Islamic Finance and Sustainable and Responsible Investment (SRI): An Ethical Dimension


The immoral behaviour of some conventional bankers in the lead-up to the Global Financial Crisis of 2007-2008 focused public attention on the social costs of marginalizing ethical considerations in the financial system. Islamic finance garnered substantial positive publicity because its institutions seemed unaffected by the existential threats looming over conventional banks. Much of the reporting at the time noted that ethical considerations were central to Islamic finance. Ironically, the idealism of its earlier pioneers seems to have been tempered by the practical necessities of survival in a highly competitive financial system designed by and for conventional bankers. Moreover, many of those who had gone to work in the Islamic finance industry were not particularly motivated by the same ethical considerations as its pioneers. This meant that just as a global spotlight was being focused on Islamic finance as an ethical alternative to conventional finance, the ethical element was less manifest than it had once been.

The ideal of economic justice is not unique to Islam. The Theory of Moral Sentiments was written by the “father” of modern economics in the 18th century (years before his more celebrated The Wealth of Nations). Economic justice is, of course, the central theme of communism, although the concept differs drastically between the two systems. Religions beside Islam also have strong traditions of working for social justice. That tradition in Christianity gave rise to the sustainable and responsible investment (SRI) movement in North America around the same time that Islamic banks were being established in the Muslim world.

The areas of emphasis differ between the two projects. Interest is a non-issue for SRI, interest-based financing having become so accepted in Western societies that objections to it are considered illogical. This is based on a historical distinction between interest and usury in Western civilization. Protestant theologians began to argue in the 16th century that usury below a certain level is not immoral. This was called “interest” while the term “usury” came to be restricted to exploitative levels of interest. Because the distinction was not based on any text, the definition of “exploitative level” was completely subjective. In the United States, each state has laws prescribing the legal rate of interest. They are complicated and vary from one state to another (‘Lectric Law Library, 2017).

SRI in its modern form started out emphasizing withdrawal of financial support from the military-industrial complex during the Vietnam War. As SRI grew, it became more secular and the emphasis shifted to environmental, social and governance (ESG) issues. Moreover, the arguments for paying attention to these matters have shifted from ethical to practical implications: companies that make them part of their corporate strategies tend to perform better than those that do not. Ironically, the central concerns of SRI-ESG are remarkably similar to the maqāṣid al-Sharīʿah (objectives of Islamic law) that well-wishing critics of Islamic finance have been calling the industry to consider in charting its future path of development.

This booklet is intended to call the attention of Islamic finance practitioners to the way ethical considerations have been incorporated into the practice of SRI. This is presented after a brief background comparing the basis of ethics in Islam with that of some other approaches. This is relevant in a globalized world in which people of a wide variety of outlooks have to deal with one another according to a set of basic rules acceptable to all...

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