IS ETHICAL INVESTMENT = ISLAMIC INVESTMENT?

A guy left a comment on my blog recently that he preached on ethical investment and has done it for years and feel that Islamic investment is ethical investment. However, I did not approve the publishing of his comment in view of the fact that he is trying to advertise his consultancy business, which I think is not entirely appropriate - that my blog should not be used as a marketing tool.

Let’s look at what it means by “ethical investment” - Ethical or socially responsible investment (SRI) aims to integrate personal values with investment decisions. Many investors want their investment holdings to reflect their values, and support companies that behave in ways they consider appropriate or responsible. Ethical Investment and SRI is part of an investment movement which no longer accepts that the financial bottom line is the only criterion for measuring investment success. This movement, promoting a ‘triple bottom line’, believes that environmental, social and economic consequences should be considered as parts of the investment assessment process.

Investing ethically means ‘knowing what your money is doing’

Here’s a look at “ethical investment” tips from a conventional perspective :

1) Consider what you mean by “ethical”

There are scores of different ethical funds to choose from, all with slightly different criteria. Many screen out businesses involved in alcohol, tobacco, pornography, nuclear energy and animal testing. But are you against animal testing for medical purposes, or only for cosmetics? Or if you're an environmentalist do you think nuclear energy is the work of the devil, or a practical solution to global warming? And why snub alcohol when you like a tipple yourself? These are all tricky questions that must be answered before you can sensibly choose an investment fund to match your profile.

2) Do your research

Some of these funds simply aim to filter out the baddies, while others actively invest in companies working in socially responsible areas such as pollution control, clean fuels and healthcare services.

3) Consider your attitude on risk

Some investment principles are exactly the same whether you invest in solar panels or surface-to-air missiles. First, determine your attitude to risk. If you're a low-risk investor, for example, you might want to avoid stocks and shares altogether, while only aggressive investors should sink their money into high-risk companies such as renewable energy start-ups.

4) Prepare for smaller returns

Ethical funds are hampered when competing against those funds that are free to invest in any company, and some have struggled in the past year. Most ethical managers shun oil, mining and commodities, which have been the hottest sectors lately as oil and commodity prices won't rise forever, and ethical funds should prosper again. Solar panel and wind power manufacturers have done well recently.

5) Performance does matter

Strike a balance between principles and profit. Don't just examine where the fund invests - check how it has performed (but remember, past performance is no guarantee of future returns).

Based on the 5 points above, do you think that Islamic investment = ethical investment? Now let us compare the so called “ethical investment” with Islamic investment.

Islamic investments are a unique form of socially responsible investments because Islam makes no division between the spiritual and the secular.

The establishment of an Islamic investment policy, be it for the institutional or individual investor, starts with the Sharia Board, a group of Islamic scholars (jurists) that vests investment products for compliance with Islamic Law and conducts ongoing due diligence of them. Sources for interpretation follow a hierarchy of authority: the Quran, believed by Muslims to be the words of Allah verbatim as revealed to his prophet Muhammad in the seventh century; the Sunnah which are rules from the prophet's sayings (Hadiths) and actions; Qiyas which are scholarly legal deductions; and Ijma, the consensus of scholars on a particular issue.

Many view that ethical investment overlaps Islamic investment as there are many similarities between them such as the prohibition of investment in business activities that are harmful to human being, and that both forms of investment required screening processes in order to determine the ethically acceptable form of investment. Nevertheless, there are some distinct differences. This is because Islamic investment is much more than merely investing activities as it is deeply rooted in the teaching of the Qur'an. Hence, principally the two types of investment are different.

For further clarification/insights on the subject, please feel free to explore an article by a well known shariah scholar Mufti Taqi Usmani on Principles of Shariah Governing Islamic Investment Funds that highlights all there is to know about Islamic Investment

SHARIAH VERSUS COMMON LAW

Excerpts from Reuters

A wave of debt defaults is set to hit Islamic banks as deals sour amid the global slowdown, testing the legal framework and stability of an industry already facing the biggest slump in its 30-year history.

The global economic downturn that punctured Islamic banking’s growth bubble is also expected to bring many shariah financing structures under the legal microscope for the first time in centres such as Dubai, Bahrain and Malaysia.

But the expected increase in commercial disputes raises questions about whether conventional legal systems can deal with the highly specialised niche industry which has evolved into a US$1 trillion (RM3.52 trillion) industry handling government and corporate debt.

It could also test the foundations of the Islamic banking system, which the Asian Development Bank estimates is growing by 10-15 per cent a year, but which some bankers and lawyers say stills lack a strong cohesive regulatory and legal framework.

Judges will have to weigh conventional law and shariah (Islamic law) used in contracts, and legal uncertainty over key contract provisions could hurt the industry’s ability to bounce back when the global economy recovers.

“The industry will be watching to ensure any legal disputes are settled in a transparent manner which gives certainty to the contract terms entered into,” said Davide Barzilai, a London-based Islamic finance lawyer with Norton Rose.

“If there a string of cases which result in contracts being overturned by the court for breach of shariah alone, then this could have a material impact on the growth of the industry.”

Fuelled by a recent rush of oil money, Islamic bankers innovated on the basic financing model, taking it beyond sale and profit-sharing contracts to more complex derivatives which are harder for courts to deal with.

Islam’s rules on transparency kept shariah banks from subprime mortgage loans that mauled Western banks, but their vast exposure to the property sector, especially in the Gulf, is taking a toll as global real estate markets slide.

Gulf Arab companies deemed most vulnerable to the downturn include large United Arab EmiratesAmlak and Tamweel. (UAE) real estate developers, such as Dubai-listed Islamic mortgage firms

CRUNCH TIME?

Defaults and litigation are expected to jump as the ailing world economy, tough financial markets and stalled projects make it harder for firms to repay banks and asset values plummet.

Over half of the residential and commercial property projects due for completion in Dubai between 2009 and 2012 have been cancelled or suspended, Jones Lang LaSalle said in March.

But Islamic banking’s legal framework is as fragmented as other aspects of the industry, with little case law to guide judges. Many judges are also unskilled in shariah, and the relationship between Islamic and secular law is unclear.

“It’s a contest between shariah law and common law,” said Islamic banking lawyer Mohamad Illiayas.

“Cases have gone to court where there is a problem of conflicts and inconsistencies but the English courts have always ruled in favour of common law.”

He cited a 2004 case involving Shamil Bank of Bahrain where an English court refused to apply shariah law to a murabaha contract (a popular contract of sale). The court said two systems of law cannot govern one contract.

In Malaysia, home to the world’s top Islamic bond market, only a handful of cases have come before the high courts in almost three decades, with most involving basic home loan cases.

Judges’ expertise has been in focus after some courts questioned the validity of the bai bithaman ajil contract, a type of deferred payment sale, sowing confusion in the industry.

The contract was recently declared valid by an appellate court, but Malaysian authorities now plan to force judges to refer to national shariah advisers when handling Islamic finance cases.

“Looking purely at the formal qualifications and experience of judges, it would be hard to expect them to be fully aware of all the relevant intricacies of Islamic finance,” said Megat Hizaini Hassan, an Islamic finance lawyer with Zaid Ibrahim.

In the Gulf Arab region, law firms have started to build up Islamic finance expertise but their skills is almost exclusively limited to consulting banks on deal structures and drafting contracts, and most have yet to see a court room from inside.

Islamic finance disputes can be referred to arbitration by specialists but many Malaysian cases still go court. In Bahrain, such cases have mostly gone to dispute resolution committees staffed by judges and specialised central bank officials.

But arbitration is not problem-free, either.

“We will still have to resort to common law at one stage or the other,” said Illiayas. “Even after the arbitration award is given, if you want to enforce that award you still have to go to court.”