Some have proposed that microfinance could be a sector where Islamic impact investing could grow. In Ethiopia, for instance, Mercy Corps created the Somali Microfinance Institution with support from USAID and conducted by the Islamic Finance Advisory and Assurance Services. The organization offers Shariʽa-compliant microfinance loans to small business owners and aims to reach communities that have been excluded from conventional banking.
The World Bank has suggested that Islamic finance could play a significant part in funding initiatives to achieve the UN’s Sustainable Development Goals—both in bridging the funding gap and in providing innovations and alternative financing models. Muslim impact investors have the opportunity to build on the shared strength of established Islamic finance institutions and nascent faith-based impact investing projects to make a difference.