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”
