Impact Finance & Islamic Finance - can go Hand in Hand
For the second consecutive year, Zurich hosted the Responsible Finance and Investment (RFI) summit organized by The Responsible Finance & Investment (RFI) Foundation and The Swiss Arab Network (SAN) at Atlantis Hotel by Giardino in Zurich, between 25 and 27 April 2018.
Mr. Khaldoun Dia-Eddine, head of the Center for Middle-East and Africa Business at SML participated at the summit moderating one workshop about: Impact Investment Funds, within the second day dedicated to Impact finance & Islamic finance. He also made a short statement about the role of education in promoting Impact investment during the round table closing that day.
The importance of this conference is coming from the fact that Impact investment is growing in scale since the calls for substantial financial and technical resources are estimated by 2030 Agenda for Sustainable Development at US$5-US$7 trillion each year for the next 15 years.
During the summit several speakers made the bridge between Islamic investments and Impact investments, they underlined the similarities in both types of investment especially when they seek to create positive social and/or environmental outcomes. They also pointed to the fact that the size of Islamic finance with its total assets value of USD1.9 trillion in 2016 and estimated to reach 3.8 trillion in 2022, is an opportunity to the development of the trend of alternative investment.
The term impact investment has gained prominence over the past few years. It is most often used to describe a set of investments that create intentional and measurable positive impacts in term of social/environmental outcomes and financial returns, for which investors may, but not always, accept a below-market rate of return. Within this frame, impact investors are no longer okay with simply “not doing bad” by screening out oil, guns, and other areas with negative externalities. Increasingly, investors are focused on ensuring that they are “actually doing good” and having a positive social or environmental impact. The same investors find that the traditional financial tools and investment structures are restricting and limiting innovation. Therefore, they are becoming more comfortable with blended financing approaches, like pay for success models, they also feel the need to include capacity building in their investment discussions.
In fact, many similarities between Islamic Finance and Impact Investing do exist, in several areas both of them are aligned, and in many more areas near convergence. Many of the objectives between both types of investment are shared as well as many values and even many rules of governance. Both Islamic finance and Impact investment occupy value-based investment universes, associate themselves with a moral purpose, offer access to finance to those directly or indirectly kept out of the conventional financial investing arena and share a broader understanding of the relationship between business and society.
Islamic investment is guided by several basic tenets, for which the “Sharia-compliance” is overseen by Muslim scholars and Sharia Supervisory Boards (SSB). Islamic, or Sharia-compliant investing is not only synonymous with restrictive interpretations of the Qur’an. Sharia compliance in the financial sector extends to a way of structuring financial transactions such that money has no intrinsic value alone, and the transaction promotes a large social good through risk sharing. These are actually not restrictive guidelines, but a framework that differs from conventionally structured financial products.The idea of risk sharing and promotion of social good is very similar to the basic idea of Impact investment.
In that regard, we may think about the strong relation between the financier and client, or to the no inherent value for money alone or the clear contractual terms as well as the role of the Zakat or the Waqf in the economic system.
However, one can’t say that if an investment is made using structures and rules that meet Sharia principles, it would be autmoatically considered as socially responsible or an Impact investment. The spirit of the objectives of Islamic economy should be respected, namely: a fair and equitable distribution among partners and in the society, the provision of basic human needs, the establishment of social justice, the circulation of wealth and the elimination of exploitation.
After reviewing many experiences and practices of companies and institutions working in both fields of Impact and Islamic Investments, the majority of the participants were convinced that a closer collaboration between the two types of investments in term of investment opportunities, standardization, regulation and technology would certainly advance the cause of positive impacts socially, environmentally and financially.