THE BEAUTY OF FAITH-CONSISTENT INVESTMENT

Islam seeks to facilitate the surrendering to the will of the Creator, which means giving up short-term self-interests for the sake of attaining long-term felicity of drawing near to Him; a difficult task for impatient and myopic humans. Surrendering operationalizes through compliance with a comprehensive and interrelated set of rules governing all dimensions of behavior, including those specific to economic operations such as investment. These rules are derived from the divine objective for humans to establish justice. Therefore, they focus individual and collective behavior on attaining and sustaining justice which, according to the Qurān, was the main reason why messengers were commissioned: to induce humans “to stand forth steadfastly for justice” (Qurān verse 25: chapter 57). Establishing and sustaining justice is to serve the further objective of achieving the unity of mankind.

The Qurān informs that all humans are created from one united soul and that their final destination is back to the Creator also as one united soul: “neither your creation (was) nor your resurrection (will be) except as one united soul” (Qurān 28:31; 1:4). All ordained rules of conduct are directed at achieving this all-important objective. Compliance with the rules—inter alia, hard work, frugality, moderation in consumption, no extravagance or opulence, faithfulness to the terms and conditions of contracts, trustworthiness, truthfulness, patience, forgiveness, cooperation, and sharing—promotes trust, cooperation, integration, solidarity and unity. Their violation—inter alia, cheating, theft, bribery, shirking, lying, hording, backbiting, impatience, abuse of trust, and contract violation—leads to mistrust, discord, disintegration, and disunity. The unity of mankind is a corollary to the central axiom of the Unity of the Creator. Long ago, Muslim philosophers established that from the One Creator only one creation can issue forth.

The rules governing economic behavior are based on the axiom that creation belongs to the Creator. He has provided, in “exact measure,” all the resources required by humans to combine with work in order to produce life-sustaining necessities. At a cosmological-global level sufficient resources, in exact measure, are provided to sustain a comfortable life for all humans at any given moment (Qurān: 49:54). Scarcity can be a binding constraint at the level of individual and perhaps at the level of collectivity. This limited notion of scarcity serves as a vehicle for the test of strength of the humans’ belief in the Creator. Strong faith compels humans to work hard, individually and collectively, to ease the scarcity constraint through the use of resources endowed by the Creator and through sharing income and wealth so that no one would be left without access to the means of acquiring the necessary means to sustain a comfortable life.

Sharing is not a charity but a mandated duty stemming from the axiom that property right to all resources belong to the Creator (Qurān: 26:3). Humans take possession of properties created by their mental-physical abilities combined with the resources. The Creator maintains the “permanence of ownership” on property because He owns all things, including humans who have equal right of access to the resources created for them (Qurān: 70:17) as an expression of the dignity accorded to humans as the crowning achievement of creation (Qurān: 70:17). The right of access and use of the created resources by those who are able to do so does not negate the right of the less able in the final product or its monetized value. These resources are also an instrument for the performance of the duties of office of agent-trustee bestowed on humans. Combined with affirmation of human dignity, the instrumentality of property rights and the principle of “permanence of ownership” of the Creator provide the foundation for the role of sharing as a duty and not as charity. The right of those unable to use the created resources has to be redeemed from either the final product or from its monetized value (Qurān: 19:51).

The remaining income and wealth, after they have become cleansed by redeeming the right of the others, are then available for consumption, saving, or investment. There are qualitative and quantitative constraints on consumption: no extravagance, waste, or opulence; frugality and moderation are ordained. There is also a tax on savings that serves as a disincentive to hording, and the prohibition of interest-based transactions does not allow accrual of any return to savings. This disincentive does not negate capital formation since the only remaining alternative to consumption or saving is investment. It is worth noting that Islam considers excess income and wealth as the life-blood of the economy that should not remain idle and must circulate (Qurān: 7:59). Also important is the fact that, while prohibiting interest-based transactions, Islam simultaneously mandates risk-reward sharing (Qurān: 275:2) and encourages direct participation of financial surplus holder in the project being financed.

INVESTMENT FROM ISLAMIC PERSPECTIVE

Investment behavior of an active believer places priority on projects that would serve to promote justice by facilitating economic empowerment of the needy and the less privileged, consistent with the sacred principle of human dignity. In the Islamic teaching there is no stronger benchmark than the level of poverty to indicate the extent of justice prevailing and the strength of the belief level of a society. Investing in projects with high job-creating potential, those with greatest benefits in terms of enhancing health and education, and investment projects that remove infrastructural bottlenecks as well as those that enhance technological improvement in production all have high priority. These are the types of investment encouraged by the Prophet as being in the domain of private sector. For much of its earliest history, most social goods in the Muslim community were financed by private sector, as were expenditures on health and education as well as contribution to the provision of the basic needs of the less privileged segment of the community. Consequently, the public sector was, to a large extent, unburdened by these expenditures.

From an Islamic perspective, investment that reduces poverty, creates jobs, improves health and education, especially for the needy and vulnerable segment of the population, allows economic growth and justice to complement one another. Efficiency, meaning getting maximum output from a given level of resources, as a corollary of the rule of no waste, is a crucially important consideration in production, consumption, and investment decisions. But this notion of efficiency is at a secondary level to justice. One example of traditional type of faith-based investment is the concept of endowment (waqf) whereby a stream of income from legitimate commercial investment is devoted to: building and maintaining hospitals and educational facilities; road construction and maintenance; orphanages; provision of venture capital for small business; providing financial resources to young people to start a family; scholarships to needy students; all similar to philanthropic endowments in Western societies.

While Islamic finance has made great strides in exploiting a special niche in the financial world, this progress has been focused on a negative role of avoiding interest-based transactions. It has yet to turn its focus on its most important positive role of targeting the financing of projects and activities with growth-justice orientation, i.e., those with greatest social impact in terms of job creation, poverty reduction, and overall well being of human societies. It has not, as of yet, developed the potentially wide and variegated range of financial instruments based on Islam’s own basic modes of finance with strong risk-sharing characteristics. The available instruments that have successfully captured a large market share are mostly reversed-engineered based on conventional financial instruments. While structured to avoid interest, these instruments lack the strength of the growth-justice attributes embedded in purely Islamic modes of finance. Therefore, they do not facilitate the strong positive attribute of Islamic finance, i.e., maximum risk-sharing and consumption-smoothing character of finance prescribed by Islam. The poor and needy segment of the society, not financially empowered to use normal credit channels, are also unable to directly access these instruments as well. Thus, the major benefits of these instruments for the poor is what would trickle down, from the projects financed by these instruments, in terms of job creation. Moreover, the major benefit of Islamic finance, i.e., requiring that the returns to investment be determined by the real sector activities, is lost because, one way or another, the returns to these instruments are benchmarked to some prevailing market rate of interest, e.g. LIBOR. In time, however, it is hoped that the present success of Islamic finance would generate enough incentives for financial engineering to develop financial instruments with appropriate growth-justice characteristics. As one of the most prominent contemporary pioneers of Islamic economics and finance, Professor Dr. M. N. Siddiqi, remarked : “After all, thirty years is not a period long enough to judge such a unique venture as reasserting faith in finance—an area from which faith had largely been banished by the dominant civilization”

ISLAMIC INVESTMENT

Muslims who wish to follow the strict tenets of Islamic Shariah law in their financial and investing activities have a narrower universe of choices than those who are not followers of Shariah law. However, a study by Islamic Research and Training Institute, of the Islamic Development Bank (Saudi Arabia) found that performance was not hampered by the Shariah filters used to create approved lists.

The author of that study, Kahled A. Hussein, provided this historical note, “Until the 1970s, a great proportion of the Muslim community was not involved in any stock market investments due to Islamic prohibition of certain business activities. In the 1990s, a major breakthrough took place in religious rulings related to equity investment, and since then Islamic equity funds have started to operate.”

Islamic Investing Principles

Two major guiding principles of Islamic investing are: (1) no interest, and (2) social responsibility. The most immediately obvious result of implementing Islamic investment principles is the elimination of the entire Financial Sector from the portfolio

Dow Jones Islamic Index

For those Shariah restricted investors who wish to invest in U.S. stocks, Dow Jones maintains an index of compliant U.S. stocks. The investor can select individual companies from that list or invest in one of a small number of mutual funds that in turn invest in the companies in the Dow Jones Islamic Index.

Islamic practice requires review of an approved list of investments by a group of Shariah scholars. Dow Jones manages their index list through its Shariah Supervisory Board consisting of six scholars: Shaykh Abdul Sattar Abu Ghuddah (Syria), Shaykh Justice Muhammad Taqi Usmani (Pakistan), Shaykh Nizam Yaquby (Bahrain), Shaykh Dr. Mohamed A Elgari (Saudi Arabia), Shaykh Yusuf Talal DeLorenzo (United States) and Shaykh Dr. Mohd Daud Baker (Malaysia).